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 - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. 2015 Annual Report WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0
Disclaimer This document is a convenience translation from the Hebrew original of the separate financial data dated December 31, 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 - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. Table of Contents
A. Description of the Company’s Business B. Report of the Board of Directors on the State of Affairs of the Corporation C. Consolidated Financial Statements D. Additional Details about the Company E. Separate Financial Data as of December 31, 2015 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 A. Description of the Company’s Business WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter A - Description of the Company's Business
Description of the Company's Business – Contents
Part 1: Description of the General Development of the Company's Business ...... 6 1.1. The Company's Activity and Description of its Business Development ...... 6 1.2. The Company's Areas of Activity ...... 15 1.3. Investments in the Company's Capital and Transactions in its Shares ...... 15 1.4. Distribution of Dividends ...... 16 Part 2: Other Information ...... 18 2.1 Financial Information regarding the Company's Operating Segments ...... 18 2.2 General Environment and Effect of External Factors on the Company's Activity ...... 21 Part 3: The Retail and Wholesale Division ...... 34 3.1 The Structure of the Division and Changes therein ...... 34 3.2 Products and Services in the Division ...... 53 3.3 Breakdown of Income from Products and Services in the Division ...... 56 3.4 New Products in the Division ...... 56 3.5 Customers of the Division ...... 57 3.6 Marketing and Distribution in the Division ...... 62 3.7 Order Backlog in the Division ...... 64 3.8 Competition in the Division ...... 65 3.9 Seasonal Factors in the Division ...... 68 3.10 Production Capacity in the Division ...... 68 3.11 Fixed Assets, Land and Installations in the Division ...... 69 3.12 Research and Development in the Division ...... 72 3.13 Intangible Assets in the Division ...... 72 3.14 Human Capital in the Division ...... 73 3.15 Raw Materials and Suppliers in the Division ...... 73 3.16 Investments in the Division ...... 74 3.17 Environmental Risks in the R&W Division and Methods of Managing them ...... 75 3.18 Restrictions and Supervision of the Company's Activity in the Division ...... 84 3.19 Significant Agreements in the Division ...... 96 3.20 Collaboration Agreements in the Division ...... 97 Part 4: The Industries and Services Division ...... 98 4.1 The Structure of the Division and the Changes therein ...... 98 4.2 Products and Services in the Division ...... 104 4.3 Breakdown of Income from Products and Services in the Division ...... 106 4.4 New Products in the Division ...... 106 4.5 Customers of the Division ...... 106 4.6 Marketing and Distribution in the Division ...... 109 4.7 Order Backlog in the Division ...... 110 4.8 Competition in the Division ...... 110 4.9 Seasonal Factors in the Division ...... 112 4.10 Production Capacity in the Division ...... 112 4.11 Fixed Assets, Land and Installations in the Division ...... 113 4.12 Research and Development in the Division ...... 118 4.13 Intangible Assets in the Division ...... 118 4.14 Human Capital in the Division ...... 118 4.15 Raw Materials and Suppliers in the Division ...... 118 4.16 Investments in the Division ...... 121 4.17 Environmental Protection in the Division Environmental Risks and Ways of Managing them ...... 121 A-1 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter A - Description of the Company's Business
4.18 Restrictions and Supervision of the Company's Activity in the Division ...... 127 4.19 Significant Agreements in the Division ...... 136 Part 5: The Refining and Logistics Division ...... 137 5.1 General Information Regarding the Division ...... 137 5.2 Products and Services in the Division ...... 142 5.3 Breakdown of Income and Profit from Products and Services in the Division ...... 143 5.4 New Products in the Division ...... 145 5.5 Customers of the Division ...... 145 5.6 Marketing and Distribution in the Division ...... 146 5.7 Order Backlog in the Division ...... 147 5.8 Competition in the Division ...... 147 5.9 Seasonal Factors in the Division ...... 149 5.10 Production Capacity in the Division ...... 149 5.11 Fixed Assets, Land and Installations in the Division ...... 150 5.12 Research and Development in the Division ...... 153 5.13 Intangible Assets in the Division ...... 153 5.14 Human Resources in the Division ...... 154 5.15 Raw Materials and Suppliers in the Division ...... 154 5.16 Investments in the Division ...... 156 5.17 Environmental Protection in the Division - Environmental Risks and Ways of Managing Them ...... 157 5.18 Restrictions and Supervision of the Company's Activity in the Division ...... 165 5.19 Significant Agreements in the Division ...... 176 Part 6: Further Information about the Company ...... 184 6.1 Human Capital ...... 184 6.2 Working Capital ...... 190 6.3 Investments ...... 193 6.4 Financing ...... 193 6.5 Taxation ...... 196 6.6 Environmental Protection ...... 196 6.7 Additional Information regarding the Company - Environmental Risks and Ways of Managing Them ...... 197 6.8 Legal Proceedings ...... 199 6.9 Major Agreements ...... 210 6.10 Goals and Business Strategy ...... 210 6.11 Risk Factors ...... 213
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The Board of Directors of Paz Oil Company Ltd. ("the Company" or "Paz") is pleased to present a description of the Company's business as of December 31, 2015 ("the report"), which provides a description of the Company and its subsidiaries, and reviews developments in their business that took place in 2015. The report was prepared pursuant to the Israeli Securities Regulations (Periodic and Immediate Reports), 5730- 1970.
Glossary
For the sake of convenience, the following terms and abbreviations are used in this report:
"Ashdod Refinery" or "refinery" ...... Ashdod Refinery, owned by Paz Ashdod "BGA" ...... The David Ben-Gurion Airport "Bino Holdings" ...... Bino Holdings Ltd. "Business Licensing Law" ...... The Business Licensing Law, 5728-1968 "Clean Air Law" ...... The Clean Air Law, 5768-2008 "COL" ...... Carmel Olefins Ltd. "Companies Authority" ...... The Government Companies Authority "Companies Law" ...... The Companies Law, 5759-1999 "Company" or "Paz" ...... Paz Oil Company Ltd. "Hazardous Substances Law" ...... The Hazardous Substances Law, 5753-1993 "Delek" ...... Delek Israel Fuel Corporation Ltd. "Dolphin" ...... Dolphin Energies Ltd. "Dollar" ...... The United States dollar "Dor Alon" ...... Dor Alon Energy in Israel (1988) Ltd. "EAPC" ...... Eilat Ashkelon Pipeline Company Ltd. (a company owned by the State of Israel (50%) and a third party) "FIBI" ...... First International Bank of Israel Ltd. "Fuel company" ...... A company that is in the business of refining and/or exporting and/or importing and/or marketing fuel, and/or providing fuel infrastructure services "Fuel site" ...... A site that includes a filling station and a Yellow store "General Director" ...... The General Director of the Israel Antitrust Authority "Group" or "Paz Group" ...... Paz Oil Company Ltd. and its subsidiaries "IAA" ...... The Israel Antitrust Authority "IAF" ...... Israel Air Force "IDF" ...... Israel Defense Forces "INGL" ...... Israel Natural Gas Lines Ltd. "Instanz" ...... Instanz Holdings Ltd. "ISA" ...... The Israel Securities Authority "Jet fuel" ...... Jet fuel that is used for fueling airplanes "LPG" ...... Liquefied petroleum gas "Maalot" ...... Standard and Poor's Maalot Ltd. "Mifalei Glilot" ...... Mifalei Glilot Ltd. "NIS" ...... New Israeli Shekel
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"Nituv" ...... Nituv Fueling Stations Ltd. "Oil products" ...... Gasoline, diesel oil (for transport and heating), jet fuel, fuel oil, kerosene, naphtha, LPG, bitumen (asphalt), fuel products and lubricants "OPP" ...... Oil Products Pipeline Ltd. (a fully owned subsidiary of Petroleum and Energy Infrastructures Ltd.) "ORL" ...... Oil Refineries Ltd. "Paz Ashdod" ...... Paz Ashdod Oil Refinery Ltd. "Aviation Assets" ...... Aviation Assets Ltd. "Aviation Services" ...... Aviation Services Ltd. "Paz Industries" ...... Paz Industries and Services (Oil) Ltd. "Paz Lubricants" ...... Paz Lubricants and Chemicals Ltd. "Pazgas" ...... Pazgas Ltd. "Pazkar" ...... Pazkar Ltd. "Pazmovil" ...... Paz-movil Ltd. "Pazomat" ...... Pazomat a Member of Paz Group Ltd. "PEI" ...... Petroleum and Energy Infrastructures Ltd. (a company wholly owned by the State of Israel) "Pi-Glilot" ...... Pi-Glilot Petroleum Terminals and Pipelines Ltd. "Restrictive Trade Practices Law" ...... The Restrictive Trade Practices Law, 5748-1988 "Retail division" ...... The fueling division, including filling stations, Yellow stores and additional areas at sites that the Paz Group leases out to third parties "Securities Law" ...... The Securities Law, 5728-1968 "Sonol" ...... Sonol Israel Ltd. "State" ...... The State of Israel "The IEC" ...... The Israel Electric Corporation Ltd. "Yellow" ...... The Company's chain of convenience stores
Adjustments for the Index and the Exchange Rate
The financial data for the period beginning on January 1, 2004 are presented in reported amounts as described in Note 2.3 of the Company's financial statements as of December 31, 2015. Where any foreign currency is translated into NIS, this is done according to the representative exchange rate of that currency on December 31, 2015, unless expressly stated otherwise.
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Forward-looking Information
In this report, which includes a description of the Company's business as of December 31, 2015, the Company has included, with regard to itself and with regard to the Group, forward-looking information, as this term is defined in the Securities Law. Such information includes, inter alia, forecasts, goals, assessments and estimates, which relate to future events or matters whose occurrence is uncertain and is not within the control of the Company. Forward-looking information in this report will usually be identified either in specific terms or by means of expressions such as "the Company foresees", "the Company estimates", "the Company intends" and similar expressions.
Forward-looking information does not constitute a proven fact and it is based solely on the subjective assessment of the Company, which relied in its assumptions, inter alia, on an analysis of general information that was in its possession at the time of preparing this report, including public announcements, research and surveys, which do not contain any undertaking as to the correctness or completeness of the information contained therein and whose accuracy has not been examined by the Company independently.
In addition, whether or not the forward-looking information will be realized will be influenced by factors that cannot be estimated in advance and are not within the control of the Company, including risk factors that characterize the activity of the Company as set out in paragraph 6.11 below, and by developments in the general environment and external factors that affect the activity of the Company, as set out in paragraph 2.2 below in this report.
Therefore, even though the Company believes that its expectations, as they appear in this report, are reasonable, there is no certainty that the actual results of the Company in the future will be consistent with these expectations, and they may differ from those presented in the forward-looking information as set out in this report.
In cases where forward-looking information is included as aforesaid, this has been expressly stated.
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Part 1: Description of the General Development of the Company's Business
1.1. The Company's Activity and Description of its Business Development
1.1.1 Introduction
The Paz Group is the largest group in Israel in most of the main fields of the energy industry. The Group operates a chain of filling stations, a chain of convenience stores, fueling sites and retail sites, directly markets oil products for industry and private consumption and owns the second largest refinery in Israel. The Paz Group is also active in industrial fields that are closely related to the production of lubricants for industry and vehicles, manufacturing sealants, etc.
The Company's divisions and spheres of activity, as of the date of the report, which represent the operating segments in the financial statements, are as follows:
Paz Retail and Wholesale ("the R&W Division"). This includes three subdivisions that are operated by the Company itself and several subsidiaries. The first subdivision markets, distributes and transports oil products at filling stations and food and convenience products at Yellow stores ("the Retail Subdivision"). The second subdivision focuses on expanding the retail infrastructure of the Company by locating and developing land for constructing filling stations, convenience stores, fueling sites and other retail areas. This subdivision is also involved in current management of agreements involved in these operations, leasing stores and providing engineering, maintenance and logistic services for the retail areas and the customers of the Wholesale Subdivision. This subdivision operates through two branches: (1) operations and assets, and (2) real estate entrepreneurship ("the Entrepreneurship and Assets Subdivision"). The third subdivision is involved in the direct marketing of fuels to institutional customers, industries and other large enterprises, and it is also active in the marketing of fuel to car fleets ("the Wholesale Subdivision").
Paz Industries and Services ("the Industries Division"). This includes Paz Industries which directly and indirectly holds, among others, the following subsidiaries: Pazgas, Pazkar, Paz Lubricants, Aviation Services and Aviation Assets. Through the various units, this division focuses on product manufacturing, import, storage and marketing, export, recycling and developing new products, while creating synergies between the various units.
Paz Refining and Logistics ("the Refining Division"). This division is involved in the management of the Ashdod Refinery, the import of crude oil and related products, the production of oil distillates, the generation of electricity and steam for in-house use and the generation of electricity for sale to external customers. The Refining Division consolidates the logistic services in the Paz Group, including fuel storage and distribution (at the Ashdod Refinery, the storage and distribution facilities in Haifa and elsewhere), supply and purchase services. The entire inventory of crude oil and related products, except for operational inventory at filling stations, is managed by the Refining Division.
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The Group's organizational structure makes it possible to realize in full the natural vertical synergy of Paz's whole supply process from the import of crude oil by the Refining Division to the marketing of refined oil products by the R&W Division and the Industries Division, with a comprehensive perspective of the consolidated profitability of the Group. The Wholesale Subdivision of the R&W Division is the sales arm of the refinery in the domestic market: it synchronizes production capacity with market demand, which is used to plan the production schedule for the refinery.
The synergy between the divisions of the Group can also be seen in the consolidation of the purchase system and the combined logistics system, the use of the economies of scale in the purchase process, the operation of a joint headquarters for the Group, the Entrepreneurship and Assets Subdivision's assistance in the Group companies' real estate activities, the marketing and sale of lubricants by Paz Lubricants by the R&W Division, the supply of materials and products to the R&W Division and to the Industries Division in accordance with the Group's needs and subject to regulatory restrictions, the distribution of oil, food and convenience products to the filling stations, the Yellow stores and other customers, the joint management of Aviation Services and Aviation Assets, and the joint management of Paz Lubricants and Pazkar (effective from 2014).
The Group operates joint headquarters headed by the Group's management forum which consists of the CEO of the Group, the Director of the Refining Division and the CEO of Paz Ashdod, the CFO (Vice-President), the Chief Legal Advisor (Vice-President), the Vice- President of Human Resources, Computerization and Administration, the Vice-President of Retail and Wholesale, the Vice-President of Trade and the Vice-President of Operations and Assets.
The relative advantages of Paz in the refueling areas, dating back to its earlier years, derive from strategic thinking that led to purchasing property rights in real estate at central locations for filling stations.
The purchase of the Ashdod Refinery at the end of 2006 was a strategic step that made the Group the only energy group in Israel that is vertically integrated and has synergetic activity in the field of energy, which includes the import of crude oil, its refining at the Ashdod Refinery and the sale and distribution of oil products by the Group companies. The synergy between Paz Ashdod and the Group companies that market the oil products adds value to the Group.
The Company has an entire subdivision for the production, storage, marketing and sale of oil and other products, a logistic activity that allows independent distribution of the oil and other products, an engineering and maintenance activity of the filling stations and refueling installations of direct marketing customers and electronic fueling, all while reducing reliance on external parties. The Company regards an advanced computerized environment as a strategic tool in the management and support of the Group's business. The Group invests regularly in software packages, computer technologies, data systems, data security and maintenance of operational continuity in order to maintain and develop existing and new abilities that are of assistance in managing and furthering its business. The Group's data systems operate with integrated communications at all the sites in which the Group is active: offices, filling stations, storage facilities and terminals. The main hardware and communications systems are installed at the Company's main offices and are based on an advanced central computer room that includes processing servers, communication infrastructure, central storage systems, back-up systems and control systems.
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The Company considers the cultivation and development of human capital as a valuable aspect that enables maximizing the Group's capabilities.
1.1.2 The Structure of the Energy and Fuel Industry in Israel in which the Group is Active
The following is a description of the energy industry in Israel, which includes the supply chain from the import of crude oil into Israel, the production of oil products through sales to the end user.
1.1.2.1 Import of Crude Oil
The refineries in Israel, including Paz Ashdod, the Israeli fuel companies and others that have import licenses are entitled to import crude oil, including SR fuel oil and condensates, and oil products into Israel.
1.1.2.2 Unloading and Storage of Crude Oil and Distillates
Imported crude oil is unloaded at three ports (Haifa, Ashkelon and Eilat) by Petroleum and Energy Infrastructures Ltd. (PEI) and Eilat Ashkelon Pipeline Company Ltd. (EAPC). SR fuel oil is also unloaded at the IEC's connector terminal in Ashdod. The condensates are transported to the Nobel Energy facility in Ashdod or unloaded at the three ports where crude oil is unloaded (Haifa, Ashkelon and Eilat).
Until it is transported to the refineries, crude oil imported into Israel by Oil Refineries Ltd. (ORL) is stored at terminals in the area of the unloading ports. The terminals are operated by PEI and EAPC. Crude oil for refining is supplied to ORL's plant in Haifa from PEI's terminal in Kiryat Haim, via a pipeline owned by ORL and PEI, and also from the EAPC terminal in Ashkelon, via a pipe owned by EAPC. Crude oil for refining is supplied to the Ashdod Refinery from the EAPC terminals in Ashkelon and Eilat, via a pipeline that is operated by EAPC and the IEC's connector terminals in Ashdod Port.
The charges for crude oil infrastructure services (unloading, storage and supply) for the Haifa terminal only were determined in the Commodities and Services Price Stability (Temporary Provision) (Prices for Infrastructure in the Fuel Industry) Order, 5756-1995, as amended.
Oil products (as opposed to crude oil) are currently unloaded at three sites: at two ports (Haifa and Ashkelon), by PEI and EAPC, and at the IEC's connector terminals in Ashdod.
Oil products are stored at terminals in the area of the unloading ports, at Aviation Assets' facilities and at Pazgas' facilities. The terminals are operated by PEI, EAPC, the refineries, the Company and other fuel companies. Oil products are supplied and distributed to the storage terminals via a pipeline belonging to Oil Products Pipeline Ltd. (OPP). Oil products are supplied to the Company's storage and distribution terminal in Haifa and the facilities of Sonol and Delek in Haifa usually by means of a pipeline belonging to ORL. Oil products are supplied from the IEC's connector terminals in Ashdod via a land pipeline maintained by Paz Ashdod Refinery.
The rates for infrastructure services (unloading, storage, distribution and supply) of oil products are determined in the Control of Prices of Commodities and Services (Infrastructure Charges in the Fuel Industry) Order, 5756-1995 ("the Infrastructure Price Control Order").
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1.1.2.3 Refining
Crude oil is refined in Israel by ORL at the Haifa Refinery and by the Company, through Paz Ashdod, at the Ashdod Refinery.
1.1.2.4 Transport, Storage and Distribution of Oil Products
Oil products that are manufactured at the refineries in Haifa and Ashdod, as well as refined products that are imported, are distributed by means of a national refined oil pipeline, which belongs mainly to OPP, the terminals of Pi-Glilot that belong to the Delek Corporation and are situated in the area of Ashdod, Be'er-Sheva and Jerusalem, PEI's terminals, the Company's terminal in the Haifa area, the terminals of other fuel companies in the Haifa area, to Pazgas' LPG facility in Kiryat Ata, to Aviation Assets' storage facility at Ben-Gurion Airport and directly to large consumers whose sites are close to the refineries (mainly fuel oil for the facilities of the IEC in Haifa and Ashdod and gas oil for the gas turbines throughout Israel).
The storage of (refined) oil products is done mainly by the refineries, at PEI's terminals, at Pi- Glilot's terminals, at the terminals of the fuel companies, at EAPC, at Pazgas' facilities, at Aviation Assets' facility at Ben-Gurion Airport, at Pazkar's plant and at the facilities of the IEC (fuel oil and diesel oil).
Oil products are stored in containers at the distribution sites and from there they are distributed to road tankers. The choice of the storage site and the manner of distributing the various oil products is made, from time to time, by the fuel companies on the basis of business considerations.
The Company distributes oil products to most of its customers from the distribution site at the Ashdod Refinery and the distribution facility in Haifa. The distribution facility in Haifa and Pazgas' facility at Kiryat Ata are used by the Company for storing and distributing oil products to its customers in the north of the country. Aviation Assets distributes jet fuel and aviation gasoline to its customers from its tank farm at Ben-Gurion Airport.
The charge for distribution services (to end customers) is calculated on the basis of the quantities that are distributed and the distance that they travel. Moreover, the Infrastructure Price Control Order provides a price for distributing oil products for some of the distribution sites in Israel, but not for distribution sites in the north of the country, including the Company's distribution site in the Haifa area.
Oil products are distributed to road tankers from the Pi-Glilot terminals that are owned by Delek, the fuel companies' terminals, the terminals of the refineries in Haifa and Ashdod and terminals belonging to PEI and EAPC.
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1.1.2.5 Transport of Oil Products from the Distribution Sites to Filling stations and Customers
The transport of oil fluid products from the distribution points to the various fuel companies is done by road tankers.
The distribution and transport of the Company's oil products from the distribution points to the filling stations, to the customers of the Wholesale Subdivision and to other Group customers is carried out by road tankers belonging to the subsidiary Pazmovil and/or by various transport contractors using road tankers. Most of the Company's distribution activity is carried out at the distribution facility at the Ashdod Refinery.
1.1.2.6 Marketing of Oil Products
To the best of the Company's knowledge, dozens of fuel companies that have approval from the tax authorities in Israel are registered with the Fuel Administration and are licensed to buy oil products directly from the refineries. The Company estimates that there are many more companies, agents, distributors and wholesale customers that are active in buying oil products from the licensed fuel companies and marketing them to customers.
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1.1.2.7 The following chart shows a diagram of the fuel industry in Israel:
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1.1.3 History of the Group
In 1922, the Company began its activity as a company that was registered in England with the name Anglo Asiatic Petroleum. In 1927, the Company began operating under the giant oil concern, the Shell Company of Palestine. After various developments, in which, inter alia, the rights of the English company were acquired by an Israeli company, headed by Messrs. Wolfson and Nachmias, the name of the Israeli company was changed to its current name - Paz Oil Company Ltd. In 1981, the Company's shares were transferred to the Government of Israel and in 1988, the Company was privatized and its shares were acquired by a corporation controlled by the late Mr. Jack Lieberman of Australia. In December 1999, Bino Holdings, Dolphin and Instanz acquired the control over the Company. In September 2006, the Company completed the purchase of the Ashdod Refinery. In December 2006, the Company's securities were listed for the first time for trade on the Stock Exchange.
For details of the holdings of interested parties in the Company, see Regulation 24 in Chapter D - Further Details about the Company. The controlling shareholders in the Company as of the date of this report are: Bino Holdings, Dolphin and Instanz, whether by virtue of shareholdings in the Company or by virtue of agreements signed between them.
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1.1.4 Organizational Structure of the Paz Group
דctorsדיof Dire רקטוריוןרקטוריוןBo ard
מנכ"CEOל
and יעוselץal Cou nמשפטיHuman Capital and Le g הון אנושי ומחשוב cretariesומזכיeרS ות חברה Computerization Corporate כספיinanceם F
holesale Industries and ServicesחW טיבתand Logistics Retail and חטיבת Refining Division קמעוnנאות Divisioומסחר זיקו קDivisio nולוגיסטיקה
פזגזRetail and Distribution Pazgas yבrית Refine זיקוק dodאשדhודAs
פdז an שמנים bricantsוכיuמPaz Lיקלים Pazomat סחר and ופזומטWhollesale Chemicals לand וגיסטיקה ורogisticsכLש Purchases פזקרl Pazkarיזוaם and Re עסקים sinessונדuלB"ן Estate Entrepreneurship es פז Servic שרותי -תiiationעAv ופה Paz
ts פז Asse נכסי-iationתעעAv ופה Paz
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1.1.5 Chart of the Companies in the Paz Group
The following chart shows the Paz Group and the rates of the Company's direct and indirect holdings in the Group's major subsidiaries in each of the Group's divisions:
Industries and Retail and Wholesale Refining and Services Division Division Logistics Division
100% 100%
Paz Industries and Services (Oil) Ltd. 100% Paz Ashdod Oil 100% Pazomat of the Paz Refinery Ltd. Pazgas Ltd. Group Ltd.
100% 100% Paz Lubricants and Chemicals Ltd. Nituv Filling Stations 100% Ltd. Pazkar Ltd.
100% 100% Paz Aviation Pazmovil Ltd. Services Ltd.
100%
Paz Aviation 40%-100% Assets Ltd. Several companies that hold the real estate housing the gas stations
21.5% Pi-Glilot Oil and Pipe Terminals Ltd. (1)
(1) Pi-Glilot - the remaining shares of Pi-Glilot are held by the State of Israel (50%), Delek and Sonol. See details of the sale of the Company's interests in Pi-Glilot in paragraph 3.11.2.1 below.
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1.1.6 Purchase, sale or transfer of material assets not in the ordinary course of business
For further details regarding the sale of the Company's holdings and land in Pi-Glilot, see paragraph 3.11.2 below.
1.2. The Company's Areas of Activity
The divisions and areas of activity, which represent the operating segments in the financial statements, are:
Paz Retail and Wholesale - for further details regarding the R&W Division, see paragraph 3 below.
Paz Industries and Services - for further details regarding the Industries and Services Division, see paragraph 4 below.
Paz Refining - for further details regarding the Refining Division, see paragraph 5 below.
1.3. Investments in the Company's Capital and Transactions in its Shares
1.3.1 Investments in the Company's Capital
In 2014 and 2015, no investments were made in the Company's capital.
1.3.2 Repurchase of debentures by the Company
The Company has a plan of repurchasing its debentures.
For details of the Company's plan for the repurchase of debentures (series C and D) through December 31, 2016, see paragraph 18 to the Report of the Board of Directors. Through the date of this report, the Company and/or any subsidiary of the Company have not repurchased any debentures (series C) and/or debentures (series D).
1.3.3 Repurchase of Shares by the Company
The Company has a plan of repurchasing its shares.
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"). 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 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).
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According to the terms of the repurchase plan and in keeping with the allocation of RSUs to executives in the Company, the Company repurchased 16,964 shares (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.
1.3.4 Significant Transactions in the Company's Shares by Interested Parties
To the best of the Company's knowledge, in 2014 and 2015, interested parties that are controlling shareholders in the Company executed material transactions for the off-market sale of the Company's shares, as detailed in the table below:
Date Interested party No. of sold shares Transaction rate April 28, 2014 Bino Holdings 42,876 NIS 539.92 April 28, 2014 Dolphin 5,216 NIS 539.92 April 28, 2014 Instanz 7,908 NIS 539.92 May 1, 2014 Bino Holdings 437,196 NIS 539.92 May 1, 2014 Dolphin 53,180 NIS 539.92 May 1, 2014 Instanz 80,631 NIS 539.92 March 23, 2015 Bino Holdings 584,197 NIS 550 March 31, 2015 Dolphin 71,061 NIS 550 March 31, 2015 Instanz 107,742 NIS 550
The transactions detailed above were conducted off the market and consisted of sales to an institutional entity which distributed the shares to institutional entities.
1.4. Distribution of Dividends
On January 5, 2014, the Company's Board of Directors decided on a qualifying distribution of a cash dividend in a total sum of NIS 250 million. For further details, see an immediate report of January 5, 2014 (TASE reference: 2014-01-003703).
On November 27, 2014, the Company's Board of Directors decided on a qualifying distribution of a cash dividend in a total sum of NIS 250 million. For further details, see immediate reports of November 30, 2014 (TASE reference: 2014-01-208704) and December 10, 2014 (TASE reference: 2014-01-219045).
On June 24, 2015, the Company's Board decided on a qualifying distribution of a cash dividend in an overall amount of NIS 250 million. See more details in an immediate reports of June 24, 2015 (TASE reference: 2015-01-056136), July 7, 2015 (TASE reference: 2015-01- 067890) and July 16, 2015 (TASE reference: 2015-01-074532).
On November 23, 2015, the Company's Board decided on a qualifying distribution of a cash dividend in an overall amount of NIS 170 million. See more details in immediate reports of November 24, 2015 (TASE reference: 2015-01-161523) and December 17, 2015 (TASE reference: 2015-01-183240).
For details of repurchases of Company shares in 2015, see paragraph 1.3.3 above.
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1.4.1 Retained Earnings
The Company's retained earnings based on its financial statements as of December 31, 2015 approximate NIS 1,808 million.
The Company's retained earnings, less treasury shares (of approximately NIS 189 million), based on its financial statements as of December 31, 2015 approximate NIS 1,619 million.
The Company's distributable earnings (less revaluation gains of approximately NIS 416 million and treasury shares of approximately NIS 189) as of December 31, 2015 total approximately NIS 1,203 million.
1.4.2 External Restrictions on the Company's Ability to Distribute Dividends
According to the deed of trust of the Company's debentures (series D) of June 11, 2014, one of the grounds for the immediate repayment of the debentures (series D) is if the Company distributes a dividend or repurchases its shares as a result of which the Company's equity drops below NIS 2 billion.
As of the date of the report, there are no external restrictions on the Company's ability to distribute dividends other than the restrictions provided in the law and the restriction mentioned above.
1.4.3 Dividend Distribution Policy
In the addendum to the agreement that was signed on November 6, 2006, between Bino Holdings, Dolphin and Instanz, it was determined that subject to the provisions of applicable laws and the provisions of said addendum, they would act to the best of their ability in order to ensure that the Company would distribute some of its profits to its shareholders each tax year, in an amount that would not be less than 70% of the net income in the tax year in which the dividend is distributed.
On March 24, 2010, the Company's Board of Directors decided that a future distribution of dividends will only take place if the dividend does not impair the Company's current activity and its financial policy.
An actual dividend distribution is subject to the provisions of the Companies Law, including compliance with the distribution tests.
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Part 2: Other Information
2.1 Financial Information regarding the Company's Operating Segments
2.1.1 Financial Data according to the Paz Group's Operating Segments
For financial information regarding the Paz Group's operating segments, see Note 29 to the Company's financial statements as of December 31, 2015.
The following tables show the financial results according to the Paz Group's operating segments:
2015 Unallocated and Industries adjustments Retail and and to Wholesale Services Refining consolidated Consolidated NIS in millions 1. Revenues Revenues from 6,771 1,140 4,949- 12,860 external factors Revenues that represent costs of other operating 142 398 4,808(5,348 ) - segment in the Company Total 6,913 1,538 9,757(5,348 ) 12,860 2. Costs Fixed costs 386 104 270 37 Variable costs 6,146 1,221 8,994(5,281 ) 11,877 Total costs 6,532 1,325 9,264(5,244 ) Costs to external 1,388 1,142 9,243 104 11,877 factors Costs that represent revenues of other 5,144 183 21(5,348 ) operating segment in the Company Total costs 6,532 1,325 9,264(5,244 ) 11,877 Other income 8 5()2 ) (3 8 3. Operating income 389 218 491(107 ) 991 Operating income attributable to equity 389 215 491(107 ) 988 holders of the Company Operating income attributable to non- -3 -- 3 controlling interests 4. Total assets attributable to the 3,667 1,250 5,182 343 10,442 operating segment at 31.12.2015 Total liabilities attributable to the 1,034 441 1,253 4,407 7,135 operating segment at 31.12.2015
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2014 Unallocated and Industries adjustments Retail and and to Wholesale Services Refining consolidated Consolidated NIS in millions 1. Revenues Revenues from 9,216 1,284 8,013- 18,513 external factors Revenues that represent costs of other operating 210 444 7,131(7,785 ) - segment in the Company Total 9,426 1,728 15,144(7,785 ) 18,513 2. Costs Fixed costs 385 108 269 36 Variable costs 8,686 1,446 14,651(7,730 ) 17,851 Total costs 9,071 1,554 14,920(7,694 ) Costs to external 1,605 1,256 14,899 91 17,851 factors Costs that represent revenues of other 7,466 298 21(7,785 ) - operating segment in the Company Total costs 9,071 1,554 14,920(7,694 ) 17,851 Other income 42 4()12 ) (16 18 3. Operating income 397 178 212(107 ) 680 Operating income attributable to equity 399 174 212(107 ) 678 holders of the Company Operating income attributable to non- (2) 4 -- 2 controlling interests 4. Total assets attributable to the 3,580 1,325 5,639(58 ) 10,486 operating segment at 31.12.2014 Total liabilities attributable to the 1,081 465 2,078 3,843 7,467 operating segment at 31.12.2014
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2013 Unallocated and Industries adjustments Retail and and to Wholesale Services Refining consolidated Consolidated NIS in millions 1. Revenues Revenues from 9,831 1,452 8,352- 19,635 external factors Revenues that represent costs of other operating 324 546 7,028(7,898 ) - segment in the Company Total 10,155 1,998 15,380(7,898 ) 19,635 2. Costs Fixed costs 389 112 248 37 Variable costs 9,379 1,733 15,337(7,837 ) 19,398 Total costs 9,768 1,845 15,585(7,800 ) Costs to external 2,331 1,407 15,562 98 factors Costs that represent revenues of other 7,437 438 23(7,898 ) operating segment in the Company Total costs 9,768 1,845 15,585(7,800 ) 19,398 Other income 4114(2 ) 17 (expenses) 3. Operating income 391 164()201 ) (100 254 Operating income attributable to equity 390 161()201 ) (100 250 holders of the Company Operating income attributable to non- 13-- 4 controlling interests 4. Total assets attributable to the 3,722 1,401 6,363 2,005 13,491 operating segment at 31.12.2013 Total liabilities attributable to the 1,355 519 2,392 5,883 10,149 operating segment at 31.12.2013
For details regarding the adjusted operating income according to the operating segments (adjusted for certain effects in order to present the Group's current operating income without the effect of unusual factors), see paragraph 3.5.5 of the Report of the Board of Directors.
For details regarding the Company's adjusted net income (adjusted for certain effects in order to present the Group's current net income without the effect of unusual factors), see paragraph 3.10 of the Report of the Board of Directors.
For an explanation of the developments that occurred in the aforesaid financial information, see paragraph 3 of the Report of the Board of Directors.
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2.1.2 Nature of the Adjustments to Consolidated Figures
The adjustments to the consolidated figures include the Company's general and administrative expenses that cannot be attributed to one of the operating segments (such as expenses of the Company's headquarters: the CEO's office, finance, legal, etc.) and also the elimination of intersegment transactions.
2.2 General Environment and Effect of External Factors on the Company's Activity
The Paz Group is exposed to trends, events and developments in the fuel industry in Israel and around the world, which may have an influence on the Group's activity and on its competitors, including:
2.2.1 Domestic and Global Economy and the Effects on the Oil Market
For details, see paragraph 1.2 of the Report of the Board of Directors.
2.2.2 The Security and Political Situation
The security and political situation in the world directly affects the state of the world economy, global oil prices and the prices of refined oil products, and therefore also the Company's activity. Among others, the security situation in Israel has an effect on the leisure and vacation habits of the Israeli public that owns private cars, and as a result on their consumption of fuel. A deterioration or tension in the security situation is likely to result in a decrease in the consumption of refined oil products by the public in Israel and the Palestinian Authority. For further details of the Company's agreement with the Palestinian Authority, see paragraph 3.5.2.2 below.
Moreover, the general security position has an effect on Israel's incoming and outgoing tourism and on the scope of activity of the aviation companies (the activity increases in times of calm and decreases at times when there is a deterioration in the security situation), which affects the amount of sales of jet fuel in Israel.
In July-August 2014, Operation "Tzuk Eitan" (IDF's military operation) took place in the Gaza Strip. During Operation "Tzuk Eitan" and as a result thereof, the Company sustained a decline in revenues from filling stations in the south of Israel, from sales to the Palestinian Authority and from sales of jet fuel due to the reduction in incoming and outgoing tourism in Israel.
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2.2.3 The Prices of Oil Products Worldwide and in Israel
The main factors that affect the prices of oil products in Israel are the price of oil prices in the Mediterranean basin, the refiningg margin, the exchange rate of the dolllar in relation to the NIS and the amount of excise duty and VAT imposed on the sale of oil products in Israel.
The global oil market is characterized by extreme fluctuations with regard to the prices of crude oil and refining margins, which together constitute the main parameters for determining the prices of oil products, and thherefore oil products are exposed to great fluctuations that cannot be predicted or prepared for in advance to an extent that will make it possible to prevent a decrease in the value of crude oil reserves and oil products that are held by the Paz Group during those periods when there is a decrease in these prices around the world.
In the past four years until the third quarter of 2014, the global pricces of crude oil revolved around USD 110 a barrel and weere characterized by strong fluctuatiions. Starting from June 2014, there was a decrease in the price of crude oil which, in the course of 2015 through the date of this report, reached a low of over a decade of oil prices of less than approximately $ 30 a barrel. See additional informatiion about the crude oil barrel prices in paragraph 1.2 to the Report of the Board of Directorrs. The following chart describes the fluctuations in (Brent) crude oil prices in Europe from January 2013 to January 2016 (source:: Reuters):
Developments in Brent crude oil prices
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Paz Ashdod's refining margin, as it is calculated by it, includes the gaap between the prices of the crude oil mix and the pricces of refined products, the revenues from electricity and distribution less consumption and loss. As is customary, the margin does not include other variable and fixed expenses, energy expenses, depreciation and amortization and is neutralized of the effect of hedges and the curve structure when inventtories are fully hedged.
For the purpose of comparison to the business environment in which the Company operates, following is information on the NORTH WEST EUROPE FCC+VB crude oil refining margin which is calculated and published by KBC (international energy consulting firm) and the IEA, and the Ural margin ("the indicaative margins"). The indicative maargins do not necessarily represent Paz Ashdod's refining margin but form a relevant indiication for the business environment in which the Company operates.
The following chart shows the fluctuations in the NORTH WEST EUROPE FCC+VB margin in 2015 (the figures are in dollars per barrel) (source: KBC):
Indicative margin
The method of calculating the indicative margin which is published by KBS simulates a situation in which the purchase of Brent crude oil and the sale of refined oil products are done at the same time based on a representative mix of refined products that are produced at a refinery under the configuration of FCC+VB (fluid catalytic cracking and viscosity breaking) in North West Europe, which is siimilar to the operating configuration of Paz Ashdod.
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The following chart describes the fluctuations in the Ural margin from January 2015 to early January 2016 (the figures are in dollars per barrel) (source: Platts):
2.2.4 Oil Product Standards
Oil products in the Israeli market are governed by international and local standards relating to the quality and composition of the product. Changes in standards for the oil products marketed in Israel or abroad may affect customer requirements regarding the specifications of the fuel products that Paz Ashdod manufactures. Paz Ashdod supplies its customers with fuels that are in compliance with the requirements of the standards.
2.2.5 Interest Rates and the Consumer Price Index
For details, see Note 30 to the finaancial statements as of December 31,, 2015.
2.2.6 The Exchange Rate of the Dollar aagainst the NIS
For details, see Note 30 to the finaancial statements as of December 31,, 2015.
2.2.7 Excise on Oil Products
The excise component (which is also subject to VAT) in some of thee prices of oil products is very significant. The excise is leevied on the fuel companies directly and paid byy them when the fuel is distributed, with ten days credit (apart from excise for liquefied petroleum gas (LPG), which is paid to the refineries when payment is made for thee LPG, and the refineries send the excise for the LPG to the tax authority), whereas the numbeer of days of credit given by the Company to its customers is significantly higher than this.
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In order to improve the collection of excise duty on fuel, enhance legal enforcement and as a means of deterrence, the Excise on Fuel Law, 5718-1958 ("the Excise Law") determines, among others, that when fuel is used in the production facility, other than use by processing fuel into a different type of fuel that is subject to excise duty, the excise duty will be paid when the fuel is used by the user. Moreover, the Excise Law states that no excise duty will be recoverable for bad debts. This means that while bad debts are recognized as an expense according to the Israeli Income Tax Ordinance (Revised), 5721-1961 and as an expense pursuant to the Value Added Tax Law, 5736-1975, the Excise Law does not recognize excise duty in respect of bad debts as an expense and therefore the fuel companies are not entitled to the refund of excise duty and/or recognition of excise duty in respect of a bad debt as an expense.
The Excise on Fuel (Imposition of Excise) Order, 5764-2004 enacted by virtue of the Excise Law, stipulates specific rates of excise for each oil product.
The rise in the excise rates increases the Company's exposure to customer credit and its finance expenses.
For further details regarding the change in the Company's policy with regard to customer credit, see paragraph 6.2.1.3 below.
2.2.8 Regulatory Developments
2.2.8.1 The Group's activity is affected by regulatory changes that apply from time in the Israeli fuel industry, including with regard to the prices of oil products.
Thus, within the framework of the existing regulations in the fuel industry, control was introduced on the marketing margin in the sale of gasoline 95 octane at the fueling stations, on the Refinery's ex-factory LPG price (effective from February 2015 - excluding LPG that does not contain mercaptan), on the price of an immovable LPG tank, on the reporting of LPG prices to domestic customers, on maximum prices per deposit on LPG equipment, on the reporting of transport diesel, on prices for infrastructure services that are provided by Aviation Assets, on aviation gasoline prices for domestic airports and on the prices of airplane fueling services provided by Aviation Services at Ben-Gurion Airport.
The fuel companies, the gas companies and the refineries receive from time to time demands to produce data to the Ministry of National Infrastructures, Energy and Water Resources and to the Antitrust Authority, among others for the purpose of examining the enactment of control over prices.
In September 2011, the Committee for Socioeconomic Change (the Trajtenberg Committee) recommended updating the currently practiced price and profit control methodology since it considered the return rates defined in the current methodology to substantially exceed the appropriate rates given, among others, the fact that the existing control method was established during a period of interest rates which were considerably higher than today's interest environment and in view of the changes in accounting principles. This recommendation was ratified as a Government resolution in December 2011.
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In January 2016, the Ministry of Finance issued a recommendation report for publishing the proposed price control methodology for public review and comments. The proposed methodology, as described in the Ministry of Finance's report, sets forth general guidelines for determining and updating the controlled prices in Israel. The Company, with the assistance of an outside expert, will file its position in respect of the report by the end of March 2016.
2.2.8.2 Proposed Fuel Industry Law, 5772-2012
In March 2012, the Ministry of National Infrastructures, Energy and Water Resources published a draft of the proposed Fuel Industry Law, 5772-2012. The bill contains several sections that may affect the Company if passed without changes. The main sections are:
- The Minister may determine rules with regard to the period of a license for operations in the fuel industry, provided that the duration of a refining or infrastructure license shall not exceed 25 years and the duration of any other license shall not exceed three years.
- The holder of a refining license that supplies more than 25% of the gasoline and diesel distributed in Israel, as well as a controlling owner thereof or an interested party therein shall not be the owner of a fuel marketing license that holds a right in more than 33% of the public filling stations and shall not be a controlling owner or an interested party in a holder of such a marketing license. The minister, after consulting the General Director of the Antitrust Authority may determine a lower amount than 33% of the filling stations, provided that the following two conditions are satisfied: the amount that shall be determined shall not be less than 25%; and the holder of a refining license who before such a determination held a right in public filling stations, in an amount that exceeds the amount determined, shall be entitled to continue to hold those rights.
Paz Ashdod supplies approximately 40% of the gasoline and diesel oil distributed in Israel and the Palestinian Authority. It holds rights to approximately 23% of the public filling stations.
- A person may not have rights in more than 60% of the public filling stations in a certain district unless this is approved by the director of the Fuel Administration, on such conditions as he shall approve ("district" as defined in section 3 of the Government and Justice Arrangements Ordinance, 5708-1948).
As of the report date, the Company does not hold more than 60% of the filling stations in any district.
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- The bill bestows extremely broad regulatory authorities upon the Director of the Fuel Administration ("the Director") by impairing the judgment and authority of the Minister in charge and of the Government. These authorities allow, among others, imposing restrictions and provisions some of which, as per the Company, are unreasonable and disproportional regarding the activities of entities operating in the fuel industry, including refineries, for example: instructing refineries in the matter of holding operational emergency reserves, including the storage of another license holder's inventory, conditioning the refinery's license on the transport of fuel by Israeli vessels, prescribing the manner of use of the refinery's assets, demanding the Director's approval for investing in/setting up facilities in the refinery, limiting the refinery's activity to refining only etc.
- Moreover, the holder of a refining license or a controlling owner thereof or an interested party therein shall not carry out infrastructure activity and shall not be a controlling shareholder or an interested party in an infrastructure license. The Director may approve the continued provision of infrastructure services that were provided before the law came into effect for service assets that are used for refining or the continued provision of infrastructure services for fueling aircraft or shops, or other operations in the fuel industry that are defined and limited operations only, if the license holder was previously involved therein prior to the enactment of the law, provided that he is persuaded that the refining operations will not adversely affect competition in the fuel industry or any of the other purposes of the law. Aviation Assets provides storage services.
This bill was preceded by a bill of January 2011, which had more serious repercussions on the Company's operations, including a restriction on marketing LPG and a more stringent restriction on the organic growth of the Company at filling stations. The Company notified the Ministry of National Infrastructures, Energy and Water Resources that it opposes any additional restriction that may be imposed on it by legislation beyond the strict restrictions that were imposed on the Company in the terms of the merger of the Company with Paz Ashdod.
If this or other bill is passed with the proposed wording or in a similar version, this may have adverse effects on the Company's operations and seriously affect the Company's property rights. The Company will consider taking legal action in order to prevent unfair harm to the Company and in order to prevent unreasonable restrictions being imposed on its continued natural development.
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2.2.8.3 The Law for Promotion of Competition and Reduction of Centralization, 5773-2013
In December 2013, the Law for Promotion of Competition and Reduction of Centralization, 5773-2013 was issued ("the Law"). The Law includes, inter alia, provisions regarding a separation between real holdings in major corporations (significant real corporations) and holdings in major financial entities (significant financial entities), as defined in the Law. According to the Law, in December 2014 and in May 2015, the Committee for Minimizing Market Concentration published a list of centralized factors, a list of significant real corporations and a list of significant financial entities. The Company is featured on the list of significant real corporations and FIBI, which is indirectly controlled by the controlling shareholders in Paz, is featured on the list of significant financial entities. According to the Law, the control group in the Company will be required to separate its real holdings (the Company) from its financial holdings (FIBI), within a transition period of six years from the effective date of the Law. If at the end of the transition period no such separation between the real and financial holdings has been effected, then a trust mechanism will come into effect whereby the controlling shareholder in the significant real corporation and in the significant financial entity will be able to choose which of the means of control in the corporations controlled by it will be delivered to the control of a trustee appointed by a court who will act pursuant to the court's instructions. It should be noted that if the Company's record sales turnover or record credit (as defined in the Law) increases above the record sales turnover or credit, as applicable, as it was on the eve of the publication of the Law, as a result of the acquisition of another real corporation or the acquisition of the activity of another real corporation, the transition period mentioned above will be four years from the date of issuance of the Law.
Also according to the Law, an individual that controls a significant real corporation (published in the official records), or the individual's relative, partner, a related individual or an officer in the significant real corporation cannot serve as director in a significant financial entity (published in the official records). This restriction shall be in effect for a transition period of two years with respect to acting officers. Furthermore, according to the Law, as long as the significant real corporation or the controlling shareholder therein is entitled to hold or control the significant financial entity, pursuant to the transition provisions, then the related officers may continue in their position.
The Law also imposes restrictions on the allocation of rights, including the allocation of rights in vital industries (as the term "allocation of rights" is defined in Mark B to Chapter A to the Law) to market concentration entities. According to the Law and the above list, the Company is a market concentration entity. Vital industries include, among others, the areas of activity of a fuel company, fuel refinery and gas supplier license. As per the Law, anyone seeking to allocate a right in a vital industry to a market concentration entity can only do so after taking into account market-wide considerations of market concentration factors and considerations of promoting competition in the industry and after consulting with the Committee for Minimizing Market Concentration and the General Director of the Antitrust Authority (in the case of promoting competition in the industry). The provisions of this chapter will apply from December 2014. To the best of the Company's knowledge, no rules that address national market concentration considerations that consist of provisions and conditions underlying the allocation of rights to market concentration entities in the vital industries in which the Company operates have been published.
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Since the Law became effective, the Company's shareholders have been receiving, from time to time, offers from entities that seek information about the Company for exploring the possibility of acquiring the interests of the shareholders in the Company. The Company has established a mechanism for handling requests for information and also decided that any such information will only be provided subject to signing a non-disclosure agreement and that the nature, scope and manner of delivery of any such information will be approved by the Company's Audit and Finance Committee. The Company handles requests for information in accordance with this mechanism.
2.2.8.4 Report of the Committee for Socioeconomic Change (the Trajtenberg Committee)
In September 2011, the Committee for Socioeconomic Change (the Trajtenberg Committee) published a report, which included, inter alia, the following recommendations:
(a) LPG - it was proposed that control should be imposed on the refinery's LPG ex-factory prices and on the gas companies' marketing margin. At the same time, in order to increase competition, it was proposed that a government team should be established to propose an additional reform in the industry. For additional details regarding the introduction of control at the reporting level on LPG profits and prices, see paragraph 4.18.4 below.
(b) Filling stations - the proposal consists of: (1) promoting legislation that will immediately release all of the filling stations that were subject to the determination of the General Director of the Antitrust Authority in 1993 in all matters pertaining to lease arrangements, in accordance with what is stated in the opinion of the Attorney General in CA 9959/03 (which related to real stations). For additional details of the Attorney General's opinion, see paragraph 3.1.11.2(c) below; (2) giving preference in the filling station planning process to independent entities (developers that are not associated with the large fuel companies); (3) instructing the Israel Land Authority and the planning authorities to allocate land for 40 new filling stations for independent entities within two years and getting the Israel Land Authority to market them at the end of the planning stage; (4) instructing the Ministry of National Infrastructures, Energy and Water Resources to act to implement universal fueling regulations; (5) requiring the Ministry of National Infrastructures, Energy and Water Resources to map out specific geographic areas in which the four largest companies in the industry are present, with an emphasis on city centers, and in view of the level of competition that is defined in those areas, determining a mechanism that requires the sale of filling stations in those areas to small companies, with a smaller market share, in order to encourage competition; (6) this mechanism and the manner of implementing it should be incorporated in the draft Fuel Industry Law. For additional details regarding the draft Fuel Industry Law, see paragraph 2.2.8.2 above.
(c) Diesel oil for transportation - introducing immediate control over the refineries' ex- factory prices of diesel oil for transportation and in filling stations, similarly to the control mechanism for the gasoline market. It should be noted that this recommendation is in addition to the reporting control principles imposed on the sale of diesel oil for transportation in filling stations. For additional details, see paragraph 3.18.8.1 below.
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Following the Committee's recommendations regarding filling stations as described above, the Israeli Government accepted several proposed resolutions according to which a draft legal memo will be submitted for releasing the operators of filling stations who had entered into property and retail agreements with the fuel companies and for restricting the marketing of lands to certain factors in order to promote competition. The Company has delivered its response to these proposals, arguing that they infringe on its property and freedom of occupation.
In addition, in December 2011, the Government adopted a resolution, in the spirit of the Committee's recommendations, to instruct the Prices Committee operating pursuant to the Control of Prices of Commodities and Services Law, 5756-1996, as follows:
1. To examine the required level of control of LPG ex-factory prices, including the controlled maximum price;
2. Within the framework of examining the need to impose control on the LPG marketing margin, to consider the various marketing sectors, including the marketing of LPG to the institutional market and the marketing of LPG for home consumption in containers and in canisters;
3. To instruct the Minister of Finance and the Minister of National Infrastructures, Energy and Water Resources, on the basis of the recommendation of the Prices Committee, if any, that the LPG marketing margin will be controlled.
Moreover, following an additional Government resolution, in which the Prices Committee was instructed to examine introducing control on the marketing margin of diesel oil for transportation at filling stations, control was introduced at the reporting level on the sale of diesel oil for transportation at filling stations. For additional details, see paragraph 3.18.8.1 below.
2.2.8.5 Taxation
For details, see Note 28 of the Company's financial statements as of December 31, 2015.
2.2.9 Environmental Protection
The crude oil and oil products industry is subject to extensive regulation and supervision, whose purpose is to prevent any harm to the environment, especially water, air, soil and sea pollution) and to protect the safety of the public and the workers in the industry. Oil products are defined as poisons by the Hazardous Substances Law, 5753-1993. Therefore, any processing or handling of them, including refining, storage and transport, is subject to regulation and supervision. In recent years there is a clear trend to make the relevant legislation stricter and to enact regulations, standards and strict conditions for business licenses on matters relating to environmental protection, and there is also a trend to make the enforcement of the provisions of the law stricter. It should be noted that the Company has an internal enforcement program in the field of environmental protection. For details of the Company's activity in the field of environmental protection, see paragraphs 3.17, 4.17, 5.17 and 6.11.2.6 below.
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2.2.10 Safety
Crude oil and the oil products in the possession of the Paz Group are hazardous substances, both to those handling them and to the environment. Therefore the handling of these is subject to various regulatory provisions and requires strict compliance with safety arrangements at work. The Group meets the requirements of the Work Supervision Organization (Safety Management Program) Regulations, 5773-2013, which came into effect in August 2014 and whose purpose is to determine a systematic program for safety management at the work place in order to prevent accidents, reduce risks and comply with statutory requirements on the subject of employment safety and health. It should be noted that the Company carries out an internal safety enforcement program.
2.2.11 Competition
The spheres of activity in which the Group operates are very competitive. With regard to competition in the R&W Division, see paragraph 3.8 below. With regard to competition in the Industries and Services Division, see paragraph 4.8 below. With regard to competition in the Refining Division, see paragraph 5.8 below.
2.2.12 Changes in Consumer Habits in Israel - Natural Gas that Constitutes a Substitute for Industrial LPG, Fuel Oil and Diesel Oil
Natural gas has become a significant energy source in the Israeli economy and is already replacing the use of industrial LPG, fuel oil and diesel oil in places where supply and distribution infrastructures were and are being constructed or using road tankers (for the transport of CNG). The increase in the consumption of natural gas is a result of economic factors (the price of natural gas compared to the price of oil distillates) and environmental protection factors. It should be noted that in 2015, the price of an oil barrel and of oil distillates was at a low compared to the prices in the past decade to an extent that effectively reduced the economic incentive for using natural gas. Paz Ashdod is preparing for an increase in the consumption of natural gas in order to reduce the quantities of fuel oil for the local market and in order to allow the upgrade of diesel oil for transportation. The plants of Paz Lubricants and Pazkar are preparing for the transition to use of natural gas, which will reduce their production costs (insofar as the prices of natural gas are lower than the prices of oil distillates).
Natural gas is sold to institutional customers, such as the IEC, power stations and large plants. Concessions for distributing natural gas in various parts of Israel have been granted on the basis of tenders published by the State. The expansion of the use of natural gas might reduce the scope of the Company's sales.
The Natural Gas Industry Law (Amendment No. 6), 5774-2014 allows companies defined as oil distillers or oil distillation related entities to market and sell natural gas. The Company is preparing to launch its activity for the marketing and sale of natural gas for the industrial and transportation markets.
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2.2.13 Changeover to LPG Refueling
The Amendment to National Master Plan 18 (change no. 3) allows the use of automotive LPG for the refueling of vehicles at filling stations ("automotive LPG").
The transition to using automotive LPG for refueling automobiles is limited in scope, and the Company does not expect it to materially increase in the near future and/or to have any significant effect on its financial results.
The Group operates positions for automotive LPG refueling at some of the Company's filling stations. In addition, Pazgas provides automotive LPG to private stations. The Group is increasing the number of positions that allow using automotive LPG for refueling, including at filling stations. The introduction of automotive LPG refueling at the filling stations does not involve significant investments for the Company.
This information is forward-looking information, as defined in the Securities Law. It is possible that in practice, the transition to automotive LPG refueling will be more widespread than the Company expects, as a result of various reasons such as: competitive automotive LPG prices, mainly as a result of the low rate of excise, and other advantages in comparison with the use of gasoline (such as reduced emission of pollutants).
2.2.14 CNG (Compressed Natural Gas) Refueling
In January 2013, the Government adopted a resolution on the subject of the reduction of Israeli dependence on oil for transport. This resolution is a continuation of resolutions of previous Governments, with regard to implementing a national program to reduce the global dependence on oil for transport. The purpose of the program is to advance, during the years 2013 to 2025, a transition transportation in Israel to alternative energy sources to oil and to reduce the preponderance of oil as a source of energy for transportation in Israel by approximately 30% in 2020 and approximately 60% in 2025, in relation to the consumption forecasts in those years, insofar as such a transition will be economically viable, by means of reducing prices, encouraging economic growth and adapting regulatory requirements.
The resolution instructs several Government ministries, inter alia, to formulate within 180 days the safety and security requirements for using buses operated by compressed natural gas (CNG), the regulatory framework for vehicles running on alternative energy sources that are not based on oil (electrical, hybrid, gas, bio-fuel, methanol, etc.), to examine stimuli for a fuel industry based on natural gas, and inter alia the viability of a facility for converting natural gas into fuel and the use of waste to create fuel. In addition, it was decided to consider the taxation policy and the manner in which it encourages the use of alternative fuel.
In December 2013, the Order of Vehicle Operation (Motors and Fuel) (Vehicle Operation in Natural Gas), 2014 was issued, which allows operating vehicles using CNG if the vehicle has a CNG-powered propulsion system, whether as an exclusive system or combined with another fuel-powered propulsion system.
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In January 2016, the Ministry of National Infrastructures, Energy and Water Resources, in collaboration with other Government ministries, issued a draft public appeal calling for grants and safety net for supporting the construction of new CNG-operated filling stations. According to the proposed outline, a financial grant will be awarded to filling stations that switch to supplying natural gas to customers and a safety net mechanism according to which filling stations that fail to reach a certain natural gas sales quota will be entitled to annual financial support under the terms and criteria stipulated in the outline.
The outline also establishes threshold conditions for filling stations that file applications, benchmarks for studying the applications for entering the program etc. The Company submitted its response to the outline in February 2016, arguing that, among others, the grand and safety net stipulated in the outline are not lucrative.
The Company does not expect a large-scale transition to CNG-powered vehicles in the coming years nor does it expect CNG refueling to have any material effect on its financial results in the near term. However, the Company has been studying the necessary preparations for setting up several CNG-operated filling positions. The Company's decision depends, among others, on receiving financial grants and a safety net for operating CNG-powered filling stations.
This information is forward-looking information, as defined in the Securities Law. It is possible that in practice, the transition to CNG refueling will be more widespread than the Company expects, as a result of various reasons such as: quick penetration of automobiles with a CNG-powered propulsion system into the Israeli market, competitive CNG prices, low excise rate on CNG and other CNG advantages compared to the use of gasoline (such as reduced emission of pollutants).
2.2.15 Directives for the Prevention and Reduction of Air Pollution caused by Vehicle Fleets
In the context of the measures taken for implementing the Government's resolution of January 2013 for promoting alternative transport fuels, the Ministry of Environmental Protection issued directives for the prevention and reduction of air pollution caused by vehicle fleets in keeping with Article 14 and 16 to the Clean Air Law. These directives were issued to 28 companies that manage large vehicle fleets. The directives prescribe an average particle emission target for vehicle fleets that will apply effective from January 1, 2018 which is supposed to lead to a gradual reduction in pollutant emissions. The directives also establish a compliance target whereby at least 3% of the vehicle fleets of said companies effective from 2020 will be powered using alternative energy sources (electrical, hybrid, natural gas, synthetic diesel originating from natural gas or biomass, a mix of diesel and biodiesel produced from waste, used vegetable oil or animal fats).
Starting from 2015, said companies are required to publish data regarding levels of vehicle fleet emissions and their compliance with the directives. Some of the data will be published on the Ministry of Environmental Protection's website and all of the data must be published on the companies' websites.
The Company does not expect a massive transition to vehicles powered by alternative energy sources in the coming years nor does it expect that such a transition will have a material impact on its financial results in the short term.
This information represents forward-looking information, as this term is defined in the Securities Law, and therefore it is possible that the actual transition to using vehicles powered by alternative energy sources will have broader effects that those anticipated by the Company, among others, due to various reasons such as lower excise duty or other incentives for using energy sources other than gasoline or diesel or due to regulatory amendments that will offer incentives to the massive transition to vehicles powered by alternative energy sources.
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Description of the Company's Business by Divisions
The following is a detailed description of the divisions of the Company.
The description of the R&W Division is set out in Part 3 (paragraph 3); the description of the Industries and Services Division is set out in Part 4 (paragraph 4.1.1); and the description of the Refining Division is set out in Part 5 (paragraph 5).
Part 3: The Retail and Wholesale Division
3.1 The Structure of the Division and Changes therein
3.1.1 The Activities included in the Division
The R&W Division includes three main subdivisions:
The Retail Subdivision, which is responsible for the marketing, distribution, transport and sale of fuels and food and convenience products at filling stations and retail centers, which include the Yellow filling stations and convenience stores located throughout Israel.
The Wholesale Subdivision, which is responsible for direct marketing of fuel to commercial, industrial and institutional customers, mainly to the customers' premises, and which is also responsible for marketing fuel to the Palestinian Authority and to electronic fueling (Pazomat) customers.
The Entrepreneurship and Assets Subdivision, which operates in two branches: Real Estate Entrepreneurship and Operations and Assets, in locating and purchasing lands, selling lands and assets, entering into contracts with property owners and/or holders of other contractual rights, promoting permits, urban building plans and licensing arrangements for exhausting property potential, constructing and expanding refueling and retail sites, leasing commercial areas at the refueling and retail sites and providing engineering and maintenance services for the Company's equipment. The Entrepreneurship and Assets Subdivision also assists the Group companies in their real estate activities.
3.1.1.1 The Retail and Real Estate Subdivisions
The Paz Group's activity at public filling stations is one of its main activities. The fueling sites sell the Group's customers fuels, lubricants, food and beverage products, various other products and accessories for drivers. The Company is continuing the expansion of its retail trade activity at the refueling sites. As a part of this policy, the Company is continuing to expand the range of products that are sold in the Yellow convenience stores and to provide consumers with a shopping experience at the refueling sites. Most of the sites are open seven days a week 24 hours a day. At some retail sites, Paz leases commercial areas to various businesses such as restaurants and cafés.
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As of the end of 2015, the Company has 272 public filling stations that are located throughout Israel, of which 233 filling stations include a Yellow convenience store (and another three Yellow convenience stores that are not at filling stations). Of all of the filling stations, 51 filling stations are retail sites. In the Company's estimation, the Company has the largest number of filling stations, convenience stores and retail sites of all the fuel companies in Israel.
Regarding the methods of operation and details of the Company's rights in the filling stations, see paragraph 3.1.11 below.
3.1.1.2 The Wholesale Subdivision
The activity of the Paz Group in the Wholesale Subdivision includes marketing, sale, distribution and supply of fuels to customers outside the scope of public filling stations, to commercial (industrial and institutional) customers and to private customers. In addition, the Wholesale Subdivision consists of the marketing and sale of fuels to the Palestinian Authority and the marketing and sale of fuels at filling stations by means of the electronic refueling (Pazomat) system, mainly to car fleets.
This activity is carried out both directly by the Company and through independent agents and distributors that are bound by agreements with Paz. The transport activity is carried out through external transport contractors and through Pazmovil. In the Wholesale Division, the Company contracts with the customers in a non-recurring order or agreement.
The marketing of oil products is done, inter alia, to approximately 200 internal filling stations that are located on the premises of some of the customers.
The Company's customers include industrials plants, kibbutzim, moshavim, State corporations, security organizations, moving companies, infrastructure contractors and others. The Palestinian Authority represents the Company's largest customer and in 2015 was a material customer of the Group. The Company's institutional customers also include institutions that are required by law to hold tenders.
The activity of the Wholesale Subdivision also includes the sale of jet fuel for airplanes, which is mostly done on the basis of annual tenders. Some of the sales are made directly to the aviation companies and some are made through international agents - AIR BP and QAS.
The Wholesale Subdivision is, as aforesaid, also responsible for the marketing and sale of oil products by electronic fueling, which is done at the refueling stations by Pazomat, which specializes in computerized refueling, with control and supervision of the refueling and washing expenses of car fleets.
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3.1.1.3 The following table shows the amount of sales of oil products by the Wholesale Subdivision in 2014 and 2015:
Number of Number of filling stations Average filling stations whose oil sales to whose oil product sales Total oil filling product sales were lower product sales stations exceeded the than the Year (in KL) (in KL) annual average annual average 2015 Public filling stations (*) 1,249,280 4,590 106 166 Pazomat in public filling stations 424,846 Direct marketing 1,661,392 Fuels by injection 17,750 2014 Public filling stations (*) 1,182,081 4,302 112 162 Pazomat in public filling stations 428,726 Direct marketing 1,638,981 Fuels by injection 27,939
(*) Includes sales through Pazomat.
3.1.2 The Competition in the Division and Changes therein
For details, see paragraph 3.8 below.
3.1.3 Legislative and Regulatory Restrictions and Special Constraints in the Division
The activity of the Company is subject to various legislative and regulatory restrictions. For an extensive discussion of the legislative and regulatory restrictions in the field of activity, see paragraphs 3.17 and 3.18 below.
3.1.4 Changes in the Scope of the Activity and its Profitability
See paragraphs 3.2.2, 3.3.2 and 3.5.2 of the Report of the Board of Directors.
3.1.5 Developments in the Markets
In the last decade there has been a trend of developing filling stations into refueling sites and retail sites, and each of the large fuel companies has developed a chain of brand name convenience stores. In recent years, the large fuel companies that compete with the Company (Delek, Sonol and Dor Alon) have been reducing the gaps between them and the Company in the number of filling stations and convenience stores operated by them. Moreover, in recent years there has been considerable acceleration in the trend of setting up filling stations that do not belong to one of the large fuel companies, with the aspiration of creating private brands in the market.
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3.1.6 Technological Changes
In recent years, the environmental regulations for filling stations have become stricter, and investments are required both in infrastructure for protecting the land and water sources and in the field of dispersing the gas fumes in tanks and pumps, to protect the air quality. In this framework, the Company is acting to replace the old dispensers with new modern dispensers, which allow continuous monitoring of the fuel vapor on a dispenser level, in order to comply with a German standard, the BIMSCH 21, which was adopted by the Ministry of Environmental Protection.
The competition, the high standard of service, and the changeover to self-service have resulted in the development of software and equipment that allows central management and control at the filling stations and the improvement of electronic refueling and ancillary services. The Company has wireless infrastructure at the filling stations, which allows the fueling installations and the pumps to communicate wirelessly rather than by wired connections. Regarding Universal Refueling Device Regulations, see paragraph 3.18.11 below.
3.1.7 The Critical Success Factors in the Division and Changes therein
The critical success factors underlying the fueling and retail sites include the following:
Nationwide deployment at strategic sites, financial strength that allows investments to be made in building new filling stations, renovating and extending existing filling stations (while making significant investments in the field of safety, energy efficiency and environmental protection), establishing a chain of convenience stores and establishing retail sites, property rights in land on which the fueling sites and retail sites are built, agreement terms with the filling station operators, giving credit to car fleet customers for electronic fueling and keeping professional human resources in the Company.
The critical success factors underlying direct marketing include the following:
The synergy between Paz Ashdod and the direct marketing activity (the Wholesale Subdivision of the R&W Division constitutes the sales branch of the Ashdod Refinery for optimal coordination of production outputs with market demand), availability of products and storage abilities, a competitive edge in tenders of institutional customers, developed marketing and logistic systems, financial strength that allows flexibility in giving credit to customers, a collection system and a developed quality control system, professional services given to customers and reliance on a range of marketing and distribution channels with nationwide deployment.
For additional details of the Company's policy with regard to customer credit, see paragraph 6.2.1.3 below.
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3.1.8 Changes in Suppliers and Raw Materials
Most of the oil products sold by the Company are refined at the Ashdod Refinery and are bought by the Company from Paz Ashdod. The Company buys the rest of the oil products that it needs from ORL and imports. For additional details see paragraph 3.15.2 below.
For the purpose of fueling with the Pazomat fueling device, the Company and Pazomat have an agreement with a single supplier that supplies a wireless infrastructure to the filling stations, which is comprised of a wireless device reader that is installed on the gas dispenser, a receiver-transmitter unit/units and software for managing communications and transmitting them between the various system components. In February 2016, the Company entered into an agreement for replacing the wireless infrastructure at the filling stations with a single supplier that will replace the previous single supplier. The Company can purchase the automatic refueling devices from both suppliers currently operating in this market. For further details regarding the regulations of the universal fueling standard, see paragraph 3.18.11 below.
For the purpose of installing new dispensers, the Company has entered into an agreement with a sole supplier that manufactures, supplies and provides service for dispensers for the Company. The Company is not dependent on this sole supplier.
3.1.9 The Main Barriers to Entry and to Exit in the Division and Changes therein
Entering the field of activity requires large investments that demand large scale credit sources and identifying sites (which involves a long time) for fueling sites and retail sites. These investments are influenced by the high standards required for building the sites, planning restrictions and legislative and regulatory requirements in the planning and building sphere and in the field of environmental protection and in the field of safety (including the obtaining of approvals, licenses and permits for the various activities, as stated in paragraph 3.18 below).
It should be clarified that obtaining a license to operate as a fuel company is not a major barrier to entering the field.
For marketing oil products in the area of direct marketing, the barriers to entry are less significant and therefore the competition in this area is greater.
3.1.10 Alternatives to the Products in this Operating Segment and Changes therein
Regarding the use of automotive LPG for refueling cars at filling stations, including in the Company's filling stations, see paragraph 2.2.13 above.
As for the Order of Vehicle Operation (Motors and Fuel) (Vehicle Operation in Natural Gas), 2014 which allows refueling vehicles with CNG, see paragraph 2.2.14 above.
As for the directives for the prevention and reduction of air pollution caused by vehicle fleets using alternative energy sources, see paragraph 2.2.15 above.
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Several car importers are marketing hybrid cars (cars that are operated by a combination of an electric motor and a combustion motor), which consume less oil products. In the Company's estimation, the number of hybrid cars in Israel is negligible.
Electric cars have been marketed in Israel for several years now and an infrastructure for charging electric cars has been established. At this stage, the Company cannot estimate the long-term effect of this activity, but it estimates that in the coming years the effect on its financial results will not be material.
For further details regarding the Government's resolution with respect to reducing dependence on oil products for transport and encouraging a transition to energy sources that are alternative to oil, see paragraph 2.2.15 above. The Company does not foresee, in the coming years, a significant decrease in demand for oil products for transport as a result of the development of such alternative energy sources.
The Company's assessment with regard to the effect of the introduction of hybrid and electric cars and with regard to alternatives to oil for transport on the Company's business is forward- looking information, as this term is defined in the Securities Law, which is based on the Company's assessments. The effect of the use of hybrid and electric cars or alternatives to oil for transport on the Company's business may be significantly and adversely different from the Company's assessments, because of a quicker and larger scale penetration and/or the regulatory initiatives, tax benefits, etc.
3.1.11 Methods of Operating Filling Stations and the Company's Rights therein
3.1.11.1 The Company's Different Types of Fueling Sites - General
The Company's fueling sites can be divided into several types according to two characteristics. One of these is the nature of the Company's property rights in the land on which the site is built, and the other is the manner of operating the site.
The Company is not dependent on any of the filling stations through which it markets its products, and none of the Company's fueling sites has a significant effect on the results of its activity.
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The following table shows details of the Company's filling stations, according to the characteristics of the property rights in the filling stations and the method of operation of the filling stations, as of the end of 2015:
Keshet Active retail Supply Type of filling station Reshet concessions agreement agreement Total Ownership 77 17 5 1 100 Disabled veterans 25 4 11 - 40 Real 17 0 7 - 24 Long-term lease 37 14 - - 51 Short-term lease 35 7 1 - 43 No property rights - - - 14 14 Total 191 42 24 15 272
The following tables below show the main characteristics of the filling stations, according to the property rights and method of operation:
a. According to property rights:
Type of property right Risk of (no. of Paz's antitrust filling stations of related Operating Nature of Paz's this type) claims rights property rights Duration (in years) Ownership (100) None Owned by Paz in Ownership or Without restriction perpetuity without main lease (on Israel Land restriction, except for Authority (ILA) land, eight filling stations that usually 49+49) are co-owned as follows: the operation of six of these filling stations was transferred to Paz for a fixed period, one is operated by the partner and one is co-operated Disabled Yes In principle, given to the Sublease of 49 + 49 veterans' filling disabled veteran, but at Israel Land stations (40) 29 filling stations there is Authority land an agreement transferring operation rights for a fixed period Real filling Yes In principle, Paz does not Main lease from Usually 49 years. In stations (24) have the right, but at 17 the owner (who some cases there is an filling stations there is an is not the Israel option for an agreement transferring Land Authority) additional 49 years operation rights or sublease of Israel Land Authority land Long-term lease None The Company owns the Lease Usually 25 years less (51) rights one month from the date of receiving possession Short-term lease None The Company owns the Lease Usually up to ten (43) rights years from the date of receiving possession Supply None The Company does not No property One to three years agreements (15) own the rights right
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b. According to method of operation:
Credit Type of operation risk for Duration CPI (no. of Paz's filling Nature of Inventory the end of decided Collateral stations of this type) operation owned by customer agreement by level Reshet stations (191) Operated by Paz Paz Paz Usually 1- Paz Usually there through Nituv or 3 years is proper an independent collateral manager who that provides guarantees management and undertakings operation services Keshet Keshet Cases where after The The Usually 3 The Usually there stations concessions a purchase or operator operator years operator is collateral (81) (42) lease of operation for supply rights, Paz for a part of granted the rights the obligo to a concessionaire for a period of up to three years Retail (24) Filling stations The The Not fixed The In most where Paz has operator operator in time operator cases there is property rights insufficient and has appointed collateral an operator for an unfixed period in a retail agreement, according to which the retailer buys fuel from Paz at a price determined by Paz Supply Short term supply The The 1-3 years The In most agreements agreements where operator operator operator cases there is (15) Paz has no insufficient property rights in collateral the land on which the filling station is built
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3.1.11.2 Types of Filling Stations from the Viewpoint of Property Rights
The Company's filling stations are divided into the following six types, from the viewpoint of the property rights in the land on which the filling station is built as specified below.
a. Filling Stations Owned by the Company
The filling stations owned by the Company or leased directly from the Israel Land Authority ("privately owned filling stations") are filling stations where the Company has a right of ownership in the land on which the filling station is built (in a small number of cases, the land is jointly owned with another party), or the Company leases the property directly from the Israel Land Authority, or the Company is a sub-lessee from a chief lessor (other than the ILA), excluding one filling station which the Company leases from a public fund until 2033. The Company has 100 privately owned filling stations. 77 filling stations are operated as Reshet filling stations, as defined in paragraph 3.1.11.3a below, and 17 filling stations are operated as Keshet concession filling stations, as defined in paragraph 3.1.11.3b below. Five of the filling stations owned by the Company are operated by retailers in accordance with a retail agreement as defined in paragraphs 3.1.11.2b and 3.1.11.3b below.
It should further be stated that of the 100 filling stations owned by the Company, there are eight filling stations where others have ownership rights in the land together with the Company; in some cases, these involve ownership rights together with the Company in the whole site, and in other cases the Company owns the area of the filling stations and the rest of the site belongs to the other parties. The Company's ownership of the land on which the filling station is built allows it operational flexibility to choose the appropriate method of operation.
b. Disabled Veterans' Filling Stations
Filling stations that are subleased by Paz in a rehabilitation arrangement for disabled IDF veterans ("disabled veterans' filling stations"). These are filling stations that were built in accordance with an inter-ministerial arrangement that was made between the State of Israel and the fuel companies. According to the aforesaid arrangement, it was decided that land of the Israel Land Authority would not be allocated for building filling stations, unless the right to operate the filling station was given to a disabled IDF veteran, who would be chosen by the Rehabilitation Department at the Ministry of Defense, for the purpose of his rehabilitation. According to the aforesaid arrangement, the disabled IDF veteran was given a direct lease right for 49 years and, in most filling stations, an option was granted to extend this term by an additional period of 49 years. At the same time, the fuel company would be granted a sublease right for the same periods. The set of agreements for these filling stations includes four agreements: a master agreement between the disabled IDF veteran and the Company ("the master agreement"), a main lease agreement between the Israel Land Authority and the disabled IDF veteran, a sublease agreement in which the parties are the Company, the disabled IDF veteran and the Israel Land Authority, and an operating agreement between the Company and the operator, which is called a "retail agreement" ("retail agreement").
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The master agreement provides, inter alia, that the Company shall set up the filling station, at its expense, on the land that the disabled IDF veteran leases from the Israel Land Authority, equip it with most of the equipment required for its proper operation and maintain its facilities. According to this agreement, the disabled IDF veterans undertake that upon receiving the lease from the Israel Land Authority, they will sublease the land to the Company. The Company undertakes in this agreement that after it constructs the filling station, it will appoint the disabled IDF veteran as its operator in accordance with a retail agreement as set out below.
The sublease agreement made between the disabled IDF veteran, the Company and the Israel Land Authority gives the Company the rights of possession and use of the filling station land and provides that the Company shall pay the disabled IDF veteran rent for each year of the period of the lease in an amount identical to the amount that the disabled IDF veteran pays for that year to the Israel Land Authority. With the consent of the disabled IDF veteran, the Company pays the rent directly to the Israel Land Authority.
The retail agreement provides that the disabled IDF veteran is liable to buy the oil products solely from the Company, and the price of the oil products for the filling station (i.e., the sale price to the disabled IDF veteran) will be determined by the Company. In most cases, there is insufficient collateral for the payment for the supply of fuel.
As stated in paragraph 3.18.12.1 below, in 1995, the General Director of the Antitrust Authority revised his decision of 1993, within the framework of an agreed arrangement between him and the Company and additional fuel companies. According to the revised decision of the General Director of the Antitrust Authority, retail agreements - long-term exclusivity agreements - at filling stations that are not owned by the fuel companies, constitute a restrictive arrangement within the meaning of this term in the Restrictive Trade Practices Law, but not at filling stations where there is a "standard lease agreement". The decision states that it does not prevent the operators of individual filling stations from applying to the courts and arguing otherwise. The Company's agreements with the disabled IDF veterans and the real filling stations, as defined below, constitute a "standard lease agreement" as defined in the arrangement of 1995. Following the decision of the Director, a petition was filed in the High Court of Justice by a disabled IDF veteran against the arrangement, in which arguments were raised against the validity of the arrangement. The Court dismissed the petition.
Several disabled IDF veterans who have agreements with the Company as described above began separate legal proceedings against the Company on several grounds, including claims against the validity of the Company's sublease rights, as well as claims that the exclusive supply right given to the Company, the right to determine the price for the sale of the oil products to the filling stations and the right to cancel the agreement without paying compensation, together with the right to evict the disabled IDF veteran, constituted restrictive arrangement or unfair terms in a standard agreement.
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The decisions of the District Courts on these issues contradicted one another. Eight judgments have been given on the subject (five in cases where the Company was a party and three judgments with regard to filling stations of other fuel companies). All of the legal proceedings in which the Company was a party held that the sublease right of the Company is valid. One judgment rendered in April 2014 in a proceeding in which the Company was not a party, ruled that the entire set of agreements between the fuel company and the disabled veteran, including the above fuel company's proprietary rights and the operation agreement, are invalid. Four of the eight judgments rejected the argument that there was a non-exempt restrictive arrangement, and four of the judgments held that there was a non-exempt restrictive arrangement. Five of the eight judgments rejected the argument that there was a prejudicial term in a standard contract and three judgments held that there were prejudicial terms in a standard contract. Appeals have been filed against seven judgments. Over the years, Paz reached various settlements in all of the five proceedings to which it was party, in which all of the disabled IDF veterans struck out the appeals that they filed, whereas the appeals filed by Paz against the District Court judgments that held that there was a non-exempt restrictive arrangement and/or a standard contract with prejudicial terms were allowed consensually within the framework of the relationship between the parties. As of the date of this report, four legal proceedings filed against the Company with the District Court are pending and no legal proceedings are pending against the Company at the Supreme Court.
For further details regarding the legal proceedings taking place with regard to the filling stations, see paragraph 6.8 below.
On September 1, 2008, the Attorney General filed an opinion to the Supreme Court within the framework of an appeal in a case in which the Company was a party that was pending in Court. The conclusions of the opinion were that the exclusivity clause in the retail agreement constitutes a non-exempt restrictive arrangement and is therefore void, and the exclusivity clause and the clause that grants the Company the power to determine the price for the filling stations constitute unfair terms in a standard contract, and are therefore void. The Attorney General states in his opinion that the sublease is real, but, according to him, it does not find any expression in the set of agreements, except as a "property whip" for enforcing the provisions of the retail agreement. The Attorney General discussed the possibility of compensating the Company for its investments if and when the filling stations cease to buy fuel from it exclusively. The proceeding in the Supreme Court ended in a commercial arrangement. The Supreme Court gave the force of a judgment to a consensual application that was filed by the parties, in which the Company's appeal in the Supreme Court was allowed and the counter-appeal filed by the disabled IDF veteran was denied, in the sense that the judgment given by the District Court in the framework of the relationship between the parties and their surrogates was cancelled.
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The Company has 40 filling stations operated by disabled IDF veterans. At 29 disabled IDF veteran filling stations of the Company's 40 disabled IDF veteran filling stations, an additional agreement was signed over the years, in which the parties suspended the validity of the retail agreement for a specific period of several years, and during this time the right to operate the filling station was assigned to the Company in return for payment of an operating fee to the disabled IDF veteran ("the operation transfer agreement"). In some of the agreements, the Company has an option to extend the operation agreement. The operation fees paid by the Company to the disabled IDF veterans are fully or partially linked to changes in the CPI or to the marketing margin for gasoline 95 octane, which is a price controlled product. In most of the operation transfer agreements there is a waiver clause for claims and actions relating to the past up to the end of the period of the operation transfer period. In addition, at some of the disabled veteran filling stations where there is no operation transfer agreement, a commercial terms agreement has been signed.
In 2016-2018, the validity of 14 operation transfer agreements will expire and in 2019- 2023 - the validity of 12 operation transfer agreements will expire. The Company estimates that even if the operation transfer agreements are not extended and/or renewed, its profits will not be materially affected since, as stated above, among others, at the end of the operating period, the filling station operator is required to purchase oil products only from the Company according to the retail agreement.
The Company's estimate represents forward-looking information, as defined in the Securities Law, based on its actual past experience. The effect of the non-renewal of the majority of operation transfer agreements might reduce the Company's market share and impair its business.
During 2008 and 2009, the Rehabilitation Department of the Ministry of Defense approached disabled IDF veterans who are being rehabilitated at the filling stations and the fuel companies with a request to receive details concerning the operation transfer agreements. In this request, it was stated that the parties should have obtained the consent of the Rehabilitation Department and/or the Israel Land Authority to these arrangements, and that the fundamental position of the Rehabilitation Department is not to agree to these arrangements. The Company's position, relying on the opinion of its legal advisors, is that the set of agreements does not require the consent of the Rehabilitation Department and/or the Israel Land Authority to the aforesaid arrangements, and that in any case the State knew of these arrangements and did not object to them. The Company replied to the Rehabilitation Department in a detailed letter that has not been answered. To the best of the Company's knowledge, discussions took place between various authorities with regard to the rehabilitation of disabled IDF veterans at the filling stations. The Company is not involved in the discussions that took place and is unfamiliar with their content.
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Resolution 3473 of the Israel Land Authority issued in January 2014 regarding the ILA's policy for allocation of land to filling stations states that at the end of the initial 49-year lease term, a lessee who is a disabled IDF veteran and pays discount fees at a rate of 51% of the value of the land based on the valuation of the Government Appraiser will be entitled to the extension of the lease term by another 49 years. If this term is cut short, the lessee will be entitled to reimbursement of the lease fees with the addition of linkage differences and interest as required by law. It should be noted that the discount rate applicable to a lessee (not according to this Resolution) is 22.5%. Also according to the Resolution, if the leasehold rights are assigned to another before the date of issuance of the Resolution, the assignment will remain intact on a non- recourse basis. It should be mentioned that to the best of the Company's knowledge, this stipulation derives from the recommendation to proscribe the transfer of leasehold rights granted to a disabled IDF veteran lessee. In view of the ambiguity and/or illegitimacy (as per the Company) of this Resolution, the Company is unable to estimate its effect on the Company's filling stations that are subleased according to IDF disabled veteran rehabilitation plans.
c. Real Filling Stations
Real filling stations are filling stations in which Paz has a sublease or a main lease from a third party that is not the Israel Land Authority and in which Paz has appointed the main lessee / the owner as the operator under a retail agreement. At these filling stations, the set of agreements usually comprises three agreements: a master agreement, a lease or sublease agreement and a retail agreement ("real filling stations").
The master agreement in real filling stations regulates the relationship between the Company and the owner / main lessee of the land, and usually provides that Paz will build the filling station at its expense, equip it with most of the equipment required for its proper operation and maintain all its facilities. The owner undertakes to lease the land for the filling station to Paz and to transfer the right of possession to it. The Company undertakes in this agreement that after it constructs the filling station, it will appoint the owner or someone acting on their behalf as its operator in accordance with a retail agreement as defined in paragraph (b) above.
At filling stations where the ownership of the land is private, the Company leases the land from the owner in a main lease. The rent in such cases is determined and updated in accordance with a contract signed between the parties. At filling stations where the ownership of the land is the Israel Land Authority, the Company leases the land in a sublease from the main lessee in return for the same rental fees that the main lessee pays the Israel Land Administration or for an amount that is higher than this rent. The rent was and/or is determined in negotiations between the parties.
At some of these filling stations, the property rights of the Company under the set of agreements are for a period of 49 years from the date on which possession was received, and in most cases there is an option to extend the lease period for another 49 years. At some of the real filling stations, the lease period is less than 49 years. Since these are old filling stations, at two of the filling stations the lease agreements will expire in 2016-2018, at eight of the filling stations the lease agreements will expire in 2019-2020 and at three filling stations the lease agreements will expire in 2021-2024. In some of the agreements the Company has an option to extend the lease period.
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The Company cannot assess whether a lease agreement will be signed for an additional period or what the terms of such agreement will include. The Company estimates that the non-extension of the lease agreements and/or any changes made in their terms will not materially affect its profits.
The Company's estimate represents forward-looking information, as defined in the Securities Law, based on its actual past experience. The effect of the non-renewal of the majority of long-term lease agreements might reduce the Company's market share and have an adverse effect on its business.
The retail agreement provides that the operator is liable to buy the oil products solely from the Company, and the price of the oil products for the filling station (i.e., the sale price to the operator) will be determined by the Company. In the majority of cases, there is insufficient collateral for the payment for the supply of fuel.
The revised decision of the General Director of the Antitrust Authority concerning the retail agreements, as set out in detail in paragraph 3.18.12.1 below with regard to the disabled IDF veteran filling stations applies also to the real filling stations. In the Company's opinion, the agreements with the real filling stations are "standard lease agreements" according to the definition of this term in the 1995 arrangement.
Several main lessees of real filling stations had filed legal proceedings against the Company, based on several causes of action, including claims against the validity of the Company's lease rights, and claims that the right of exclusive supply constitutes a non-exempt restrictive arrangement or an unfair term in a standard contract. Regarding one filling station, the District Court rendered its decision. In said case, the question was whether the Company had a right to realize the option to extend the sublease by another 49 years, after the period of the first 49 years had ended. The Court ruled against the Company on the grounds that the Company's property right merely constitutes a property means of enforcing the exclusivity clause in the retail agreement that constitutes a non-exempt restrictive arrangement, and therefore the exercise of the option should not be allowed.
Within the framework of an appeal that the Company filed with the Supreme Court, in 2010 an opinion was filed on behalf of the Attorney General. According to the opinion, the exclusivity provision in the purchase of fuel products, which appears in the retail agreement between the fuel companies and the filling station operators, constitutes a non-exempt restrictive arrangement that may prejudice competition. The opinion did not adopt any position of the property right questions that were the subject of the dispute between the parties. In August 2012, a settlement was signed, in which it was agreed, inter alia, that the Company's appeal would be allowed in such a manner that the verdict would be cancelled with regard to the relationship between the parties and their assignees and the operation of the filling station was transferred to the Company.
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As of the report period, there are three additional pending legal proceedings filed against the Company by operators of real filling stations. See details in paragraph 6.8 below.
For details regarding the comments of the Committee for Socioeconomic Change (the Trajtenberg Committee) on the Attorney General's opinion concerning the release of filling stations, see paragraph 2.2.8.4 above.
The Company has 24 real filling stations. At 17 of these real filling stations, an operation transfer agreement was signed over the years, similarly to the agreements with the disabled IDF veterans. The operation transfer agreements are for fixed periods. In 2016-2018, the operation period of nine filling stations is expected to end and in 2019-2023, the operation period of eight filling stations will end. In some of the agreements the Company has an option to extend the operation agreement. The Company estimates that even if the operation transfer agreements are not extended and/or renewed, its profits will not be materially affected since, as stated above, among others, at the end of the operating period, the filling station operator is required to purchase oil products only from the Company according to the retail agreement.
The Company's estimate represents forward-looking information, as defined in the Securities Law, based on its actual past experience. The non-renewal of the majority of operation transfer agreements might reduce the Company's market share and have an adverse effect on its business.
d. Long-Term Leased Filling Stations
These filling stations were built on land owned by a third party or leased therefrom under a main lease. Most of the filling stations were leased to the Company for a period of 25 years less one month. In some cases the Company has a right of first refusal at the end of the lease period. These filling stations (except for a few) were built by the Company and/or with its funding. The right of possession and use, including operation, was given to the Company by the owner of the land for the lease period. The Company undertook that at the end of the lease and operation period it would vacate the land and leave the equipment and buildings, apart from its removable equipment (namely, movable property, including attached equipment that can be dismantled and is not considered part of the land), to the land owner. During the lease and operation period, the Company pays the land owner rent as agreed between the parties in the agreement to build the filling stations. In some cases this is a fixed amount that is linked to changes in the consumer price index or changes in the exchange rate of the dollar; in other cases, the amount is linked partially or fully to changes in the marketing margin of gasoline 95 octane, which is a controlled commodity; and at the remaining filling stations, the rent varies according to the amount of sales of oil products at the filling station. In some cases where the rent varies, the Company undertook a certain minimum amount that does not depend upon the amount of sales. The Company has 51 long-term leased filling stations.
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In 2016-2018, the lease period of seven filling stations will end and in 2019-2023, the lease period of eight filling stations will end. The Company cannot estimate whether a lease agreement will be signed for an additional period, and if so, what its terms will be. Nevertheless, as stated above, in some of the cases, the Company has a right of first refusal at the end of the lease period. The Company estimates that the non- extension of the lease agreements and/or changes in the terms of the lease agreements will not have a significant adverse effect on the profitability of the Company.
The Company's assessment is forward-looking information, as defined in the Securities Law, which is based on its actual experience in the past. The effect of not renewing most of the long-term lease agreements may reduce the Company's market share and adversely affect the Company's business.
e. Short-Term Leased Filling Stations
Short-term leased filling stations are filling stations in which the Company leases both the land and the filling station's building from the owners of an active filling station for a limited period of several years, which is usually not more than ten years from the date of receipt of the claim, in return for the payment of rent; the Company received from the owner a right to operate the filling station for the period of the lease. In some cases these are old filling stations that were built by Paz and it is the owner of the equipment at the filling station. These cases concern filling stations where the Company's sublease rights have ended, either because the agreed lease period has ended or as a result of the arrangement in 1995 with the General Director of the Antitrust Authority, as described in paragraph 3.18.12.1 below, and at the end of the sublease periods, the Company signed lease agreements with the owners of the filling stations. In some cases, the filling stations were built by Paz but it did not have a sublease right. The rent in these lease agreements is determined in negotiations, and usually it is not determined on the basis of sales. In some cases Paz has a right of first refusal at the end of the least period.
The Company has 43 short-term leased filling stations. In 2016-2018, the lease period will end at 24 filling stations and in 2019-2023, the lease period will end at 16 filling stations. The Company cannot estimate whether a lease agreement will be signed for an additional period, and if so, what its terms will be. The Company estimates that if the lease agreements are not extended and/or if there are changes in the terms of the lease agreements, this will not have a significant adverse effect on the profitability of the Company.
The Company's assessment is forward-looking information, as defined in the Securities Law, which is based on its actual experience in the past. The effect of not renewing most of the short-term lease agreements may reduce the Company's market share and adversely affect the Company's business.
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f. Filling Stations without Property Rights (Supply Agreements)
These are filling stations where the Company has no property rights, right of possession or right of use. In some cases, the filling stations are ones where the Company's property rights ended, whether because the agreed lease period ended or as a result of the arrangement with the General Director of the Antitrust Authority in 1995, as detailed in paragraph 3.18.12.1 below. In some cases, Paz never had any property rights in the filling station, and the station is operated by the owner of the land on which it is built or by its representative. In some cases, the Company signed agreements with the owner of the land on which the filling station is built, which guarantee exclusivity in the supply of oil products for periods of one to three years, and in other cases there are agreements regarding the commercial terms. In most cases there is insufficient collateral for the payment for the supply of oil products. In most cases Paz services the filling station when called to do so by the filling station itself. The Company has 15 filling stations of this kind without property rights.
From past experience and in view of the relationships with the owners of these filling stations, the Company estimates that for most of these stations, the supply by the Company will continue at the end of the supply agreement period, but there is no certainty that the profitability margins at the time of renewing these agreements will remain unchanged. The Company estimates that if certain agreements are not extended, the Company will succeed in entering into alternative supply agreements.
The Company's assessment regarding the effect of the non-renewal of the supply agreements on the Company's business is forward-looking information, as defined in the Securities Law, which is based on its actual experience in the past. The effect of the non-renewal of the supply agreements may reduce the Company's market share immaterially.
3.1.11.3 Types of Filling Stations from the Viewpoint of Operation - General
Out of a total of 272 Paz filling stations, the retail sale of oil products to the public is carried out through the Company at 191 filling stations. Of which, 26 self-service filling stations through the subsidiary Nituv and 165 filling stations through "retail agents" (as defined below) ("Reshet stations"). At the other 81 filling stations, the retail sales of oil products to the public are carried out through various retailers/concessionaires, who buy the oil products from Paz ("Keshet stations"). At 42 of the Keshet stations, the Company has the right to operate the stations and the Company chose to operate them through concessionaires. These are called "Keshet concessions", as defined below.
a. Reshet Stations
Most of the Reshet stations and Yellow convenience stores that are located at these filling stations (where there is one) are operated on behalf of the Company by a manager with an independent business, who provides the Company with management services, including the employment of the fueling site workers, in return for a commission that is determined by the sales of various products at that filling station ("retail agent").
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According to the agreements signed from time to time between the retail agents and the Company, the Company gives the retail agent, for a fixed period of time of up to approximately three years (with a mutual right of terminating the contract with notice of up to two months), an exclusive right to manage one or more filling stations as stations in the Company's chain of filling stations, which allows limited use (pursuant to the agreement) of the trademarks of the Paz Group. The retail agent undertakes to sell, during the period of the agreement, only oil products of the Company. Within the framework of the day-to-day management of the filling station, the retail agent is liable for the manpower costs of operating the station. The Company is liable for the fixed costs and all the other regular maintenance costs, and is the owner of the equipment and inventory of fuel at the fueling site. The retail agent gives the Company collateral to guarantee performance of the agreement.
According to a verdict rendered in March 2014, the Court accepted the Company's position whereby the retail operation method does not create employer-employee relations.
At most Reshet stations there is a Yellow store. At these filling stations, the agreement with the retail agent applies also to the Yellow store for an identical period, and gives permission to manage the store, which includes limited permission (according to the agreement) to use Yellow's trademarks, brand names and work methods. The Company pays the full cost of setting up the store, the purchase of the equipment and the maintenance of the store. The retail agent pays the day-to-day operating costs. Unlike the filling station, the retail agent owns the inventory of products at the store until they are sold to the customer, and shortly before they are sold to the end customer they pass into the ownership of the Company. For the right to manage the store and all the services that he receives from the Company, the retail agent pays the Company a service fee or a concession fee, which are consideration that is usually made up of a fixed sum and a percentage of the sales turnover at the Yellow convenience store. The Company supervises, inter alia, the variety and inventory of the products and the level of service at each filling station and store, by means of a computer system, work procedures and manpower.
As stated above, the Reshet stations include 26 of the Company's self-service filling stations, which are operated through the subsidiary Nituv and 165 filling stations operated by retail agents.
b. Keshet Stations
The Company's contracts with the operators of the Keshet stations can be divided into three categories:
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Keshet concession agreements - the Company has the right to operate 42 Keshet filling stations, whether permanently or for a fixed period pursuant to a lease agreement or an operation transfer agreement, but the Company has granted the right to operate the filling station for a short period of up to approximately three years to a concessionaire ("Keshet concession stations"). Keshet concession stations differ from filling stations managed under a retail agreement, inter alia, in the short and fixed period of the agreement during which the operator is given the right to operate the filling station and in the fact that the operators give the Company collateral for supplies in the amount of a part of the expected obligo.
Retail agreements - 24 filling stations operate in accordance with a retail agreement. According to the retail agreement, the retailer undertakes to market only the Company's products in the filling station and the retailer takes upon himself the main risks involved in the maintenance of the inventory of fuel that he bought from the Company, including changes in the sale price of the oil products to the end consumer, with the exception of electronic fueling sales. The retailer is required to pay the Company the consideration for the oil products on credit terms that are agreed between him and the Company. In some cases, the sale is made without collateral and/or with partial collateral.
Supply agreement - At 15 filling stations in which the Company has no rights in the land, a short-term supply agreement has been signed for periods between one and three years. In the supply agreements between the Company and the filling station operators, the operators undertake to buy exclusively from the Company, at agreed prices and on agreed credit terms, all the oil products and other products that will be marketed at the filling station and to sell them under the Company's trademarks. The filling station operators are required to sell the oil products within the framework of price control restrictions, and in accordance with the Company's guidelines. At some stations, the Company owns the underground equipment and lends the equipment to the station operator. The Company installs at the filling station the above-ground equipment that is required to operate the filling station and it provides the owner of the rights in the filling station maintenance services for the equipment owned by it and professional training. In some cases, there is insufficient collateral for supplies.
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3.2 Products and Services in the Division
In the R&W Division, the Paz Group has income from three categories of main products: (1) fuel and lubricants at filling stations; (2) convenience products and the lease of property at stores and retail sites and (3) direct marketing of fuel.
3.2.1 The Fuel and Lubricants Product Group
3.2.1.1 General
The fuel products marketed at the Company's fueling sites include: the various kinds of gasoline, transport diesel, automotive LPG, urea (an additive for transport diesel for use in heavy vehicles) and engine lubricants and oils for cars.
The oil products sold in direct marketing category include gas oil, transport diesel and the various kinds of gasoline (for the filling stations of the chain and for direct customers), jet fuel and fuel oil.
3.2.1.2 Prices of Oil Products at Filling Stations
At the filling stations operated by Paz (Reshet stations), the selling prices of oil products to the end customer are determined by the Company.
The consumer selling price of gasoline 95 octane at filling stations is subject to control. See details of the gasoline 95 octane control decree in paragraph 3.2.1.3 below.
Regarding the prospective introduction of control on the marketing margin of transport diesel at the filling stations, see paragraph 3.18.8.1 below.
The difference between the selling price to the end customer (less excise duty and VAT) and the fuel ex-factory price is called the marketing margin ("the marketing margin").
For details of the marketing margin of gasoline 95 octane, see paragraph 3.18.8.3 below.
At filling stations that are not Reshet type stations as defined above (Keshet stations), Paz and the filling station operator agree on the selling price of the oil products from Paz to the filling station operator. According to the agreement, the filling station operator assumes the financial risks pertaining to maintaining the reserve of fuel purchased from the Company and to providing credit to its customers and determines the selling price of the oil products to the end consumer.
The margin between the selling price to the operator and the ex-factory purchase price of the oil products by the Company (after payment of excise duty and VAT) is called the wholesaler's margin ("the wholesaler's margin").
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The price that direct marketing customers pay is determined in agreement signed between the Company and the customers or according to tenders which the Company wins.
The price that Pazomat customers pay is determined in negotiations between Pazomat and its customers and and/or in tenders. In most filling stations, the filling station operators receive commissions for Pazomat sales and also pay fees to Pazomat for the services rendered by it. In these filling stations, Paz and/or Pazomat bear the cost of discounts granted to customers as well as the credit risks. In another part of the filling stations, the filling station operators participate in the majority of Pazomat discounts and also pay fees to Pazomat for its services. In these filling stations, Pazomat bears the credit risks.
3.2.1.3 Maximum Price for Controlled Oil Products
The Control of Prices of Commodities and Services (Maximum Prices at Filling Stations) Order, 5762-2002 ("the Price Control Order"), determines the maximum consumer price for gasoline 95 octane. For additional details regarding the marketing margin of gasoline 95 octane, see paragraph 3.18.8.3 below.
On the subject of considering whether to impose control on the marketing margin of transport diesel at the filling stations, see paragraph 3.18.8.3 below.
3.2.2 The Property Leasing and Convenience Product Group
3.2.2.1 Convenience Products at Yellow Stores - General
The Company gives third parties (filling station operators) concessions for fixed periods of time, to operate convenience stores under the Yellow brand name alongside Paz's filling stations. Some Yellow convenience stores are operated by the Paz Group itself and the other stores are operated by third parties according to a mechanism whereby Pas is paid fixed consideration and/or a percentage of the income. Yellow convenience stores operate as a chain and specialize in the sale of convenience products that include travel food products (coffee, sandwiches, baked goods, snacks, refrigerated soft drinks, ice creams, etc.), the sale of other food products for a complete shopping experience, the sale of tobacco products, the sale of non-food products (such as pharmaceutical products and electrical goods) and the provision of advanced services (as stated in paragraph 3.2.2.2 below).
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Most Yellow convenience stores operate 24 hours a day, seven days a week. The Company is working to open additional Yellow convenience stores and to increase the activity of the Yellow convenience stores, inter alia, by increasing the variety of products for a complete shopping experience, providing advanced services, focusing on the coffee category and increasing the sales of coffee. The Company sees the Yellow convenience stores as a growth engine of the Company and a part of the complete shopping experience at the fueling sites. The Company estimates that Yellow convenience stores offer an opportunity for growth, inter alia in comparison to the activity of convenience stores in other countries abroad. In recent years, the Company improved the quality of the coffee (including by replacing the coffee machines), and it is operating to strengthen the coffee brand sold in the Yellow convenience stores and create separate coffee sites in the Yellow convenience stores. The Company has entered into an agreement to market and sell Lavazza coffee and to market and sell Lavazza home coffee machines and capsules. In 2013-2015, the Company expanded the variety of non- food products, including cellular phones, SIM cards and various cellular related accessories and focused on planograms at the stores. The Company also added bakery and falafel selling sections in some of the Yellow convenience stores. In 2016, the Company intends to launch a website for selling consumer products online and/or for collecting various products that are purchased from other websites by customers at the Yellow convenience stores.
3.2.2.2 Advanced Services at Yellow Convenience Stores
Most Yellow convenience stores at filling stations provide, inter alia, advanced services such as cash withdrawal services (Caspoman), pre-paid services (charging cellular phones and charging parking cards) and wireless internet connection service.
As the market leader for convenience stores, the Company developed a cellular application that combines six tools that consist of services that assist the Company's customers "on the road". The tools include: a members' club that grants various benefits, trip routes, a collection of games, etc. The application allows communication between the Company and the customer and provides cumulative sales campaigns for the purchase of coffee at Yellow convenience stores.
3.2.2.3 Property Leasing and Sale of Electricity
At the retail sites, Paz leases a variety of commercial areas, including areas for erecting advertising signs, package collection facilities (for online shoppers) and cellular antennas. In the field of food and restaurants, it is possible to find, alongside the Yellow convenience stores, cafés and restaurants, most of which belong to the leading chains in Israel. In the field of non-food businesses, a variety of stores and businesses at the retail sites offer leisure products, clothing, banking, cellular products and pharm. Dozens of Paz's fueling sites have car wash machines, which provide a solution to the needs of customers within the framework of the retail sites. Moreover, the Company has set up solar (photo-voltaic) systems of up to 50 kilowatts on a part of the roofs of the filling stations and it records income from the sale of electricity to the IEC in accordance with long-term (twenty year) agreements.
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3.3 Breakdown of Income from Products and Services in the Division
The following table shows details of the income in the R&W Division, broken down according to the following product groups: oil and lubricants at filling stations, direct marketing fuels, and products sold at Yellow convenience stores and income from property leasing (the figures include intersegment sales within the Group):
2015 2014 2013 % of % of % of Group Gross Group Gross Group Gross Revenues revenues profit Revenues revenues profit Revenues revenues profit NIS in millions Fuels and lubricants in filling stations 2,870 22% 700 3,761 20% 690 4,189 21% 709 (including Pazomat) Direct marketing of 3,340 26% 170 4,984 27% 172 5,285 27% 185 fuels Yellow products, concessions and 703 6% 230 681 3.7% 220 681 3.5% 224 property leases (*) Total 6,913 54% 1,100 9,426 51% 1,082 10,155 52% 1,118
(*) The revenues from concessions and property leases are immaterial to the Company's revenues.
In 2015, the income from the sales of gasoline 95 octane and from sales of diesel constituted approximately 61% of the sales of the division. The gross profit margin of each of the above products (gasoline 95 octane and diesel) in NIS per kiloliter out of the sales of fuel at filling stations is similar. The income from the sale of gasoline 98 octane constituted approximately 0.2% of the income from the division, but the gross profit margin of gasoline 98 octane in NIS per kiloliter is higher compared to the other products.
The sales turnover of the Yellow convenience stores, including sales through concessionaires, that is not included in the Company's books but earns profits for the Company, totaled approximately NIS 741 million in 2015 compared to approximately NIS 718 million in 2014. For an explanation of the changes in the scopes of activity and profits, see paragraphs 3.2.2 and 3.5.2 of the Report of the Board of Directors.
3.4 New Products in the Division
In recent years, the Company added a bread bakery section in about ten Yellow convenience stores and a falafel selling section in a smaller number of Yellow convenience stores. The Company is considering expanding these sites to other convenience stores.
As for expanding the coffee category in Yellow convenience stores and the steps taken by the Company for that purpose, see paragraph 3.2.2.1 above.
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3.5 Customers of the Division
3.5.1 Customers of the Fueling Sites
Customers of the Company in the sphere of activity of the fueling sites are drivers/visitors that stop at the filling stations, including Pazomat customers, Yellow convenience store customers, operators of Keshet filling stations and property lessees at the retail sites. Most of the sales of oil products at the fueling sites are to the private customers and Pazomat customers. The Company does not have any dependence on any of the customers of the fueling sites, and none of these customers has a significant effect on the results of the Company's activity.
3.5.2 Direct Marketing Customers
3.5.2.1 End Customers
The Company markets and sells oil products, through the Wholesale Subdivision, to institutional customers, business customers, tender customers, domestic (private) customers and the Palestinian Authority. The Company's institutional customers also include government agencies and organizations that are required by law to hold tenders. The business customers include industrial plants, kibbutzim and moshavim, aviation companies, moving companies, infrastructure contractors and others. The Company markets diesel or home-use kerosene to domestic (private) customers through agents or distributors.
The sale of jet fuel to aviation companies is carried out by the Wholesale Subdivision or through international agents - Air BP and QAS. The Company or the international agent participate in tenders and undertake to supply the jet fuel. The Company de facto supplies the jet fuel to the aviation companies. Some of the tenders for the purchase of jet fuel also include refueling services that are provided by Aviation Services or another fueling supplier. The Company's largest customer for jet fuel is El Al Israel Airlines Ltd.
Regarding direct marketing customer credit, see paragraphs 6.2.1.3 and 6.11.3.3 below.
3.5.2.2 The Palestinian Authority
Following the agreement from September 29, 2006 and the addendum to the agreement from December 2007 which were also signed by the current Palestinian Government ("the agreement"), the memorandum of understandings from December 30, 2010 ("the 2010 MOU") and the MOU signed in May 2012 ("the 2012 MOU") (collectively - "the previous MOUs"), on September 30, 2014, the Company and the Palestinian Authority (in this paragraph - "the Authority") signed a binding MOU for extending the supply agreement (by the Company and its subsidiaries) of at least 50% of the oil, LPG and asphalt products delivered to the West Bank and Gaza pursuant to the Authority's needs ("the 2014 MOU").
The 2014 MOU is in effect for a period of 27 months commencing on October 1, 2014 and ending on December 31, 2016 and is binding to the parties until the signing of a detailed agreement. Similarly to the agreement and the previous MOUs, either party may terminate the agreement, for whatever reason, subject to a 90-day advance notice.
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Within the framework of the 2014 MOU, as in the previous MOUs, the Company undertook, inter alia, to provide the Authority with maintenance services, equipment and training based on the terms stipulated in the 2014 MOU. The 2014 MOU also provides arrangements with respect to payment terms, including the grant of credit.
As in the agreement and previous MOUs, as collateral for the payment, the Authority undertook to allow the Company to collect its payment from the tax monies held for the Authority by the Government of Israel (a commitment that was also signed by the current Palestinian Government). In this regard, it should be noted that the Company provides the Palestinian Authority credit in significant amounts and cannot estimate the possibility and the time that would be needed in order to collect the money from the Government of Israel, if and insofar as the Company demands the money from the Government of Israel. No additional collateral has been given to the Company.
For additional details, see an immediate report of October 1, 2014 (TASE reference: 2014-01- 167490).
According to the 2012 MOU and 2014 MOU, the Company supplies at least 50% of the Authority's oil product needs (including LPG and asphalt), both to the West Bank and to the Gaza Strip.
In 2015, the Palestinian Authority represented a material customer of the Company, see paragraph 3.5.3 below.
3.5.2.3 Wholesale Customers
The Company has contracts with wholesale customers (agents and distributors) who buy the Company's products and sell them to their customers. The products that are marketed by the wholesale customers are not necessarily identified with the Company's brand names. Usually the Company enters into contracts with the wholesale customers for an unlimited period of time. The agreement remains valid unless one of the parties gives notice to the contrary. For details of the Company's agents and distributors, see paragraph 3.6.4.1 below.
3.5.2.4 Car Fleet Customers
Car fleet customers include, inter alia, government, business or other institutional customers and private customers that are incorporated as workers' committees or various organizations. The government customers and some of the institutional customers are obliged by law to hold tenders. In cases where the Company's offer is accepted, it enters into a contract with the publisher of the tender to supply products, with price (after discount) and credit terms that are usually determined in advance for the whole period of the contract. Among these customers it is possible to list the Government Car Administration, the IEC and others. The Company also has other institutional customers that buy oil from the Company in commercial negotiations rather than by tender. Car fleet customers refuel at the Company's public filling stations and some of them also have internal filling stations on their premises. The cars of these customers are equipped with 'Pazomat' fueling machines or cards that allow electronic fueling and direct debiting of the customer.
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In August 2010, the Company won a tender for the supply of fuel and ancillary services to Government offices and other Government/Municipal bodies ("the Car Administration"). The supply period according to the tender is three years with a possibility of the Car Administration extending the supply period by another three years (each time for one year). The Car Administration extended the agreement to the latest possible extension date according to the agreement, i.e. August 2016. The supply of fuel to the Car Administration is carried out at the public filling stations through Pazomat refueling devices. In addition, the Company supplied fuel to internal filling stations of the various entities at the Car Administration. In total the tender involves approximately 8,500 vehicles and approximately 27,500 kiloliters of oil products per annum. The tender includes an undertaking of the Company to supply fueling devices and cathodic protection systems, to carry out periodic tests to ensure the equipment does not leak and to provide maintenance for the computer systems at the internal filling stations.
The green taxation reform regarding the value in use of employer-provided vehicles, as expressed in the Income Tax Regulations (Car Use Value) (Revised), 2009 which became effective in January 2010, led to reduced demands for employer-provided cars by employees, followed by a reduced number of vehicles that use the Pazomat and similar prepaid refueling devices and an increase in refueling by occasional customers.
3.5.3 Dependency on a Single Customer
In 2015, the Palestinian Authority represented a material customer of the Company, accounting for about 10% of the Company's total revenues. In the Company's estimation it is not dependent on this customer, since in the event that the agreement with the Palestinian Authority is cancelled, the Company will be able to increase the sales of the surplus oil products of Paz Ashdod to fuel companies (because of the proximity of the Ashdod Refinery to the area of most of the consumption in Israel) and/or export (with no VAT or excise duty) and under better credit terms. However, it is reasonable to assume that should the agreement with the Palestinian Authority be cancelled, the Company's profits will be materially affected.
All of the Group's agreements with its institutional and business customers are material to the activity of the Company, but the Company is not dependent on any individual customer.
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3.5.4 Breakdown of Sales
The following tables present the breakdown of sales to the segment's customers without excise duty or VAT (the figures do not include intercompany sales in the Group):
a. By type of customer:
2015 2014 2013 Sales in Sales in Sales in Customer type NIS in % of NIS in % of NIS in % of (*) millions total millions total millions total Business (without 3,134 47% 4,662 51% 4,875 50% car fleets) (**) Institutions and tenders (without 76 1% 130 1% 91 1% car fleets) Car fleets 976 14% 1,478 16% 1,843 18% Private 2,585 38% 2,946 32% 3,022 31% Total 6,771 100% 9,216 100% 9,831 100%
(*) The figures were categorized according to sales to end customers (including customers refueling at Keshet stations).
(**) Business customers include farmers, kibbutzim and moshavim, industrial customers and companies, textile companies, automobile importers, transport companies, transportation companies, business organizations, aviation companies, the Palestinian Authority and wholesalers.
The number of the Group's customers in each of the categories in the table above is large. The Group has hundreds of business customers, tens of institutional customers (who buy through tenders), thousands of car fleet customers, including private customers who are member of an organization and millions of private customers (the general public).
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b. By property right and method of operation:
2015 sales in NIS in millions Keshet Active retail Supply Reshet concessions agreement agreement Total Ownership 1,071 129 66- 1,266 Disabled 376 43 131 - 550 veterans Real 320 - 58- 378 Long-term 559 88 - - 647 lease Short-term 551 65 15 - 631 lease No property - - - 101 101 rights Total 2,877 325 270 101 3,573
2014 sales in NIS in millions Keshet Active retail Supply Reshet concessions agreement agreement Total Ownership 1,304 172 90- 1,566 Disabled 487 38 167 - 692 veterans Real 394 - 74- 468 Long-term 673 115 - - 788 lease Short-term 713 66 20 - 799 lease No property - - - 129 129 rights Total 3,571 391 351 129 4,442
2013 sales in NIS in millions Keshet Active retail Supply Reshet concessions agreement agreement Total Ownership 1,420 195 96- 1,711 Disabled 584 50 150 - 784 veterans Real 414 2 78- 494 Long-term 698 156 - - 854 lease Short-term 777 81 21 - 879 lease No property - - - 148 148 rights Total 3,893 484 345 148 4,870
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c. By seniority of car fleet customers:
2015 2014 2013 Sales in Sales in Sales in NIS in % of NIS in % of NIS in % of Seniority millions total millions total millions total Up to one year 12 1% 20 1% 24 1% Between one and 104 11% 175 12% 275 15% five years Over five years 860 88% 1,283 87% 1,544 84% Total 976 100% 1,478 100% 1,843 100%
d. By seniority of customers and other types of customers:
2015 2014 2013 Sales in Sales in Sales in Customer Seniority NIS in % of NIS in % of NIS in % of type (years) millions total millions total millions total Up to one 6 0% 6 0% 37 0% year Between one and 60 1% 173 2% 244 2% Business five years Over five 3,068 45% 4,483 49% 4,594 48% years Total 3,134 46% 4,662 51% 4,875 50% Up to one 1 0% 42 0% - - year Between Institutio one and 3 0% 2 0% 1 0% nal and five years tenders Over five 72 1% 86 1% 90 1% years Total 76 1% 130 1% 91 1%
3.6 Marketing and Distribution in the Division
3.6.1 Marketing at the Fueling Sites
Paz's marketing policy is based on strengthening the status of Paz as the largest and leading company in Israel for marketing oil products.
As a part of the marketing activity, Paz invests in and maintains the fueling sites on a regular basis and to a high standard.
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From time to time, Paz gives discounts and benefits to its customers. Pazomat customers benefit from discounts and credit terms. The discounts given to customers at the filling stations operated by Paz are derived from the competitive environment in which the filling station is located. Paz also advertises and holds sales promotions that are suited to the customers' needs (such as advertising in various forms of media, national and local advertising campaigns, reduced prices on newspapers, car wash promotions, etc.).
Paz is expanding its variety of services at the fueling sites and is acting systematically to improve the level of service and to renovate and improve some of the old filling stations.
The Yellow convenience stores operate at 233 of the Company's filling stations. The Company is acting and will act in the future to set up Yellow convenience stores at additional filling stations. Paz has set itself a high standard for the stores and the toilets facilities so that they will also be accessible to disabled persons in accordance with new standards determined in legislation.
Paz is dealing with the appearance and visibility of the filling station surroundings and in this context has been replacing old dispensers with new modern dispensers that have a large screen that allows marketing, display and more convenient communication for customers. Also, in 2015, Paz installed in most of its filling stations lighting fixtures with higher energy efficiency, which also contributed to better lighting solutions. The investments in infrastructure and operation are intended to make the shopping experience at the fueling sites, filling stations and Yellow convenience stores better for the customer.
3.6.2 Distribution and Transport to the Refueling Sites
The distribution and transport of the Company's oil products from the Company's distribution sites at Ashdod Refinery and in Haifa, from ORL in Haifa (gasoline 95 octane) and from the distribution sites of Delek Pi-Glilot in Be'er-Sheva and Jerusalem to the public filling stations is carried out by the road tankers of Pazmovil and/or by various transport contractors.
Most of the distribution activity is carried out at the distribution facility at the Ashdod Refinery.
The distribution and transport of products to the Yellow convenience stores is done partly by various suppliers and partly by Pazmovil.
3.6.3 Direct Marketing
The Company operates a marketing and sales system and markets the various oil products directly and through agents and distributors.
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3.6.4 Distribution in the Field of Direct Marketing
Distributing the various oil products in direct supply to the customer's site, including to the direct marketing channel customers, is performed using an underground pipeline infrastructure that is owned by OPP and/or ORL and/or the Ashdod Refinery (see paragraph 5.6.1 below) and forms part of the Refining Division's system. The supply prices for this infrastructure are determined in the Infrastructure Prices Control Order. For additional details, see paragraph 1.1.2.2 above.
3.6.4.1 Agents and Distributors
The Company's products are also marketed outside the filling stations through independent agents and distributors. The Company has contracts with approximately 10 agents and approximately 20 distributors. In the contracts, the agents and distributors took upon themselves the risks involved in holding the products that they bought from the Company (except for liability for the quality of the product, which the Company bears), including price, inventory and collection risks. The agents/distributors buy the Company's products from it at the price determined between the parties. The end customer price is determined by the agents/distributors. Within the framework of its contracts with the agents/distributors and the end customer, the Company loans the appropriate equipment that it owns to the end customer where necessary.
3.6.4.2 Dependency on Marketing Channels
Paz is not dependent on any of the agents or distributors that market the oil products in the field of direct marketing, but the Company's contracts with the agents or distributors are significant for the Company when taken as a group, because of their relationship with some of the end customers in the field of direct marketing. Should the agents or distributors stop their contracts with the Company in a major way, the Company will need to expand the existing marketing system.
3.7 Order Backlog in the Division
The order backlog is not relevant to examining the scope of the activity, in view of the fact that at the filling stations and Yellow convenience stores, the sales are retail sales, including the supply to car fleet customers, and therefore there is no order backlog. In direct marketing the orders are received up to a month before their delivery date. Customers who undertook to buy old products from the Company in tenders for fixed periods did not give undertakings for a financial amount; the agreements with them generally include a non-binding estimate of purchase amounts or quantities.
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3.8 Competition in the Division
3.8.1 Competition at the Fueling and Retail Sites
According to figures from the Fuel Administration, there are dozens of fuel companies that are licensed to buy oil products from the refinery or to import oil products. Four of the active companies (including Paz) are the large fuel companies, who between them have most of the market share in Israel. In the Company's estimation, as of the end of 2015, Paz's main competitors have the following number of public filling stations: Delek has approximately 242 filling, the Dor Alon group has approximately 211 filling stations, Sonol has approximately 230 filling stations and the Company has 272 filling stations throughout Israel, which constitute, in the Company's estimation, approximately 23% of all the public filling stations in Israel. In recent years, there has been a significant increase in the number of filling stations that are not associated with the four large fuel companies. In the Company's estimation, as of the date of the financial statements there are some 221 such filling stations, of which some 53 are filling stations of Ten Petroleum Company Ltd.
In the Company's estimation, as of the end of 2015, its main competitors had the following number of convenience stores: Delek had approximately 198 convenience stores (of which approximately 196 were at filling stations), the Dor Alon group had approximately 169 convenience stores (of which approximately 139 were at filling stations), Sonol had approximately 188 convenience stores (of which approximately 183 were at filling stations) and the Company had 236 convenience stores (of which 233 are at filling stations).
In recent years, the Company and its competitors have taken steps to develop the filling stations and fueling sites into retail sites that offer a variety of services, which include, inter alia, convenience stores, restaurants and cafés. The Company leads in the number of retail sites that operate around the country.
The competition at the fueling and retail sites is reflected, inter alia, in three main aspects: competition in the field of marketing fuel products to the end consumer(including the variety of ancillary services offered to customers, the standard of the services, the discounts, credit terms and sales promotions), competition for the purchase or lease of rights to build new fueling sites and competition for contracts with old filling stations (whose lease or fuel supply contracts have expired).
For details regarding the recommendations of the Committee for Socioeconomic Change (the Trajtenberg Committee), see paragraph 2.2.8.4 above.
The fuel companies have taken steps in recent years so that the fuel companies can take over the operation of filling stations. However, the Company is considering whether it is viable to continue operating certain filling stations itself in view of the level of the marketing margins. At some of the filling stations, when the operating agreement is terminated, the operation of the filling station is returned to the retailer that owns the operating right. Moreover, the fuel companies are taking steps to construct new filling stations where the operating rights usually belong to the companies from the outset.
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Despite the increased competition in recent years in the industry, Paz's network of filling stations, the prime locations, the operating methods, the investments in the upgrading of filling stations, the use of brand names and the building of retail sites have allowed Paz to maintain its leading position in the competition and to create additional sources of income beyond the sale of oil products.
The Company's retail strategy is to construct modern retail sites by rebuilding and/or upgrading the existing building, on the basis of the overall contribution and the synergy between the activity of the fueling sites and the activity of the retail sites. Adapting the correct type and brand name of the businesses for each site and its character is a key point in the ability to meet the varied needs of potential customers.
The Company has a joint venture with Shufersal Ltd. and Leumi Card Ltd. The joint venture operates a customers' club which offers "Shufersal" credit cards that grant certain benefits at the Company's Yellow convenience stores and filling stations. The Company considers the cooperation with Shufersal Ltd. and Leumi Card Ltd. as a growth engine for encouraging prospective customers to use the Company's fueling sites. See also paragraph 3.20 below.
The conditions laid down by the General Director of the Antitrust Authority for the merger between the Company and Paz Ashdod provide, inter alia, that in certain cases Paz should not enter into an arrangement to receive a right in a filling station before obtaining the approval of the General Director. For further details regarding the approval of the General Director, see paragraph 3.18.12.2 below.
For legislation and decisions of the General Director of the Antitrust Authority that are liable to affect competition in the industry, see paragraphs 3.18.12.1-3.18.12.3 below.
3.8.2 Competition in the Direct Marketing Activity in the Wholesale Subdivision
The significant competition in the direct marketing field is a consequence of the fact that the marketing is targeted directly at the customer and does not depend upon the physical location of the marketer (as opposed to the public filling stations), and in general does not involve a large financial investment in facilities. The institutional and business direct marketing customers are characterized by great sensitivity to price and payment terms, and the fuel suppliers are required to give customers significant credit, which involves risks because of the lack of full collateral, and to ensure a high service standard. For further details of the Company's policy with regard to customer credit, see paragraph 6.2.1.3 below.
As a rule, direct marketing customer loyalty is low. Some of the direct marketing contracts are made through tenders for a period of several years on competitive terms, and there is a risk that at the end of the contract, the Company will not win the new tenders or some of them and/or that its profits will be harmed in the event of a change in the terms.
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The parties competing with Paz in the direct marketing channel are the large fuel companies (Delek, Sonol and Dor Alon), smaller companies that are licensed to buy fuel and are active, inter alia, in the field of direct marketing, fuel agents and additional distributors. Thus, in the Company's estimation, there are many companies, agents, distributors and wholesale customers that buy oil products from the licensed fuel companies and market them to customers. Effective from July 1, 2007, ORL is licensed to sell oil products directly to customers. This activity is in competition with the Company's direct marketing activity. To the best of the Company's knowledge, as of October 2012, ORL supplies about 50% of the Palestinian Authority's consumption (in 2015 - about 15% of its LPG consumption).
In recent years an increase can be seen in the number of competitors in the field of supplying oil products to direct marketing customers. The increase in competition derives from the low entry barriers for this activity and from the fact that most of the oil products are generic products, which means their source is of limited importance. Therefore, the competition focuses mainly on the sale terms.
In the Company's estimation, the ownership of Ashdod Refinery gives it a relative advantage over the competing fuel companies in the field of direct marketing. The Company has the advantage of the flexibility and availability of the products, because of its control of the production mix, its storage and distribution abilities at the Ashdod Refinery and its ability to supply the products to the customers.
3.8.3 Competition in the Field of Electronic Fueling
The fuel companies market fuel to some customers by means of an electronic fueling system. The Company, through Pazomat, specializes in providing computerized fueling services to electronic fueling customers, while enabling customers that manage car fleets to control and monitor the fuel and car wash costs of the car fleets. The competition in this field focuses mainly on price, credit terms, deployment of filling stations and, additional services such as: electronic reports and media, means of managing car fleets, types of devices and other services such as car wash services. The electronic refueling segment is characterized by fierce competition and the transition of customers from one fuel company to another.
In October 2011, the Fuel Industry (Stimulating Competition) (Rules for General Automatic Fueling Facilities) Regulations, 5771-2011, came into effect. For further details, see paragraph 3.18.11 below.
3.8.4 Methods of Contending with the Competition
In order to contend with the competition at the fueling sites, since the location of the filling station is a main criterion in the customer's decision to choose a place to refuel, the Company invests considerable efforts and resources in expanding the national deployment of its fueling sites. Paz has a certain advantage over its competitors because its fueling sites are situated in central positions. The Company is taking steps to maintain its position as the leader in terms of the number and location of filling stations, subject to the conditions of the General Director of the Israel Antitrust Authority for the merger between the Company and Paz Ashdod and the Fuel Industry Law. For the General Director's terms regarding the merger, see paragraph 3.18.12 below.
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In the Company's estimation, the expected investment in building a new fueling site / retail site (including an average Yellow convenience store) is between approximately NIS 6 million and approximately NIS 15 million based on the size of the site. These amounts do not include the cost of buying the land.
The Company invests considerable efforts in developing and expanding the chain of Yellow convenience stores. For additional details of the Yellow convenience store chain, see paragraph 3.2.2 above.
Moreover, the Company invests considerable efforts in improving the service at the fueling and retail sites, including by means of customer service centers and by giving various benefits to the Company's customers (such as newspapers, special offers on car washes, gifts in Yellow convenience stores, benefits for customer clubs, etc.).
The Company's activity in the field of selling oil products to the institutional and business customers involves a relatively high risk because of exposure to credit risks and relatively low profits. Paz's ability to provide credit to its customers constitutes a competitive advantage. For additional details of the Company's customer credit policy, see paragraph 6.2.1.3 below.
The Company's various marketing channels, which are based, inter alia, on independent agents and distributors that are bound to Paz in agreements, some of which are long-term, and are the long arm of the Company, which are familiar and have connections with the direct marketing customers, are of importance when contending with the Company's competitors in the direct marketing channel.
Paz's financial strength and advanced marketing system and the synergy with Paz Ashdod benefit the Company when contending with the competition.
3.9 Seasonal Factors in the Division
As a rule, the levels of demand for oil products at the fueling sites do not vary significantly over the calendar year. Notwithstanding, there is an increased consumption of fuel in the months of July and August. There is greater demand for Yellow convenience store products in the summer months and during the Jewish religious holiday season (September-October / March-April). The high demand for the oil products and Yellow convenience store products during these periods is a result of the larger number of trips made in private cars to vacations and events.
As a rule, there is no major seasonal variation in direct marketing, but in the jet fuel sphere, there is a significant increase in consumption during the summer months and at the time of religious holidays.
3.10 Production Capacity in the Division
Not relevant to the division.
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3.11 Fixed Assets, Land and Installations in the Division
3.11.1 General
The Company has property rights (freehold and leasehold and rent) at most of the filling stations and additional real estate assets. Land owned by the Company (some of which is leased to a third party), prepaid lease fees, buildings and equipment at the filling stations all constitute a part of the Company's fixed assets.
In addition, the Company has equipment and buildings at some filling stations where the Company does not have property rights in the land.
The Company's equipment at the filling stations includes all the equipment that is required for the proper operation of the filling stations, including tanks, pipes, pumps, computer and communications systems, officer equipment, electrical systems and generators, fire extinguishing systems and toilets.
Some of the land owned by the Company and leased by the Company has not yet been registered in the name of the Company at the Land Registry and/or at the Israel Land Authority and the Company is taking action to complete the registration proceedings. Most of the land owned by the Company and leased by the Company is used by the Company for selling services and products. Moreover, the Company has a limited number of pieces of land that are used for investment purposes and for administrative purposes.
In accordance with its policy, the Company sells or acts to achieve the rezoning of filling stations with low profit margins which are not vital to the deployment of the Company's filling stations. For additional information regarding the Company's policy for harvesting its asset potential, see paragraph 6.10.1 below.
For additional information regarding the Company's property rights in the land on which the filling stations are built, see paragraph 3.1.11 above.
3.11.2 Pi-Glilot
3.11.2.1 The Company has holdings in Pi-Glilot (about 21.5%), along with Sonol and Sonepco Ltd. (about 14.25%), the State of Israel (50%) and Glilot Corner Ltd. (a private company which acquired Delek's holdings in Pi-Glilot in a transaction completed in January 2015) (about 14.25%) ("Glilot Corner").
Pi-Glilot holds the land rights in the Pi-Glilot compound in Ramat HaSharon, with a total area of approximately 164 dunams, on which in the past there was a storage and distribution facility.
In addition, Pi-Glilot has about 50% holding and the Company has about 4.3% holding in Magal Israel Gas & Oil Enterprises Ltd., which is engaged in the distribution and marketing of natural gas in the area of the city of Arad.
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Various restrictions were imposed on the Company's holdings in Pi-Glilot both by virtue of the control permit in Paz Ashdod (as defined below) and by virtue of conditions that the General Director of the Israel Antitrust Authority imposed with regard to the Company's merger with Paz Ashdod.
The fuel companies and Pi-Glilot signed an agreed order that within a certain time Pi-Glilot would sell all of its business activity in the sphere of oil and oil products, apart from its land rights, so that two (or more) fuel companies would not hold the any of the facilities, assets or activity of Pi-Glilot jointly. Immediately after that, Pi-Glilot will adopt a voluntary liquidation resolution. On July 31, 2007, Pi-Glilot's terminals were sold to the Delek Group ("the agreed order").
Following an agreed petition filed with the Restrictive Trade Practices Court and in view of the sale of Delek's holdings in Pi-Glilot and the proceeding for the sale of the Company's holdings in Pi-Glilot (as discussed below), on November 2, 2015, the Restrictive Trade Practices Court revoked the agreed order.
According to an amendment to the control permit of May 18, 2014, as detailed in paragraph 5.18.1 below, the Company was permitted to hold Pi-Glilot until no later than December 31, 2014.
In November 2014, the Company applied to the Companies Authority for revising the control permit and removing the article in the control permit that addresses the sale of the Company's interests in Pi-Glilot given that Pi-Glilot has not been engaged in the oil industry for years and its activity has no bearing on the Company's and/or Paz Ashdod's activities. The response of the Companies Authority has not yet been obtained although, in view of the proceeding for the sale of the Company's interests in Pi-Glilot as detailed above and the revocation of the agreed order, it seems that the restriction in the control permit on the Company's interests in Pi-Glilot is no longer relevant. For further details regarding the control permit, see paragraph 5.18.1 below.
In January 2015, the Company signed an agreement with a third party partnership/company from the Canada Israel Group for the sale of the Company's holdings in Pi-Glilot ("the share sale transaction") in consideration of NIS 106 million plus VAT that will be paid to the Company over a period of 26 months from the date of signing. According to the adjustment mechanisms prescribed in the agreement, the consideration may increase by an amount that is immaterial to the Company.
The share sale transaction was subject to the fulfillment of certain suspending conditions including waiver of the right of refusal by the other shareholders in Pi-Glilot and the approval of the Ministry of Finance and the Board of Directors of Pi-Glilot.
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On March 26, 2015, Glilot Corner notified the Company of the exercise of a right of first refusal granted in keeping with the articles of association of Pi-Glilot in connection with the acquisition of the Company's entire stake in Pi-Glilot at the same price and under the same terms as in the share sale agreement. The Company filed an interpleader with the Court in which the Court was asked to decide who is entitled to purchase the Company's shares in Pi- Glilot, the Company/the partnership in the Canada Israel Group which signed the share sale agreement or Glilot Corner which exercised the right of first refusal. On October 25, 2015, an arrangement was signed between the Company and Glilot Corner and companies/partnerships of the Israel Canada Group and the Acro Real Estate Group, which received the Court's approval on October 26, 2015 ("the arrangement").
According to the arrangement, following the exercise of the right of first refusal in keeping with Pi-Glilot's articles of association, an agreement will be signed between Glilot Corner and the Company for the sale of the Company's interests in Pi-Glilot (21.5%) for the same price and terms as those stipulated in the share sale agreement (under the necessary adjustments) and the share sale agreement will be cancelled.
The parties decided that the share sale agreement will be signed after obtaining the approval of the Minister of Finance for the new composition of shareholders in Glilot Corner which will include, among others, the companies/partnerships of the Israel Canada Group and of the Acro Real Estate Group.
According to the arrangement, Glilot Corner placed the first three installments pursuant to the agreement in a total of approximately NIS 32 million in escrow and on the date of signing the agreement, they will be released to the Company. In addition, certain provisions have been made regarding a guarantee that will be provided to secure the parties' liabilities towards the Company. As stated above, the transaction for the sale of the Company's interests in Pi-Glilot is subject to the fulfillment of two suspending conditions: obtaining the Minister of Finance's approval and obtaining the approval of Pi-Glilot's board of directors.
The parties have decided on certain provisions in the event that the Minister of Finance does not approve a certain shareholder in Glilot Corner and the Company's option of notifying Pi- Glilot whether it is interested in having Glilot Corner purchase its interests in Pi-Glilot even if the companies/partnerships of the Israel Canada Group and of the Acro Real Estate Group are not approved by the Minister of Finance and the implications of this option on the denial of the right of first refusal (according to Pi-Glilot's articles of association) from Glilot Corner, for a specific period or if at all, with respect to future transactions for the sale of the Company's interests in Pi-Glilot, as they will be. The arrangement also provides for the waiver of claims by the parties to the arrangement and an agreed compensation for the violation of the arrangement. The arrangement, which, as mentioned above, was approved by the Court, resulted in the conclusion of the Company's petition by way of the Company's interpleader. It should be noted that in keeping with the arrangement, the parties also agreed to extend the date for fulfilling the suspending conditions.
See more information in the Company's immediate report of October 26, 2015 (TASE reference: 2015-01-141633).
See details of the pre-tax income which the Company is expected to record in its financial statements in Note 12b to the Company's financial statements as of December 31, 2015. See also immediate reports of January 22, 2015 (TASE references: 2015-01-016957 and 2015-01- 017320).
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3.11.2.2 The Company owns approximately 34 thousand sq. m. in the Pi-Glilot compound (in two non- adjacent plots) which is partly used as the Company's logistics warehouse and partly leased to third parties.
In January 2015, the Company signed an agreement for the sale of its real estate rights to a third party ("the real estate sale transaction") in consideration of NIS 131 million plus VAT that is paid to the Company over a period of 26 months from the date of signing. According to the adjustment mechanisms prescribed in the agreement, the consideration may increase by an amount that is immaterial to the Company.
See details of the pre-tax capital gain which the Company recorded in its financial statements in Note 12b to the Company's financial statements as of December 31, 2015.
For additional information see also immediate reports of January 22, 2015 (TASE references: 2015-01-016957 and 2015-01-017320).
The agreement for the sale of the Company's holdings in Pi-Glilot and the real estate sale transaction are not interdependent.
3.11.2.3 As stated above, part of the land (both the land owned by Pi-Glilot and the land owned by the Company) is leased to third parties. The RS/800/A/1 plan allows the temporary use of the land for storage, display sale and lease of vehicles and for the sale and storage of gardening materials. This plan is in effect for five years from August 2013 with a possible extension of the period by another five years, subject to the approval of the District Committee.
To the best of the Company's knowledge, the Israel Land Authority is promoting a detailed master plan for the South Glilot neighborhood, with the data of the approved RS/800 plan in the area of Ramat HaSharon and TA/2812 plan in the area of Tel-Aviv.
3.12 Research and Development in the Division
Not relevant.
3.13 Intangible Assets in the Division
3.13.1 Trademarks
Paz has old and well-known registered trademarks, which distinguish it from its competitors and are a significant asset in its activity. The main trademarks are Paz, Pazomat and Yellow.
Paz invests resources in developing and maintaining goodwill and awareness of its brand names.
3.13.2 Licenses
The Company is registered with the Fuel Administration and it has approval from the Fuel Administration and from the tax authorities in Israel to buy oil products directly from Oil Refineries Ltd. and from imports.
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3.13.3 Operating Rights at Filling Stations
The Company purchased the majority of retail rights at the filling stations that it owns, which over the years have been operated by retailers for an unfixed period. The purchase of the rights accorded the Company economic benefits that derive from the retail activity and from the operating rights at the filling stations, for periods that are estimated by the Company as being on average approximately twenty years. As of December 31, 2015, the carrying amount of the depreciated consideration in the Company's books for the purchase of these rights amounts to approximately NIS 115 million.
For additional details regarding intangible assets, see Note 13 to the financial statements for December 31, 2015.
3.14 Human Capital in the Division
See part 6 below.
3.15 Raw Materials and Suppliers in the Division
3.15.1 General
Most of the oil products that the Company needs are supplied by Paz Ashdod.
In 2015, approximately 97% of the oil products that were marketed by the Company to its customers were bought from Paz Ashdod. Most of the remaining balance was bought from ORL (these figures do not include gasoline 98 octane purchased from ORL, LPG purchased by Pazgas from refineries and imports, asphalt purchased for Pazkar from ORL and basic lubricants purchased from various suppliers). The production capacity of Paz Ashdod is approximately half the production capacity of ORL.
ORL and Paz Ashdod are the only manufacturers of oil products in Israel. There are also companies that specialize in the international trade of oil products. ORL has been declared to have a monopoly on refining services for fuel and ethylene.
3.15.2 Purchases from ORL
Purchases of oil products from ORL by the Company and the terms of the purchases from ORL are based on a longstanding custom that exists between ORL and the fuel companies, according to which the Group companies enter into an annual agreement with ORL and each month they order the products in advance for the current month. On November 23, 2006, the General Director of the Israel Antitrust Authority gave approval to the Company to carry out, without the need for any further approval, regular purchases of finished refined oil products from ORL in accordance with the usual format at ORL.
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Most of the oil products that the Company buys are bought from Paz Ashdod, apart from asphalt products, fuel oil for the north, kerosene and gas oil for the north and gasoline 98 octane that are bought from ORL (and as needed, in occasional purchases, also gasoline 95 octane, gas oil and jet fuel that are bought in accordance with the usual format at ORL). LPG is bought from the refineries and imported, jet fuel is bought from Paz Ashdod and imported and basic lubricants are bought from various suppliers.
3.15.3 Import of Oil Products
The Company imports crude oil for refining at the Ashdod Refinery and from time to time also imports finished oil products.
3.15.4 Automated vehicle identification systems
For details of an engagement for the purchase of automated vehicle identification systems in connection with Pazomat's refueling devices, see paragraph 3.1.18 above.
3.16 Investments in the Division
The Company has invested and continues to invest in the fueling sites by purchasing and/or leasing rights in existing filling stations from third parties, and/or rebuilding and upgrading existing filling stations, and/or building and expanding filling stations, Yellow convenience stores and retail sites.
The Company focuses on setting up Yellow convenience stores / Yellow markets (large stores with a wider variety of products) and on diversifying the mix of products sold in the Yellow convenience stores by offering added value to customers. This includes setting up coffee sections in the majority of Yellow convenience stores which partly consist of a bread bakery and falafel selling sections.
The Company's investments in direct marketing in recent years were mainly in the building and/or renovation of internal filling stations on customers' premises.
In 2015, the Company invested approximately NIS 110 million in the R&W Division (this amount also includes the Company's investments in complying with environmental provisions, as stated in paragraph 3.17 below).
The Company intends to continue investing in the expansion of the chain of filling stations, Yellow convenience stores and retail areas.
The information regarding the expected investments is forward-looking information, as defined in the Securities Law, since it is based on the Company's business plans. It is possible that the actual investments will be different, inter alia as a result of business opportunities that will present themselves to the Company or as a result of difficulties in obtaining permits to make the planned investments, something that may result in these investments being postponed to later years.
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3.17 Environmental Risks in the R&W Division and Methods of Managing them
3.17.1 Environmental Risks
Oil products are hazardous and/or pollutant substances by nature. The use of oil products in the activity of the R&W Division may cause environmental risks, and especially air pollution from fuel fumes and soil and groundwater pollution that may be caused as a result of the activity of the filling stations. The growing environmental requirements underlying the receipt of licenses and permits involve considerable expenses and investments.
3.17.2 Major Ramifications of Legal Provisions on the Company
The Company's R&W Division activity is subject to various legal provisions that will be described below.
3.17.2.1 The Water Law, 5719-1959 ("the Water Law")
The Water Law is intended to protect water sources in Israel, and it imposes criminal liability on anyone who by an act or omission causes and/or may cause the pollution of water sources. The Water Law grants the Government authorities extensive powers, including the authority of the Director General of the Israel Water Authority to demand that anyone who caused pollution should do everything needed in order to stop the pollution and rectify the situation and to impose fines on anyone who infringes the order. Where the requirements of the Director General of the Israel Water Authority are not carried out, he may do whatever is needed by order and charge the polluter that violates the order for expenses. For details of the ramifications of the Water Law on the investments that Paz will be required to make in the event of a pollution of water sources, see paragraphs 3.17.2.2, 3.17.4 and 3.17.7 below.
In the Company's estimation, the Water Law does not have an effect on its competitive status, since it applies to all the filling stations in Israel.
3.17.2.2 The Water Regulations (Prevention of Water Pollution) (Fuel Stations) Regulations, 5757- 1997 ("the Water Regulations")
a. General
The Water Regulations include extensive provisions that were intended to prevent filling stations from causing soil and water pollution.
The liability for compliance with the provisions of the Water Regulations lies with the filling station operator. A filling station operator is defined in the Water Regulations as the owner of the business license or the person under whose guidance, management or supervision the filling station is operated. There is a possibility that a court will determine that in view of the terms in the agreement between the Company and the owner of a filling station that operates it, both the Company and the owner of the filling station will be regarded as the filling station operators.
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Failure to comply with the provisions of the Water Law and the Water Regulations may constitute a criminal offense with a possible sentence of up to one year of imprisonment or a large fine, and more serious sanctions in the case of an ongoing offense. The Company is exposed to the risk of indictments being filed with regard to the Water Law and the Water Regulations.
b. Installation of Preventative Measures
The Water Regulations provide, inter alia, provisions that bind operators of filling stations to take preventative measures both when building the filling station and also when operating it. Filling stations that have been and/or will be built after the regulations came into effect should include, inter alia, sealed surfaces that are impervious to the penetration of fuel and oil, a drainage system, an oil-water separator, secondary tanks and a monitoring device for discovering leaks. Moreover, the Water Regulations require the filling station operator to carry out and make periodic tests of the impermeability of tanks and pipes with a frequency as stipulated in the Water Regulations. Filling stations that had been erected before the Water Regulations came into effect have to be adjusted according to the Water Regulations.
The Water Regulations also stipulate methods of reporting and dealing with a site that has become polluted as a result of an oil leak.
Paz has implemented the requirements of the Water Regulations in a gradual process that has continued for several years, in accordance with priorities that were determined by the Ministry of Environmental Protection, and today the vast majority of Paz's public filling stations satisfy the requirements of the Water Regulations. At the remaining filling stations, the Company is acting to complete the necessary preventative measures. In the Company's estimation, the cost of completing the measures needed for compliance with the Water Regulations is not significant for the Company.
c. Installing Safety Measures at the Filling Old Stations
Pursuant to the Water Regulations, Paz is required to install at all the fueling stations that were built before 1997 ("old filling stations") safety measures whose purpose is to discover leaks of oil into the soil of the fueling station. The Company has approximately 190 old filling stations. The Company has installed safety measures of the ATG type and the piezometer type at all of the old fueling stations.
d. Impermeability Tests
The Water Regulations require impermeability tests to be carried out periodically (once every three to five years) for pipes and tanks at each fueling station. The Company conducts periodic tests in accordance with the Water Regulations. The cost of the impermeability tests at filling stations is immaterial to the Company.
The Water Regulations require the operator to treat soil that has been polluted in one of the ways stated in the Water Regulations. For information regarding the treatment of soil pollution, see paragraph 3.17.4 below.
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In the Company's estimation, the Water Regulations do not have any effect on its competitive status since they apply to all fueling stations in Israel.
e. Additional Conditions in a Business License
The Ministry of Environmental Protection imposed additional conditions in the business licenses of several filling stations, which require the installation of several protective devices to prevent pollution, in addition to the conditions required in the Water Regulations. These protective devices include: cathodic protection systems, devices to prevent overfilling, devices to prevent spillage and sealing under the dispensers. The Company is taking steps to implement the aforesaid conditions. The Company estimates that the cost of installing the aforesaid protective devices is not material.
3.17.2.3 Hazardous Substances Law
Oil products are defined as poisons under the Hazardous Substances Law. The Company has a poison permit for trading in fuels and the Company also requires its customers to uphold the provisions of the Hazardous Substances Law.
Given that the amount of oil products stored at each filling station does not exceed the amount prescribed in the regulations enacted pursuant to the Hazardous Substances Law, each filling station does not require a poison permit.
The Company estimates that the Hazardous Substances Law does not have a material impact on the activity of the R&W Division or on its competitive position.
3.17.2.4 Water and Sewage Corporations (Industrial Plant Waste Channeled into the Sewage System) Rules, 5711-2011 ("Water and Sewage Corporations Rules")
The Water and Sewage Corporations Rules provide, inter alia: the requirements for treatment of waste from industrial plants (including from filling stations and retail sites) into the municipal sewage systems, the reporting that will be made to the authorities by the plants, the power of the authorities to demand that plants carry out preliminary treatment and/or monitoring of the waste, the control and enforcement procedures, the costs that will be imposed on the plants for waste tests which are carried out by the authorities, and the financial sanctions that will be imposed on the plants (up to six times the rates provided in the Water and Sewage Corporations Rules for waste that does not deviate from the level determined therein). The Water and Sewage Corporations Rules introduced more stringent requirements for waste treatment and the level of control and enforcement. The Company has already implemented all the requirements in its filling stations and in some of the retail sites and is preparing to implement them in the remaining retail sites. In the Company's estimation, the Water and Sewage Corporations Rules do not have a material effect on the Company's financial results.
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3.17.3 Legislative Proposals in the Field of Environmental Protection
The following are details of the main legislative proposals known to the Company:
3.17.3.1 The Prevention of Land Contamination and Rehabilitation of Contaminated Land Bill, 5771- 2011 ("the Bill")
The Bill requires owners and occupiers of land to make an assessment (land surveys) in the cases set out in the bill and also to rehabilitate polluted land, all of which within a short timetable. The Ministry of Environmental Protection is authorized to order the registration of a caveat in the Land Registry Office with regard to the presence of pollution in the land. The Bill imposes extensive reporting duties with regard to the presence of land pollution.
Moreover, according to the Bill, a fund will be created for rehabilitating land. The budget for the fund is supposed to be financed, inter alia, by means of a levy that will be imposed on companies that are in possession of hazardous substances and on the owners or occupiers of land that is suspected to be polluted. A breach of the law constitutes a civil tort pursuant to the Torts Ordinance. The Bill gives extensive powers of supervision and enforcement to the Ministry of Environmental Protection, including the power to impose a financial sanction. According to the Bill, the provisions of the law and the orders that will be issued pursuant thereto will be regarded as a part of the business license. The Bill imposes criminal liability on causing contamination and/or on the breach of the provisions of the law, and it gives power to the court, in additional to any punishment that may be imposed on the owner and/or occupier of the land, to order the payment of expenses for soil surveys and/or expenses for treating the soil. If the Bill or another similar bill is approved, it may have an adverse effect on the activity of the R&W Division as a result of the expenses that will be required in order to comply with the requirements of the Bill. Nonetheless, it is not expected that the competitive status of the R&W Division will be affected, since this law will apply to all the fuel companies.
This information is forward-looking information, as defined in the Securities Law. It is possible that in practice the effect of the draft law will be different, inter alia because of the final wording that will be determined in the law with regard to the definition of the powers of the Ministry of Environmental Protection and the manner of implementing them.
3.17.3.2 The Consolidated Environmental Protection Licensing Bill, 5775-2015 ("the Environmental Protection Licensing Bill")
In September 2015, the Israeli Government issued the Environmental Protection Licensing Bill which aims to consolidate the various environmental protection licenses issued a certain plant into a single license ("the consolidated license") and to adopt certain standards for prescribing the conditions underlying the consolidated license. Among others, the Environmental Protection Licensing Bill defines the manner of applying for a consolidated license, the manner of determining the conditions of the consolidated license, the considerations underlying the grant of a consolidated license, its validity and the need for making the consolidated license criteria public. The Environmental Protection Licensing Bill also prescribes various provisions for plants that deal with hazardous substances that consist, among others, of preparing a safety plan for handling safety issues and events, appointing a safety officer etc.
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The Environmental Protection Licensing Bill provides the Ministry of Environmental Protection various enforcement tools, including comprehensive reporting duties by plants, potential issue of decrees, authority to impose levies in respect of environmental damages caused by various plants, authority to impose financial sanctions and more. The Environmental Protection Licensing Bill also defines criminal sanctions that may be imposed. The Company, through the Israel Institute of Energy and Environment, produced its response to the Environmental Protection Licensing Bill. The Company estimates that the Environmental Protection Licensing Bill, if approved in its current version, is liable to complicate and burden the decision-making process due to the mandatory consultation needed between the various institutions in contrast to the objective of the consolidated license in a manner that may adversely affect Israeli industries. At this stage, the Company cannot assess the potential impact of the Bill on the Company.
3.17.4 Incidents and Matters that have caused or are expected to cause harm to the Environment
The arrangement with the Ministry of Environmental Protection with regard to dealing with soil and water pollution:
In 2007, the Company and the Ministry of Environmental Protection reached an arrangement with regard to the provisions provided in the Water Law and/or the Water Regulations ("the arrangement") according to which Paz will carry out comprehensive land surveys at all of its public filling stations that were built before the Water Regulations came into force ("the fueling stations that are subject to the arrangement"), in order to locate the filling stations where there is soil and/or groundwater pollution and in order to estimate the extent of the soil and/or groundwater pollutions and to make it possible to prepare and implement a plan for soil rehabilitation and groundwater purification as required.
Within the framework of the arrangement, it was agreed that the pollution rehabilitation expenses for a calendar year at the filling stations that are subject to the arrangement (whether for surveys, rehabilitation of pollution that is discovered in the land surveys and for rehabilitation of pollution that has been located and/or will be located by other means) shall be a maximum equal to 1 (one) agora multiplied by the number of liters sold at Paz's public filling stations in the calendar year. It should be noted that these amounts will be used for rehabilitating pollution at the filling stations where groundwater pollution has been found and/or at filling stations where soil pollution has been detected and at filling stations that had been built before the Water Regulations came into effect where pollution may be found in the future. Paz reserved the right to sue the actual persons responsible for causing the pollution, such as the operators of the filling stations.
Since it is not possible to estimate the scale of the pollution until the soil studies are completed, it has been agreed between the Ministry of Environmental Protection and Paz that the arrangement will continue until the Ministry of Environmental Protection will confirm that all of the rehabilitation operations at all of the filling stations that are subject to the arrangement have been completed. On the other hand, according to the arrangement, it is not expected that the Ministry of Environmental Protection will require Paz to spend each year amounts in excess of the aforesaid amounts for the rehabilitation of pollution at the filling stations. To date, Paz has carried out soil studies at most of the filling stations to which the arrangement applies.
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So far, suspected pollution or actual pollution of groundwater has been found at 31 of the Company's filling stations (all of these are stations that are subject to the arrangement).The testing and rehabilitation operations required are being coordinated with the Water Authority and the Ministry of Environmental Protection. The Company is taking measures to rehabilitate the groundwater in 11 filling stations. 14 filling stations require periodic sampling only that is performed on an ongoing basis and six filling stations are still undergoing the Company's inspection in coordination with the Water Authority regarding the scope of contamination of groundwater.
The Company's financial statements include a provision totaling approximately NIS 4 million for the groundwater rehabilitation of the abovementioned 11 filling stations which the Company is acting to rehabilitate. The provision stated above is based on the experience that the Company has acquired and on estimates made by the Company's experts and consultants based on surveys and statistical information that has been accumulated around the world, mainly in the United States. The Company estimates that the provision that it has made in its books is fair and reflects the anticipated costs, which at this stage can only be assessed, of rehabilitating the groundwater at those filling stations in accordance with the guidelines of the Water Authority. The above rehabilitation costs are included in the amounts in the arrangement with the Ministry of Environmental Protection.
It should be noted that the Company might be required to make investments and to incur financial expenses on a larger scale that stated above with regard to the aforesaid 11 filling stations in which the Company is required to treat the pollution of groundwater and/or in connection with the remaining filling stations that are still under inspection, as described above, because of a lack of certainty with regard to the scope of pollution of groundwater (in the filling stations under inspection) and the requirements of the authorities regarding the level of rehabilitation that will be required in order to obtain approval that the rehabilitation has been completed.
In addition, different degrees of soil pollution were detected in several filling stations that were built before the Water Regulations came into force. The Company is taking action to vacate the ground and/or rehabilitate the soil around these filling stations. The Company estimates the costs of rehabilitating a station in a case of soil pollution only (without groundwater pollution) as insignificant. The aforesaid costs of rehabilitation are included in the amounts within the framework of the arrangement with the Ministry of Environmental Protection.
The Company has a third party liability insurance policy with a liability limit of US$ 100 million per insurance event which covers, inter alia, the liability that is imposed on the Company pursuant to the law due to personal injury and/or damage to tangible property sustained as a result of accidental and unexpected pollution. The Company does not have an insurance policy covering any liability arising from any anticipated, non-sudden pollution such as the pollutions detailed in this paragraph above.
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3.17.5 Legal and Administrative Proceedings and the Related Environmental Expenses that were or will be incurred
3.17.5.1 Arrangement with the Ministry of Environmental Protection with regard to dealing with Soil and Water Pollution
As stated in paragraph 3.17.4 above, Paz has reached an arrangement with the Ministry of Environmental Protection with regard to rehabilitation of pollution caused by the filling stations.
3.17.5.2 Vapor Recovery System
The Company has installed at all the filling stations a stage (I) vapor recovery system, as required by the business license given to the filling stations. The stage (I) vapor recovery system prevents the emission of gasoline vapors from the filling station's tanks when receiving supplies from road tankers.
In recent years, the Ministry of Environmental Protection and the local authorities have begun requiring the installation of a stage (II) vapor recovery system, whose purpose is to prevent emissions of gasoline vapors when cars refuel, at all of the public filling stations, on a gradual basis until the end of the first quarter of 2017. The requirement is also enshrined as an additional condition in some of the filling stations' business licenses. In addition, the Ministry of Environmental Protection drafted proposed regulations that enshrine the requirement statutorily.
During 2010, after the installation of approximately 75 OPW stage (II) vapor recovery systems ("OPW systems"), the Ministry of Environmental Protection notified the Company and the other fuel companies that the OPW systems that were installed by them do not comply with the control requirements stipulated in the terms of the business license. The fuel companies, including the Company, claimed that they relied on the approval of the Ministry of Environmental Protection for the OPW systems. The Ministry of Environmental Protection agreed that at this stage the fuel companies would carry out manual control and take steps for the upgrading of the OPW systems or their replacement with new ones. The Company is taking steps to replace the OPW systems.
The remaining cost of replacing the OPW systems and installing new stage (II) vapor recovery systems (in the stations in which it has not been installed) and of implementing the environmental conditions underlying the business license is expected to amount to approximately NIS 56 million, carried over a period of 15 months (starting from early 2016).
By the end of 2015, the Company has installed stage (II) vapor recovery systems in a total of 146 filling stations.. In 2015, the Company installed new stage (II) vapor recovery systems in 47 filling stations.
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3.17.5.3 Concluded Criminal Proceedings
In 2015, no criminal legal proceedings filed against the Company in the field of environmental protection were conducted or concluded.
3.17.5.4 Pending Indictments
As of the report date, there are no indictments pending against the Company in the field of environmental protection.
3.17.5.5 Pending Civil Proceedings
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. See more details in paragraph 6.8 below.
3.17.5.6 Concluded Civil Proceedings
In 2015, no material civil proceedings pending against the Company in the field of environmental protection were concluded.
3.17.6 The Company's Environmental Risk Management Policy and the Steps taken to reduce Environmental Risks
Regarding the Company's environmental risk management policy and the measures taken by it to reduce the environmental risks, see paragraph 6.7.3 below.
3.17.7 Amounts awarded, Provisions and Environmental Expenses
In 2015, no amounts were awarded against the Company in the context of any legal proceedings pertaining to the environment.
In 2015, the Company's environmental investments and expenses in the R&W Division, including the rehabilitation expenses at the filling stations where groundwater pollution was discovered, amounted to approximately NIS 44 million (not including investments in setting up new filling stations in accordance with environmental protection requirements), of which approximately NIS 34 million were incurred in order to prevent harm to the environment and approximately NIS 10 million were incurred in order to rehabilitate filling stations where pollution was found.
It should be noted that the above amount includes an investment of approximately NIS 23 million in the installation of vapor recovery systems and the improvement of infrastructure in accordance with the terms of the business license.
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The Company records a suitable provision in advance on the basis of an estimate of external consulting companies in the field of environmental protection, when rehabilitation of groundwater pollution is needed at a filling station. The balance of the provisions for the rehabilitation of groundwater as of December 31, 2015 amounts to approximately NIS 4 million.
The following table shows details of the Company's expected environmental expenses for 2016 and expected expenses in subsequent years in the field of environmental protection in the R&W Division:
Average forecasted Actual costs Forecasted costs annual costs for the incurred in 2015 for 2016 next three years NIS in millions Material costs 10 9 10 Material investments 34 49 21 Total 44 58 31
Since about 200 of the old filling stations were built in accordance with the standards that were accepted before the Water Regulations came into force, and since the knowledge that has been accumulated to date shows that the standards that were acceptable in that period could not guarantee that no damage would be caused to the soil and/or water, the Company cannot estimate whether any of its old filling stations formerly caused soil or water pollution because of any leak. To the best of the Company's estimation, if and insofar as it is required to carry out investments on account of pollution as aforesaid, these investments may be in amounts that are material to the Company since the estimated cost of rehabilitation of groundwater pollution is approximately $ 500,000 per filling station and the estimated cost of rehabilitation of polluted soil ranges between NIS 100,000 and NIS 400,000 per filling station.
The damage that may be caused to third parties as a result of the environmental protection aspects involved in the activity of the fueling sites may be on a significant financial scale, and may expose the Group to claims in significant amounts.
It should be noted that the anticipated expenses for environmental protection matters as stated above are forward-looking information, as defined in the Securities Law, and are based inter alia on the Company's assessments at this time. It is possible that the actual expenses and investments will be significantly different from what is stated above for various reasons, including: the making of additional demands and/or additional and/or other arrangements with the Ministry of Environmental Protection, changes in the environmental protection laws, including as a result of the Land Rehabilitation Law coming into effect, an increase/reduction in supervision under the environmental protection laws, etc.
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3.18 Restrictions and Supervision of the Company's Activity in the Division
Following is a description of the principal provisions that impose restrictions and controls that apply to the R&W Division. It should be noted that the provisions set out below do not constitute a comprehensive list of the statutory provisions and regulations that apply to the Company.
3.18.1 Customs and Excise Approval
The Excise on Fuel Law, 5718-1958 ("the Excise Law") provides that no person may produce fuel or be involved in its sale unless he has received a license for this purpose from the Director of Customs and Excise. "Production" is defined as a variety of actions relating to fuel, including holding fuel for the purpose of wholesale trade in it. The Company has been issued a production license as stated above, and it takes steps to renew it each year. According to the provisions of the Excise Law, fuel that is produced in Israel (excluding jet fuel for the aviation industry) is liable for excise. The excise duty is determined in a decree by the Minister of Finance. Pursuant to the Excise on Fuel (Exemption from Obligation to Obtain a License and Approval) Order, 5720-1960, an exemption from receiving a production license was given, inter alia, to producers and holders of fuel that received the fuel after the excise has been paid for it, subject to various conditions. See more details in paragraph 2.2.7 above.
3.18.2 Approval to Act as a Fuel Company and Holding of Emergency Reserves
In the State Economy Arrangements (Legislative Amendments for Achieving Budgetary Goals and Economic Policy for the 2001 Fiscal Year) Law, 5761-2001 ("the Economic Arrangements Law"), it was provided that a fuel company should be registered before starting to do business in the Registrar managed by the Director of the Fuel Administration and shall continue to do business as long as it is registered therein. A fuel company is defined in the law as a company engaged in the refining and/or export and/or import and/or marketing of fuel and/or in providing fuel infrastructure services. The Company is registered in the Registrar of the Director of the Fuel Administration.
The Economic Arrangements Law imposes, among others, a duty on a fuel company to buy at its expense and retain a reserve of different types of fuels as emergency reserve for security reasons on behalf of the State of Israel, as determined by the Minister of National Infrastructures, Water and Energy, after consultation with the Minister of Defense and the Minister of Finance ("emergency security reserve").
The State Economy Arrangements (Legislative Amendments for Achieving Budgetary Goals and Economic Policy for the 2001 Fiscal Year) (Holding a Reserve and a Security Reserve of Fuel) Regulations, 5761-2001 ("the Economic Arrangements Regulations") were enacted pursuant to the aforementioned Economic Arrangements Law.
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Through December 2013, the Company, as well as the other large fuel companies, held an emergency security reserve. On December 19, 2013, an agreement was signed between the Company and the State whereby the possession of the emergency security reserve was transferred from the Company to the State against the repayment of the loan by the State.
See additional information in an immediate report of December 19, 2013 (TASE reference: 2013-01-101455).
3.18.3 Recognized Supplier of the Ministry of Defense
Paz has been approved as a recognized supplier by the Ministerial Committee for approving recognized suppliers for the Ministry of Defense.
3.18.4 Restrictions on Planning and Building Filling Stations
The licensing and construction process of filling stations is regulated in a large number of laws. The main ones are the following:
According to the Planning and Building Law, 5725-1965 ("the Planning and Building Law"), any building and/or use of land requires a permit. Often a building permit for a filling station also involves a change in the designated use of the land.
Pursuant to the Planning and Building Law, the National Planning and Building Council approved the National Master Plan for Filling stations NMP 18, 5746-1986 ("NMP 18"), which provides, inter alia, conditions and criteria for building filling stations and preventing safety, traffic and environmental hazards, minimum distances between filling stations, minimum distance between fuel tanks and fuel pumps, and residential buildings and public buildings and minimum distance between filling stations and junctions or intersections.
Pursuant to amendment no. 4 of NMP 18, the local planning and building committees are authorized to approve the construction of filling stations in any "built area", including areas designated for residential purposes, offices, commerce, etc. (whereas before this the authority of the local committees only extended to industrial zones or areas where both industry and commerce was allowed). Moreover, amendment no. 4 of NMP 18 allows the construction of small filling stations, which require a smaller capital investment for building them than the investment required today to build public filling stations.
In cases where in order to build a filling station rezoning is needed for the land on which the filling stations will be built, and in cases where there are express provisions regarding the building of a filling station in a district master plan, approvals and licenses are required, in addition to the approval of the local planning and building committee and the district planning and building committee, for obtaining a permit and/or for licensing of the filling station, such as the approval of the Ministry of Transport, the approval of the fire extinguishing authorities, the approval of the Water Authority, the approval of the Ministry of Environmental Protection, the approval of the Ministry of Health, the approval of the Agricultural Land Conservation Committee (when the filling stations is being built on agricultural land), etc.
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Regarding the recommendations of the Committee for Socioeconomic Change (the Trajtenberg Committee) to instruct the Israel Land Authority and the planning institutions to allocate and market land for 40 new filling stations for independent bodies, see paragraph 2.2.8.4 above.
3.18.5 Restrictions on the Operation of a Filling Station
Operating a filling station requires the obtaining of a business license pursuant to the Business Licensing Law, 5728-1968 ("the Business Licensing Law"). According to the Business Licensing (Businesses Requiring Licensing) Order, 5755-1995, a filling station is a business that requires licensing under the Business Licensing Law. In order to obtain a business license for a filling station, it is necessary to obtain, inter alia, the approval of the following main authorities: the Israel Police, the Ministry of Environmental Protection, the Ministry of Economy, the Fire Extinguishing Services and the relevant planning and building committee.
The Business Licensing (Oil Storage) Regulations, 5737-1976 ("Business Licensing Regulations") were enacted pursuant to the Business Licensing Law. According to the Business Licensing Regulations, a facility for storing oil, in amounts that exceed what is stated in the Business Licensing Regulations, including a public or internal filling station, or a fuel or LPG tank park, requires a license from the chief supervisor appointed by the Minister of Economy. The storage of oil should be done in accordance with the terms of the license and in accordance with the Business Licensing Regulations. Moreover, the regulations provide technical specifications for the manner of building the tanks at public and internal filling stations and at tank parks.
Operating convenience stores at fueling sites and retail sites also requires obtaining separate licenses (thus, for example, convenience stores require, inter alia, the approval of the Ministry of Health).
According to the Business Licensing (Dangerous Plants) Regulations, 5753-1993, a business where dangerous substances are stored, produced, processed or sold requires a special license for this purpose and the business should comply with the safety instructions provided in or under the law.
According to the Business Licensing (Businesses that require a License) Order, 2013 and the amendment thereto ("the Order"), the validity of a filling station business license is for a period of five years and the validity of a food establishment business license is three years. The Order is effective from November 5, 2013. According to the Order, insofar as the validity of a business license is made shorter due to the application of the Order, it will expire on December 31st of the third anniversary from the date of issuing a uniform outline for the specific type of business.
In October 2015, uniform licensing specifications were issued, among others, regarding filling stations and food establishments. The uniform specifications provisions that apply to businesses which on the date of issuance of the above uniform licensing specifications did not have a permanent or temporary business license are effective from October 2015 whereas the provisions that apply to businesses which on the date of issuance of the above uniform licensing specifications did have a permanent or temporary business license are effective from October 2018.
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As for the Consolidated Environmental Protection Licensing Bill, 5775-2015, see paragraph 3.17.3.2 above.
Business licenses or temporary permits have been issued for most of the public filling stations and Yellow convenience stores operated by Paz. With regard to the other filling stations and Yellow convenience stores, the Company is taking steps to obtain business licenses or temporary permits.
From time to time, indictments are issued against the Company and officers with regard to the operation of filling stations and/or convenience stores without a business license or in contravention of the permit. In the Company's opinion, apart from fines in amounts that are not material and/or the making of closure orders until a business license is received or until the building is legalized with a permit, the Company has no additional exposure in this regard.
3.18.6 Restrictions on the Location of Filling stations
The Fuel Industry (Stimulating Competition) Law, 5754-1994, provides that a fuel company may not enter into a contract to set up a filling station or an exclusivity contract (apart from an exclusivity contract that relates to a filling station that is situated on land owned by the fuel company or leased by the fuel company from the Israel Land Authority) if within an aerial radius of 1 kilometer (on an urban road) or ten kilometers of road length (for any other road) from the place where the filling station is situated or will be built there is another filling station where fuel of the same fuel company is sold. This provision is valid until the end of June 2018. In addition, NMP 18 provides instructions regarding the minimum distance between filling stations and residential buildings and institutions and a minimum distance from a junction or interchange. For additional details, see paragraph 3.18.4 above.
For details of restrictions that have been imposed on the Company by virtue of the conditions of the merger of the Company with Paz Ashdod, see paragraph 3.18.12.2 below.
3.18.7 Special Restrictions regarding the Building of Internal Filling stations
Regarding internal filling stations that are situated in kibbutzim or moshavim, the Agricultural Department at the Israel Land Authority provides that it is possible to build in the square of an agricultural town an internal fuel point that is not commercial, without any payment to the Israel Land Authority, subject to certain conditions. The building of internal filling stations requires building permits and operating approvals.
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3.18.8 Restrictions on the Selling Prices of Oil Products
3.18.8.1 Supervision of the Prices of the Products in the Operating Segment
Following the split of ORL, and pursuant to the Control of Prices of Commodities and Services (ORL Maximum Ex-factory Prices of Oil Products) Order, 5766-2005, on January 1, 2007, the supervision of the refinery's ex-factory prices of oil products was eliminated, except for supervision of prices of LPG prices (effective from February 2015 - other than LPG that does not contain mercaptan) and of prices of oil products where more than 50% of the amount of total consumption in the local market is sold by one of the refineries and at the same time less than 15% of the amount of total consumption in the local market is sold by the second refinery.
The price of gasoline 95 octane sold to customers at the filling stations is controlled pursuant to Control of Prices of Commodities and Services (Maximum Prices at Filling Stations) Order, 5762-2002 ("the Control Order").
In July 2012, the Control of Prices of Commodities and Services (Imposing the Law on Transport Diesel and Determining the Level of Control) Order, 5772-2012 was issued pursuant to which control will be imposed on transport diesel at the level of reporting profits and prices pursuant to Chapter G of the Control of Prices of Commodities and Services Law, 5756-1996.
3.18.8.2 According to the Control Order, the maximum prices for the gasoline 95 octane at public filling stations are equal to the aggregate of the following components:
a. The refinery ex-factory component - the average price of gasoline 95 octane established according to five published days on Platts European Marker Scan Cargoes ("Platts") of Genova / Lavera Cargoes C.I.F. Med Basis prices, the latest of which preceded the date of updating the prices as stated below by two working days, plus or less amounts as set out in the document called "Price Structure", which is distributed by the Fuel Administration to the fuel companies. If Platts does not publish the price of gasoline 95 octane, the Fuel Administration, with the approval of the Minister of National Infrastructures, Energy and Water Resources shall determine the maximum price after taking into account the price of a similar product ("the ORL ex-factory component").
b. Excise duty pursuant to the Excise on Fuel Law, 5718-1958 (see paragraph 2.2.7 above), and any other tax imposed under the law ("the tax component").
c. The basket of gasoline 95 octane marketing expenses that was determined in the Control Order for the sale of self-service gasoline 95 octane at a filling station of a fuel company ("the expense basket").
d. Value Added Tax, according to the meaning thereof in the Value Added Tax Law, 5736-1965 ("the VAT component").
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3.18.8.3 In addition, when gasoline 95 octane is sold at full service (i.e., at a pump designated for refueling by the filling station workers), it is permitted to charge, in addition to the maximum price, the following components:
a. An additional payment for full service in an amount provided in the Control Order ("full service surcharge"); the full service surcharge should not be collected from an automobile bearing a handicapped tag.
b. An additional amount for the sale of gasoline at filling stations between the hours of 8:00 p.m. and 6:00 a.m. and on days of rest within the meaning of this term in section 18A(a) of the Government and Justice Arrangements Ordinance, 5748-1948, and on Independence Day, within the meaning thereof in the Independence Day Law, 5749- 1949.
According to the Control Order, the maximum price of gasoline 95 octane will be updated in conformity with the cumulative effects of the following revisions:
a. The ORL ex-factory component - on the first working day of each month;
b. The tax component and the VAT component - as revised, from time to time, by law;
The expense basket component and the full service surcharge - the expense basket component will be linked to changes in the Consumer Price Index every six months (April and October), such that starting from October 2013, every year, a streamlining coefficient at an annual rate of 1% is deducted. The full service surcharge shall be linked to the change in the Salaried Worker's Average Wage Index, which is published by the Central Bureau of Statistics.
For details of a draft report issued by the Ministry of Finance regarding a new price control methodology, see paragraph 2.2.8.1 above.
3.18.9 Transition to Gas Refueling
Regarding the transition to refueling vehicles with gas, see paragraph 3.1.10 above.
3.18.10 Operating Fueling and Commercial Sites and Retail Sites on the Sabbath
Most of the Company's fueling sites and retail sites operate on the Sabbath. Pursuant to section 9 of the Hours of Work and Rest Law, 5711-1951 ("Hours of Work and Rest Law"), the employment of Jewish workers on the Sabbath, which is included in the weekly rest under the Hours of Work and Rest Law, requires a permit of the Minister of Economy. In addition, the Hours of Work and Rest Law provides, inter alia, that on the rest days provided in the Government and Justice Arrangements Ordinance, 5748-1948, according to the meaning of the term in that Ordinance, a store owner may not carry out trade in his store.
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Non-compliance with the provisions of the Hours of Work and Rest Law is a criminal offense (for which a prison sentence or a fine may be imposed) and an administrative offense [for which an administrative fine may be imposed under the Administrative Offenses (Administrative fine - Hours of Work and Rest) Law, 5758-1998].
Moreover, the provisions of the Hours of Work and Rest Law are incorporated in municipal bylaws, which apply to some of the Company's fueling sites and retail sites, according to which the opening of certain businesses is prohibited on the Sabbath, Jewish religious festivals and, in some cases, also during the night.
The Company regards the operation of filling stations on the Sabbath and on Jewish religious festivals as an essential need of the economy.
The Company has a special permit for employing standby staffs during the weekly rest hours pursuant to the Hours of Work and Rest Law in cases of critical, environmental and safety related incidents or malfunctions at the filling stations. The permit is in effect until September 2017.
Moreover, some of the Yellow convenience stores have been given a business license for operation as a "food establishment". According to a permit dating from 1951, the employment of workers in a "food establishment" is permitted during the weekly rest.
Until now, the restrictions arising from the provisions of the aforesaid laws have had no significant adverse effect on the business results of the Company, and in the Company's opinion, based on its experience, these restrictions will also not have a significant adverse effect on the Company's results in the future.
This information is forward-looking information, as this term is defined in the Securities Law. It is possible that the aforesaid restrictions will have an adverse effect on the business results of the Company, inter alia for the following reasons: increased enforcement of the provisions of the Hours of Work and Rest Law and/or the bylaws throughout the State of Israel, which may result in the closing of fueling sites and retail sites on Sabbaths and religious festivals.
3.18.11 Universal Fueling Device Regulations
Pursuant to the Fuel Industry (Stimulating Competition) (Rules for General Automatic Fueling Devices) Regulations, 5772-2011 ("the Regulations"), from the end of the transition period, as defined below, a fuel company may not sell fuel by means of a non-universal fueling device. A fuel company shall not express unreasonable refusal to enter into an agreement with a customer for the purchase of fuel by means of a universal fueling device. A refusal to enter into such an agreement with a customer because of an inability to pay, the existence of prior business experience with the customer or a failure of the customer to provide reasonable collateral shall not be regarded as an unreasonable refusal, but if the customer provides the details of a credit card, that will be regarded as providing reasonable collateral.
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According to the Regulations, the obligation to deploy universal fueling devices at filling stations is gradual, starting a year after the date of approval of universal fueling device specifications and ending 36 months after such date ("the transition period").
In June 2013, the Standards Institution of Israel ("SII") published Israeli Standard 6200, "Universal Refueling Devices" ("the Standard"). In September 2014, the Ministry of National Infrastructures, Energy and Water Resources chose a supplier for providing general encryption and coding services for universal automatic fueling systems.
In October 2014, the universal fueling device specifications were published in the official Government records which adopted the Standard. Conditions were published for the approval of a supplier of universal infrastructures and automotive universal fueling devices.
On July 6, 2015, the Israeli Parliament's Economic Committee approved an amendment to the Regulations which defers the effective date of the mandatory gradual deployment of the universal fueling devices during the transition period by four months (to April 1, 2016) and another deferral by another stage of the mandatory gradual deployment during the transition period.
It should be noted that the Standard, as approved and issued, does not correspond to the fueling standard underlying the use of Pazomat and the Company is required to make a monetary investment that will be carried over the transition period, among others, in replacing and/or adapting the existing infrastructures and devices at the filling stations and in vehicles and/or in disposing of existing infrastructures and devices. Moreover, the transition of Pazomat customers to a universal refueling device in competing filling stations is liable to impair the Company's revenues.
In October 2015, the fuel companies, through the Association of Oil Companies in Israel ("the AOC"), applied to the Minister of National Infrastructures, Energy and Water Resources, the Ministry's Director General and the Director of the Fuel Administration and described numerous failures detected in the course of preparing for the adoption of the Regulations, demanding that the Regulations be amended accordingly. In December 2015, the fuel companies reapplied to the same entities, through the AOC, and held a meeting at the Fuel Administration in which the representatives of the fuel companies presented another failure described in a letter received from an integral and central supplier of the universal fueling device according to which the component adopted in the Standard is incompatible with use that requires a high level of security such as sensitive financial issues in contrast to the level of security prescribed in the Regulations. The AOC requested that a solution be found for this serious problem and that simultaneously, the effective date of the mandatory use of the fueling device be postponed until said failures are resolved. The Director of the Fuel Administration dismissed the request of the AOC and the fuel companies. In February 2016, the AOC also applied to the Director General of the SII and to the Minister of Economy and Industry. In March 2016, the fuel companies, through the AOC, filed a petition with the Israeli High Court of Justice and a motion for issuing an interim injunction.
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3.18.12 Restrictions on the Company's Activity under the Restrictive Trade Practices Law
3.18.12.1 Exclusive Arrangements for the Purchase of Fuel at Filling stations
In 1993, the General Director of the Antitrust Authority decided that the long-term exclusivity agreements that had Paz, Delek and Sonol had with the operators of filling stations that were not solely owned by the fuel companies constitute a non-exempt restrictive arrangement within the meaning of this term in the Restrictive Trade Practices Law, because, inter alia, these agreements prevented new fuel companies from entering the market and harmed competition.
In 1995, the General Director revised his decision in such a way that he excluded from its scope filling stations for which there is a "standard lease agreement", without this preventing individual filling station operators from apply to the courts to argue otherwise. A "standard lease agreement" was defined as a lease agreement where the rent that is paid or any other considerations that is given thereunder is real, i.e., in an amount that is not less than the rent that the Israel Land Authority charges for a filling station with a similar quantity of sales. At stations where there is no "standard lease agreement", it was agreed that the fuel companies would regard the exclusivity arrangement and the lease agreement to have expired. The General Director of the Antitrust Authority also established that should the fuel companies enter into an agreement in the future to supply those stations, then the duration of the exclusive supply agreement shall not exceed one year at a time.
Some of the filling stations where there is no "standard lease agreement" now have short-term exclusive supply agreements with the Company or the owners of the rights in the land on which those stations are built have transferred to the Company the right to manage and/or operate the filling stations by itself and/or through persons acting on its behalf for fixed periods.
With regard to new filling stations, it was determined that the exclusive supply period shall not exceed three years. Notwithstanding, it was determined that the duration of the exclusive supply agreements relating the filling stations, in which the fuel companies undertook to pay all or almost all of the financing for building the filling station, could be as much as 14 years from the date of opening the services of the filling station to the general public; it was also determined that the duration of an exclusive supply agreement that relates to a filling station where significant renovations and/or overhauls or similar major improvements are made with the financing of the fuel company, could be as much as seven years from the date on which the supply by the fuel company begins. The exclusivity arrangements at the new filling stations need to receive the approval of the Antitrust Tribunal and the Standard Contracts Tribunal.
It was also decided that the aforesaid rules will not apply to the engagement of the fuel companies in arrangements with disabled IDF veterans. Special rules will apply to them, but such rules have not yet been made.
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At a later stage, in a case that was brought before it regarding a dispute between Delek and filling station owners, the Antitrust Tribunal ruled that Delek must shorten the fourteen and seven-year periods mentioned above to six years only. The Company was not a party to that proceeding, and therefore it cannot assess whether this ruling also applies to it. Since the Company has stopped building filling stations with the contractual arrangement of the type addressed by the Tribunal, the Company expects that even if the aforesaid ruling does apply to it (i.e., the fourteen and seven year periods are shortened to six year periods only), this will not have a significant effect on its results.
Regarding legal proceedings that are being conducted against the Company by the operators of filling stations as a result of the agreed arrangement, see paragraph 6.8 below.
3.18.12.2 Restrictions Imposed on the Company with respect to Filling Stations by virtue of the Company's Merger with Paz Ashdod
According to the terms of the merger between the Company and Paz Ashdod, inter alia, in each of the cases set out below, Paz will not enter into an arrangement, either directly or indirectly, to receive, inter alia, a right under a lease agreement, a right to have possession of land as a "licensee", a right as a protected tenant, a right to operate the filling station or to influence its operation, a right under an exclusive supply agreement or any other right that gives Paz, directly or indirectly, influence over the purchase or sale of oil products at a filling station ("a right at a filling station"), unless it obtains the prior approval of the General Director, which will be given if the engagement is found not to restrict competition. The aforementioned cases are:
(a) Filling stations that existed on September 27, 2006, in which Paz did not have a right ("existing filling stations"), and filling stations that will be built after September 27, 2006 ("new filling stations"), if the existing or the new filling stations are situated in the municipal area of Jerusalem or Tel-Aviv-Jaffa. In order to remove doubt, the approval of the General Director is not required for a future contract between Paz and a filling station in Tel-Aviv-Jaffa or Jerusalem if, on September 27, 2006, Paz had a right therein, i.e., the filling station operated on that date under the Paz symbols.
(b) Existing stations in the other parts of the State of Israel, starting from the date on which Paz will be given rights in five existing filling stations. Paz will submit each arrangement that gives it a right in an existing filling station to the General Director for approval. Paz has not yet been given rights in five existing stations. The General Director shall approve the arrangement if he finds that it does not give rise to any concern of harm to competition.
(c) Existing filling stations and/or new filling stations, where the station is close to a Paz station. 'Close' means within an aerial radius of one kilometer for an urban road, and within a distance of ten kilometers, measured according to road length, for any other road.
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(d) If the percentage of Paz filling stations reaches 33% or more of all the public filling stations in Israel, Paz shall submit to the General Director's approval every arrangement that gives it a right at a new station. The General Director shall approve the arrangement if it does not give rise to a concern of harm to competition.
According to the Fuel Administration Registrar, Paz holds approximately 23% of all the public filling stations in Israel.
The aforesaid restrictions have harmed and are expected to harm Paz's expansion plans with regard to new filling stations, mainly in the Tel-Aviv and Jerusalem areas.
For additional details regarding the proposed Fuel Industry Law and the report of the Committee for Socioeconomic Change (the Trajtenberg Committee) with regard to the recommendations to limit the amount of Paz filling stations, see paragraphs 2.2.8.2 and 2.2.8.4 above.
3.18.12.3 Examination of Lease Agreements by the General Director
In June 2001, the General Director contacted the Company (and to the best of the Company's knowledge, the other fuel companies as well) and notified it that he was considering the possibility that lease agreements or the transfer of the operation of a filling station to Paz, at filling stations where the land is not only owned by Paz, constitute a merger, within the meaning of this term in the Restrictive Trade Practices Law, and as such the approval of the General Director is required for the merger. The General Director's claim was that since the lease or operating contracts between the fuel companies and the filling stations are characterized by the activity of the filling station being to the decision-making organs of the fuel companies, this constitutes a merger. In the opinion of the Company, based on its legal advisers, such a contract does not constitute a merger that requires the General Director's approval. The Company sent a letter to the Israel Antitrust Authority setting out its position, which has not been answered.
The General Director and Delek reached agreement in this matter, which is expressed in an agreed order according to which an agreement for the transfer of the operation and/or lease of a filling station for a period exceeding seven years will be regarded as a merger. Paz and the other fuel companies did not sign such an agreed order. If the provisions of this agreed order were to apply to all the fuel companies, including Paz, this would not be expected to have a significant adverse effect on the Company.
3.18.13 The Fuel Industry (Prohibition of the Sale of Fuel to Certain Filling Stations) Law, 5765-2004 ("the Fuel Industry Law")
The Fuel Industry Law imposes a prohibition on the sale and supply of fuel to public filling stations, unless it is included in the list of licensed public filling stations that is published by the Fuel Administration. Most of the Company's public filling stations appear in the list published by the Director of the Fuel Administration (excluding filling stations in Judaea and Samaria, to which the law does not apply).
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3.18.14 Essential Enterprise
The Company and its filling stations have been declared an essential enterprise in a certificate given by the Ministry of Economy. According to this certificate, in a state of emergency, the Company's car fleets and distribution and filling facilities are recruited into the service of the emergency economy in order to allow a continuous supply of fuel and gas. As for the proclamation of Pazgas and Aviation Services as essential enterprises, see paragraph 4.18.16 below. Regarding the Essential Interests Order issued to Paz Ashdod in the course of the privatization proceedings, see paragraph 5.18.6 below.
3.18.15 Environmental Protection
For details regarding regulatory restrictions in the field of environmental protection, see paragraph 3.17 above.
3.18.16 The Proposed Fuel Industry Law
For details of regulatory restrictions that may be imposed on the Company by the proposed Fuel Industry Law in the event that the law is enacted in accordance with the wording published by the Ministry of National Infrastructures, Energy and Water Resources, see paragraph 2.2.8.2 above.
3.18.17 Car Operation (Engines and Fuel) Law (Amendment no. 3) (Increased Enforcement in Sale of Fuel that Does Not Comply with the Requirements of the Standard), 5769-2008
According to the law, every operator of a filling station is obligated to carry out at least six annual tests of the adequacy and working order of the fuel in each pump at an authorized laboratory. The law significantly increases the sanction that will be imposed in respect of fuel that does not comply with the Standard, including possible administrative closure orders, publishing the names of filling stations whose products were found to be defective and a significant aggravation of fines. The law does not have a major effect on the Company's activity, since the Company takes reasonable and proper measures in order to prevent the sale of substandard fuel.
3.18.18 Car Operation (Engines and Fuel) (Distribution of Fuel in Tankers) Order, 5768-2007
The order imposes liability on all the participants in the distribution chain for oil products - the fuel company, the distribution facility, the filling station operator and the transport company - for the fact that the tankers bringing fuel to public filling stations are required to be equipped with an electronic seal that complies with the conditions set out in the schedule to the Order.
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3.18.19 Law for the Encouragement of Competition in the Food Industry, 5774-2014
On March 27, 2014, the Law for the Encouragement of Competition in the Food Industry, 5774-2014 was enacted. The objective of this law is to enhance competition in the food industry and reduce consumer prices. The law prescribes the relationship between suppliers in general, and particularly large suppliers, and retailers in general, and particularly large retailers, and among others, forbids a large supplier's involvement in determining consumer selling prices, forbids stacking shelves at large retailers by large suppliers, forbids large suppliers from conditioning the sale of commodities on the purchase of other commodities, forbids suppliers from transferring payments to large retailers, and states that the Director General will publish a list of large and extremely large suppliers online to restrict the shelf spaces allocated to these suppliers by large retailers. Also according to the law, the Director General will be authorized to instruct large retailers with respect to private brands under certain circumstances. The law also stipulates reporting requirements of the large suppliers and large retailers to the Director General and authorizes the Director General to define demand areas and competition groups for limiting the opening of stores by large retailers. According to the law, large retailers must publicize on the internet the updated overall price of each product in each store and more. The law imposes various sanctions and imprisonment penalties. The majority of the provisions of the law will become effective on January 15, 2015. Based on the opinion of the Company's legal counsel, the Company does not meet the definition of a large retailer with respect to the Yellow convenience stores.
3.19 Significant Agreements in the Division
3.19.1 As a rule, in the field of filling stations there is no single significant agreement with regard to rights in land and the manner of operating the filling stations, but the set of agreements relating to the filling stations discussed in paragraph 3.1.11 above is significant to the Company.
3.19.2 Regarding the arrangement between the Company and the General Director of the Israel Antitrust Authority dating from 1995, see paragraph 3.18.12.1 above.
3.19.3 Regarding the conditions underlying the merger of Paz with Paz Ashdod, see paragraph 3.18.12.2 above.
3.19.4 As a rule, the set of contracts between the Company and the various transport companies and agents for its products is significant to the Company, but there is no one agreement regarding transport and distribution that is significant to the Company. Regarding the Company's set of contracts with the Company's transport companies, distributors and agents, see paragraphs 3.6.2 and 3.6.4.1 above.
3.19.5 Regarding the arrangement with the Ministry of Environmental Protection concerning the rehabilitation of contaminated land and water at the filling stations that were built before the Water Regulations came into effect, see paragraph 3.17.4 above.
3.19.6 Regarding the contract between the Company and the Palestinian Authority, see paragraph 3.5.2.2 above.
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3.19.7 Regarding the Company's purchases from ORL, see paragraph 3.15.2 above and paragraph 4.15.4 below.
3.19.8 Regarding the sale of the Company's holdings in Pi-Glilot and the sale of the land owned by the Company in Pi-Glilot, see paragraph 3.11.2 above.
3.20 Collaboration Agreements in the Division
The Company has a joint venture with Shufersal Ltd. and Leumi Card Ltd. The venture concerns the issue of "Shufersal" and "Yesh" credit cards that give their holders benefits when making purchases from the Shufersal chain, the Yellow convenience store chain and Paz filling stations. The customers that hold these credit cards are also members of the Shufersal customer club and are entitled to benefits thereunder. The venture is run as a limited partnership (Shufersal Finance) in which the partners are Shufersal Ltd. (64%), the Company (20%) and Leumi Card Ltd. (16%). The general partner in the limited partnership is a subsidiary in which the aforesaid partners have shares in proportion to their holdings in the partnership. Leumi Card operates the customer club's credit card system and grants credit to the holders of the customer club's credit card. Consequently, the liability and risk underlying the credit cards are borne by Leumi Card. According to the partnership agreement, Shufersal may appoint three directors in the general partner, Leumi Card may appoint one director and the Company may appoint one director. The partnership agreement stipulates that certain material decisions are binding to all partners. According to the partnership agreement, Shufersal can require the Company to sell its holdings in the partnership to Shufersal, at a price that will reflect the value of the Company's holdings in the partnership, according to a valuation that will be made by an external valuer. The Company has a tagalong right to obligate Shufersal to purchase its holdings in the partnership at the price stipulated in the agreement in the event of termination of the agreement for operating the customer club's credit cards signed with Leumi Card.
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Part 4: The Industries and Services Division
4.1 The Structure of the Division and the Changes therein
4.1.1 General
The Industries Division includes Paz Industries which directly or indirectly holds subsidiaries, the principal ones being Pazgas, Paz Lubricants, Pazkar, Aviation Services and Aviation Assets.
The following are the activities of the Industries and Services Division:
Through Pazgas - distribution and sale of LPG for cooking, heating, water boiling and fueling cars that are designed for LPG, to institutional, business and private customers; marketing, distribution and sale of devices that consume LPG (heating devices, water heaters and clothes drying machines) and conversions of plants to natural gas operation, partly backed by LPG. Pazgas is also preparing for the sale and marketing of natural gas.
Through Paz Lubricants - production, recycling, import, marketing and export of lubricants, chemicals and solvents.
Through Pazkar - production, marketing and export of sealing and insulation products for the construction industry and production and marketing of products for transport infrastructure and development of new products.
Through Aviation Services - marketing and supply of jet fuel and aviation gasoline, and providing refueling services to aviation companies.
Through Aviation Assets - storage and distribution of jet fuel and aviation gasoline at Ben- Gurion Airport.
The division works towards creating a synergy between the various units and expanding its activity, including in manufacturing, marketing, sale and export of various products, in recycling and in developing new products.
In addition, in the field of activity, the Group has various rights in land, including: a plot in Haifa at Hof Shemen (approximately 100 thousand sq. m.) on which are stationed the Company's tank park and distribution facility (approximately 56 thousand sq. m.) and a Paz Lubricant plant (approximately 44 thousand sq. m.), a plot in the Alon Tavor Industrial Zone (approximately 52 thousand sq. m.), on which the Pazkar plant is situated, freehold and perpetual leasehold real estate rights (approximately 23 thousand sq. m.) on which the tank park of Aviation Assets is built at Ben-Gurion Airport, a plot (approximately 4 thousand sq. m.) in Rishon LeZion, which is used as a part of Pazgas' logistics center, a plot (approximately 17 thousand sq. m.) in Kiryat Ata that is used as a storage and filling facility by Pazgas and a plot (approximately 7 thousand sq. m.) in Be'er-Sheva, which is used as a storage facility by Pazgas. For additional details, see paragraph 4.11.1.1 below.
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4.1.2 Sale of LPG, LPG-operated Devices, Conversion of Plants to Operate on Natural Gas
Pazgas markets, distributes and sells LPG for cooking, heating, heating water and fueling cars that are adapted for LPG to institutional, business and private customers, and also markets, distributes and sells devices that are operated by LPG (heaters, water heaters and clothes dryers) and converts plants to natural gas operation, partly backed by LPG. Pazgas is also preparing for the sale and marketing of natural gas.
The sale of LPG is done by Pazgas and through independent agents. Pazgas buys the LPG from Paz Ashdod, ORL and direct imports. Pazgas also markets automotive LPG to filling stations.
Paz sells LPG to the Palestinian Authority through Pazgas. For additional details, see paragraph 3.5.2.2 above.
For the sale of LPG by refineries and gas suppliers pursuant to the Gas Sale Regulations as defined below, see paragraph 4.15.2 below.
For the recommendations of the Committee for Socioeconomic Change (the Trajtenberg Committee), see paragraph 2.2.8.4 above. For the imposition of control on LPG, see paragraph 4.18.4 below.
For the restriction applicable to Paz Ashdod in the supply of LPG to Pazgas by virtue of the terms of the merger between Paz Ashdod and Paz, see paragraph 4.18.2 below.
In recent years, most of Pazgas' subsidiaries were merged into Pazgas in order to consolidate the management and operation of the subsidiaries which are gas agencies. The merger of the subsidiaries into Pazgas was executed, among others, following the purchase of shares by the partners in some of the subsidiaries in a strategic move that contributed to improving Pazgas' profits. See more details of the merger of the subsidiaries into Pazgas in Note 28.1.5 to the financial statements as of December 31, 2015.
4.1.3 Provision of Airplane Refueling Services, Distribution, Supply and Sale of Jet Fuel and Aviation Gasoline
Aviation Services provides distribution, supply and fueling services for airplanes at Ben- Gurion Airport, domestic airports and private and agricultural landing pads, sells jet fuel and aviation gasoline at domestic airports and private and agricultural landing pads and sells aviation gasoline at Ben-Gurion Airport. Paz also sells jet fuel directly to various customers at Ben-Gurion Airport.
In September 2015, Aviation Services won a tender held by the Israel Airports Authority for the supply of fueling services and ancillary services at Ben-Gurion Airport, pursuant to the license agreement for a period that ends in March 2021. The Israel Airports Authority has the right to extend the period by several terms, at its discretion, by providing an advance notice of 60 days each, provided that each extension does not exceed 59 months.
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In March 2013, Aviation Services won a tender issued by the Israel Airports Authority for the sale of jet fuel, aviation gasoline and refueling services at domestic airports for a period of 24 months starting from May 1, 2013 through April 30, 2015. In June 2015, Aviation Services and the Israel Airports Authority signed an agreement to extend the term of the agreement, 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 April 2017.
The customers of Aviation Services for the refueling services at Ben-Gurion Airport are the Company, other fuel companies (that sell jet fuel to aviation companies) and aviation companies. The customers of Aviation Services for the supply of fuel, transport services and fueling are aviation companies, flight schools and private customers. In addition, it sells jet fuel, aviation gasoline and fueling services to the Israeli Air Force, Israel Aerospace Industries and the Israel Police and customers at private and agricultural landing strips.
In a verdict that rejected an application to approve a class action against Aviation Services and the Company with regard to the reasonableness of the price of aviation gasoline, the court regarded Aviation Services as having a monopoly on aviation gasoline.
In the Company's estimation, even if Aviation Services is declared as having a monopoly, in any of its areas of operation, this will not have a significant influence on the financial results of the Company.
Pursuant to the Restrictive Trade Practices Law, a monopoly holder has stricter duties in matters such as not abusing its status, restrictions on sale prices, etc. Moreover, the General Director has extensive supervision and enforcement powers over the activity of a monopoly holder.
The price of aviation gasoline is controlled pursuant to the Control of Prices of Commodities and Services Law, 5756-1996. For additional details, see paragraphs 4.17.3 and 4.18.12 below.
4.1.4 Sale of Lubricants, Chemicals and Combustion Fluid
Paz Lubricants is involved in the production and/or import and/or marketing and/or export of transport and industrial lubricants, car accessories, fuel additives, lubricant oils and creams for industry, raw materials for the detergent and cosmetic industry, process products for the metal industry, cleaning materials for industry, dust inhibitors, chemicals, solvents, and combustion liquid.
Paz Lubricants' products are mainly designed for industrial plants, garages, car fleets, institutional customers and business customers.
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4.1.5 Sale of Infrastructure and Sealing Products
Pazkar is mainly involved in production, marketing and development of products based on asphalt (which is one of the products of the oil refining process) and asphalt sheets. These products are intended for industry and construction.
In the industries sector, Pazkar sells to infrastructure contractors and asphalt plants the following products: asphalt for production and asphalt for road paving, asphalt emulsions that are used for paving new roads and renovating existing roads and asphalt sheets for roads, which are used to seal a clay infrastructure in order to prevent the cracking of that infrastructure, and also for laying on existing roads and maintaining them.
Pazkar sells to the construction industry asphalt sheets that are used for sealing roofs, parking lots and infrastructure, and foamed asphalt (which is used for sealing roofs). In addition, Pazkar markets to customers in the construction industry the following sealing materials: asphalt creams, polyurethane creams, acrylic creams, various sealing and coating liquids for roofs and surfaces, and a wide variety of other products that it manufactures, including advanced sealing creams for underground buildings that are based on and environmentally friendly technology.
To the best of the Company's knowledge, Pazkar is the only manufacturer in Israel of asphalt sheets, and it competes with a large number of importers in this field.
Pazkar exports sealing and other products.
4.1.6 Storage and Transport Services for Aviation Fuels
Aviation Assets is an exclusive provider of storage services and aviation fuel at Ben-Gurion Airport and it provides certain maintenance services for the Airports Authority's jet fuel pipes at Ben-Gurion Airport. The activity of Aviation Assets at Ben-Gurion Airport is carried out pursuant to a license that was given to Aviation Assets by the Israel Airports Authority in 2011 and in return for a licensing fee that Aviation Assets pays to the Israel Airports Authority.
Aviation Assets owns a storage park for aviation fuel, jet fuel and aviation gasoline with a total area of approximately 23 thousand sq. m. at Ben-Gurion Airport.
Within the framework of a license agreement between Aviation Assets and the Airports Authority, which is the result of a mediation that took place between the Airports Authority and Aviation Assets, which received the force of a court verdict ("the license agreement"), a settlement was reached, inter alia, with regard to the licensing of the fuel storage park owned by Aviation Assets [for a period of ten years less one month (from 2011) with an option for the Airports Authority to extend the period] and the license fees that will be paid by Aviation Assets for this license were determined. Moreover, the Airports Authority was given an option to buy the shares of Aviation Assets on such terms and in such proceedings as determined in the agreement.
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The price that Aviation Assets charges it customers is determined in an order pursuant to the Control of Prices of Commodities and Services Law, 5756-1996. For further details, see paragraph 4.18.12 below. The Control of Prices of Commodities and Services (Price of Infrastructure Services for Fueling Airplanes at Ben-Gurion Airport) Order (Amendment), 5772-2012 includes all of the license fees that Aviation Assets undertook to pay to the Airports Authority pursuant to the license agreement.
Within the context of the permit to control Paz Ashdod, Paz was permitted to continue to hold Aviation Assets, even though the activity of Aviation Assets (owning a tank farm at Ben- Gurion Airport) may be considered essential and significant infrastructure for the fuel industry. In the order regarding the merger between Paz and Paz Ashdod, the Antitrust Authority ruled that Aviation Assets will be subject to the provisions of chapter 4 of the Restrictive Trade Practices Law, and the duties that apply to a monopoly holder in every respect, including the prohibition of refusing unreasonably to provide its services, the prohibition of making services dependent upon conditions that are by their very nature or in accordance with usual commercial conditions irrelevant to the transaction, the prohibition of determining different contract terms for similar transactions, the prohibition of distinguishing between customers on the basis of their identity, etc.
Aviation Assets carries out quality control tests of the airplane fuels before they reach the airplane and is liable towards the Airports Authority for the quality of the fuels until they reach the airplane. In contrast, Aviation Assets received an undertaking from the refueling companies, Mercury Aviation (Israel) Ltd. and Aviation Services, that they will be liable for the quality of the fuels from the airplane fueling point at the airport or from the fueling point for the tankers of the fuel companies to the airplane tank. For additional details regarding the risk factor involved in this activity, see paragraph 6.11.3.4 below.
For details regarding the proposed Fuel Industry Law and its ramifications on the Company's holdings in Aviation Assets, see paragraph 2.2.8.2 above.
4.1.7 Legislative and Regulatory Restrictions and Special Constraints in the Division
4.1.7.1 Pazgas: in recent years it is possible to see a trend of making regulation and supervision stricter in the field of LPG in an aim to enhance the safety of users and the general public. In order to achieve this purpose, the various provisions of the law impose licensing duties on everyone trading in LPG, including those involved in the marketing, transport, storage, installation and maintenance of the security of the equipment installed and/or loaned at the customers' premises (including periodic examinations). For details of the legislation and regulations in this field, see paragraphs 4.18.4-4.18.6, 4.18.8-4.18.11 and 4.18.16-4.18.21 below.
Regarding the introduction of control on the reporting of LPG operations, see paragraph 4.18.4 below.
Regarding the terms of the merger between the Company and Paz Ashdod, see paragraph 4.18.2 below.
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4.1.7.2 The industrial plants of Paz Lubricants and Pazkar are subject to various restrictions under the Business Licensing Law and environmental protection and safety laws. For additional details, see paragraphs 4.17 and 4.18 below.
4.1.7.3 Aviation Assets operates in accordance with international standards (Joint Inspection Group (JIG)).
The price that Aviation Assets charges its customers is determined in the Control of Prices of Commodities and Services (Price of Infrastructure Services for Refueling Airplanes at Ben- Gurion Airport) Order, 5768-2008 and its amendment in the Control of Prices of Commodities and Services (Price of Infrastructure Services for Refueling Airplanes at Ben-Gurion Airport) (Revised) Order, 5772-2012. For further details, see paragraph 4.18.12 below.
For details regarding the ramifications of the draft Fuel Industry Law on the Company's holdings in Aviation Assets, see paragraph 2.2.8.2 above.
4.1.7.4 The prices for aviation gasoline that are charged by Aviation Services are controlled pursuant to the Control of Prices of Commodities and Services (Maximum Prices for Aviation Gasoline at Domestic Airports) Order, 5771-2011 and its amendment in Control of Prices of Commodities and Services (Maximum Prices for Aviation Gasoline) (Revised) Order, 5773- 2013.
The prices of the airplane fueling services charged by Aviation Services are controlled pursuant to the Control of Prices of Commodities and Services Price (Prices of Fueling Services at Ben-Gurion Airport) Order, 5776-1996. For additional details, see paragraph 4.18.12 below.
4.1.7.5 For details of regulatory restrictions in the field of environmental protection, see paragraph 4.17 below.
4.1.8 Changes in the Scope of Activity in the Division and its Profitability
See paragraph 3.5.3 of the Report of the Board of Directors.
4.1.9 The Critical Factors for Success in the Division and the Changes therein
The critical factors for success in the Industries and Services Division are: availability of products, production capability, import capacity, development of products, knowledge and professionalism, human resources, storage capabilities, ability to be competitive in tenders, developed marketing and logistics systems, an ability to give credit to customers, quality control, a developed collection and control system, brand name superiority of the Company's products over its competitors, goodwill, and quality and professionalism of the services provided by the Group to its customers.
For the Company's policy concerning customer credit, see paragraph 6.2.1.3 below.
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4.1.10 Changes in Suppliers and Raw Materials in the Division
In 2015, there were no significant changes relating to suppliers and raw materials in this Division. For details regarding raw materials and suppliers, see paragraph 4.15 below.
4.1.11 The Main Barriers to Entry and Exit in the Division and Changes therein
The LPG operation requires significant investments in manpower and equipment. Financial strength and technical and engineering staff are also needed to comply with regulatory requirements, to install and maintain the equipment and to purchase and store LPG. The LPG operation also requires obtaining a gas supplier license. A licensed gas supplier is required to hire trained and licensed professionals, operate a national emergency center for reporting gas leaks and safety deficiencies and hold appropriate insurance policies as required by law. However, the need to obtain a gas supplier license does not constitute a significant barrier to entry in the LPG operation.
The construction of production plants such as Paz Lubricants and Pazkar involves high construction costs and the need to obtain regulatory approvals, which constitute barriers to entry in the field.
The construction of an additional tank park at Ben-Gurion Airport involves high construction costs, finding suitable land at the airport and obtaining appropriate regulatory approvals, which constitute entry barriers into the field of activity of Aviation Assets.
The high costs required by the provisions of the law that apply to this field of activity, together with the amount of credit that the companies of the division are required to give to their customers (especially business customers) require significant financial strength, which constitutes a barrier to entry in this field.
4.1.12 Structure of the Competition in the Division and Changes therein
See paragraph 4.8 below.
4.1.13 Alternatives to the Division's Products and Changes therein
Pazgas - for natural gas as an alternative to LPG, see paragraph 2.2.12 above.
4.2 Products and Services in the Division
4.2.1 Main Products and Services
The Paz Group markets the following products and services in the Industries and Services Division:
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4.2.1.1 Pazgas Products
Pazgas is engaged in the import, marketing, sale and distribution of LPG for cooking, heating, hot water. Pazgas markets LPG to private customers in portable canisters with a capacity of 12 kg and 48 kg and by means of central gas systems. Pazgas also markets LPG to industrial and commercial customers, who mostly store the LPG in stationary tanks (accumulators).
In addition, Pazgas markets automotive LPG that is used by specially adapted cars. Moreover, Pazgas is involved in the marketing and distribution of appliances that are operated using LPG (heating appliances, water heaters and dryers).
Since 2014, Pazgas performs conversions of various plants into natural gas operation (partly backed by LPG). Pazgas is also preparing for the sale and marketing of natural gas.
4.2.1.2 Products of Paz Lubricants
Paz Lubricants produces, imports, exports, markets and sells lubricants and chemicals in three main fields:
Lubricants - Paz Lubricants produces and/or imports and/or markets and/or exports lubricants for transport and industry and automotive lubricants. Paz Lubricants also produces and markets incidental products for cars, fuel additives, lubricant creams and cleaning materials for industry.
Chemicals and process products - Paz Lubricants produces and/or imports and/or markets various solvents, raw materials for the cosmetics and detergents industry and process products for the agricultural industry (pesticides and fertilizers), and it markets raw materials for the paint and construction industry.
Recycling - Paz Lubricants produces and markets heating fluid for industry and heating, recycled lubricants and recycled solvents.
4.2.1.3 Pazkar Products
Pazkar's products for sealing and infrastructure include asphalt sheets and creams, polyurethane creams, acrylic creams, sealing products and insulating materials, asphalt that is mainly used for paving and layering roads and sealing roofs, asphalt emulsions, maintenance products for roads, and wax emulsions for the plaster industry.
4.2.1.4 Aviation Assets
Aviation Assets provides the following services at Ben-Gurion Airport: storage and/or supply of jet fuel (which is owned by the fuel companies that sell jet fuel at Ben-Gurion Airport, the Ministry of Defense and El Al Israel Airlines Ltd.), certain maintenance services for the jet fuel pipeline of the Airports Authority at Ben-Gurion Airport and absorption, storage and distribution services for aviation gasoline for various customers.
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4.2.1.5 Aviation Services
Aviation Services provides fueling services and supplies jet fuel and aviation gasoline for refueling airplanes (for airlines, private planes and the Israel Air Force), and car wash services for car leasing companies at Ben-Gurion Airport.
4.3 Breakdown of Income from Products and Services in the Division
4.3.1 The following table shows details of revenues in the Industries and Services Division, for the following groups of products: "industrial products" and "trade and services" (the figures include intersegment sales within the Group) (in NIS in millions):
2015 2014 2013 % of % of % of Group Gross Group Gross Group Gross Revenues revenues profit Revenues revenues profit Revenues revenues profit Industrial 439 3% 116 496 3% 112 609 3% 120 products (*) Trade and 1,099 9% 374 1,232 6% 341 1,389 7% 324 services (**) Total 1,538 12% 490 1,728 9% 453 1,998 10% 444
(*) Products of Paz Lubricants and Pazkar (manufactured and bought): mainly lubricants, chemicals, recycling products, emulsions, foamed asphalt, asphalt sheets, insulation products and sealing products.
(**) Products and services of Pazgas, Aviation Assets and Aviation Services: mainly LPG, jet fuel, storage and distribution services, and fueling services for aviation companies and the IAF.
4.4 New Products in the Division
There are no new products in the division.
4.5 Customers of the Division
4.5.1 General
The Industries Division markets its products and services in the Division to business customers, institutional customers, Government bodies, the Israel Air Force and private customers, with whom it enters into agreements on the basis of negotiations, on terms that are determined in the individual agreements in tenders.
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4.5.2 Customers in the LPG field
The main customers of Pazgas are institutional and business customers in a variety of fields, such as industry, agriculture, hotels, automotive LPG car refueling and other businesses (restaurants, laundries, etc.). Pazgas also has private customers who are mainly domestic customers that use LPG for cooking and heating.
Pazgas' agreement to sell LPG to its customers who are industrial plants includes the installation of storage equipment and terminal equipment at the customer's premises. The duration of the agreement generally varies between three and seven years and is determined, inter alia, by the scope of the investment in the equipment made available to the customer. The agreement is based on credit orders, generally provided without collateral, and therefore Pazgas is exposed to the possibility of non-payment of the credit by an industrial customer.
Pazgas also enters into engagements with building contractors and/or building developers in order to set up LPG supply infrastructure in condominiums.
Pazgas supplies Paz with LPG for the Palestinian Authority. For further details, see paragraph 3.5.2.2 above.
The marketing, sale and distribution of LPG to Pazgas' customers are done directly by Pazgas and through regional agencies.1
4.5.3 Customers in the Field of Jet Fuel and Aviation Gasoline
Aviation Services provides refueling services and sells aviation gasoline to aviation companies at Ben-Gurion Airport. The main customers of Aviation Services are the fuel companies that sell the fuel to aviation companies, together with the refueling services. The sales of jet fuel (by the Group) to aviation companies at Ben-Gurion Airport are made by the R&W Division.
At the domestic airports and private and agricultural landing pads, Aviation Services sells jet fuel and aviation gasoline and provides fueling services to aviation companies, flight schools and private customers.
Aviation Services also provides fueling and storage services at some Israel Air Force bases.
4.5.4 Customers in the Field of Storage and Distribution of Jet Fuel and Aviation Gasoline
Aviation Assets provides storage and distribution services for jet fuel and aviation gasoline at Ben-Gurion Airport to fuel companies, aviation companies and the Israel Air Force.
1 One agency is jointly owned by Pazgas and third parties and several agencies are independent agencies (that are not owned by Pazgas). A-107 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter A - Description of the Company's Business Part 4 - Description of the Company's Business by Divisions: the Industries and Services Division
4.5.5 Customers in the Field of Lubricants and Chemicals
The main customers of Paz Lubricants are mostly business customers, which include industrial plants, garages, car fleets, Government bodies, institutional customers, foreign customers and the Company.
4.5.6 Customers in the Field of Infrastructure and Sealing
Pazkar's main customers include distributors, owners of storage yards for building materials, sealing contractors, asphalt plants, and construction and infrastructure companies in Israel. Pazkar also has customers abroad.
4.5.7 Dependency on Individual Customer
The agreements of the Division with its institutional and business customers are, when taken together, significant for the Division's activity, but the Company has no dependence on any one of its customers. In 2015, the Palestinian Authority was a material customer of the Group. For additional details, see paragraphs 3.5.2.2 and 3.5.3 above.
4.5.8 Breakdown of Sales by Customer Type
The following table shows details regarding sales, without excise duty and VAT, by customer type (the figures do not include sales between the different companies of the Group) (in NIS in millions):
Customer 2015 2014 2013 type Sales % of sales Sales % of sales Sales % of sales Business 832 73% 977 76% 1,115 77% Institutional 23 2% 26 2% 27 2% Private 285 25% 281 22% 310 21% Total 1,140 100% 1,284 100% 1,452 100%
Most of the business and private customers of the division have been customers for more than five years. Institutional and tender customers tend to make agreements with the companies in the Division for fixed periods of a year or a few years. The division has thousands of business and institutional customers, and hundreds of thousands of private customers.
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4.6 Marketing and Distribution in the Division
4.6.1 Marketing and Distribution of LPG
The marketing and distribution of LPG are carried out by Pazgas and by independent agents. Pazgas has agreements with independent agents for defined geographic areas. The customers enter into contracts only with Pazgas. Pazgas and the independent agents are responsible for the marketing and sale of LPG and LPG-operated products, for bringing Pazgas new customers, for installing and maintaining the gas system at customers' premises, for providing service, for collecting payments, for maintaining the LPG equipment on loan to customers and for making periodic checks, as required by law.
Pazgas may have exposure for liability that may be imposed on an agent within whom it has an agreement for the distribution of LPG and/or the installation and/or maintenance of accumulators or portable canisters contrary to the safety rules (which are required by law).
In August 2015, Amendment No. 16 to the Restrictive Trade Practices Law, 5748-1988 came into effect in the context of which, among others, Article 3(6) to the Trade Practices Law was repealed, according to which agreements signed between a supplier of assets or services and the reseller of those assets or services which also signed mutual exclusivity agreements will not be viewed as restrictive agreements.
On August 6, 2015, the Antitrust Authority announced that it will refrain from enforcing the Amendment for a period of six months (until February 25, 2016) provided that the existence of any agreement that consists of such mutual exclusivity is reported to it with a condensed description of the nature of the agreement and of the exclusivity clause therein.
In keeping with Pazgas' application to the Antitrust Authority, in February 2016, the Antitrust Authority notified Pazgas that it will not view Pazgas and its distribution agents as competitors simply because both Pazgas and its distribution agents both distribute Pazgas' products. This notification allows Pazgas and its distribution agents to harbor under the exemption granted to non-lateral agreements.
Pazgas supplies LPG products to its customers through receptacles (accumulators or portable canisters) that are installed in the customer's facilities. The accumulator is a large capacity stationary tank, usually with a volume of 150 gallons to 2,000 gallons, which is installed at the customer's installations. The gas tank ('gas balloon') is a small capacity tanks (12 kilograms or 48 kilograms).
The transport of the gas to the customers is done by Pazgas and other external transport companies that specialize in the field.
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4.6.2 Marketing and Distribution of Jet Fuel and Aviation Gasoline
The main marketing of jet fuel and aviation gasoline is done pursuant to a license given by the Airports Authority (according to a tender) to Aviation Services and Aviation Assets, mostly in accordance with agreements with the fuel companies and tenders published by the Ministry of Defense and airline companies.
4.6.3 Marketing and Distribution of Lubricants and Chemicals
The marketing and distribution of lubricants and chemicals to the Company's customers are done through the marketing and distribution system of Paz Lubricants, independent agents, distributors, dealers in the Palestinian authority and the Company's filling stations. The transport is carried out by Paz Lubricants and external shipping companies.
4.6.4 Marketing and Distribution of Infrastructure and Sealing Products
The marketing and distribution of infrastructure and sealing products to the Company's customers in Israel and in the Palestinian Authority are done through Pazkar's marketing and distribution system and through distributors. The transport is done through external shipping companies.
4.7 Order Backlog in the Division
The backlog of orders is not relevant to this division in view of the fact that most of the orders are given to the companies in this Division up to three months before the products are delivered.
4.8 Competition in the Division
4.8.1 General
In the field of activity of the Industries Division, there are many competitors and competition is fierce. The institutional and business customers are characterized by a high sensitivity to price and payment terms. The professional and engineering services that are provided to customers for designing systems and adapting equipment constitute an additional factor that affects competition, especially for institutional and business customers.
4.8.2 Pazgas
LPG is sold by the large gas companies [Pazgas, Dorgas (which is controlled by the Dor Alon Group), Supergas (which is a sister company of Sonol), and Amisragas] and small gas companies. In the Company's estimation, the market share of Pazgas in Israel (not including the Palestinian Authority) is approximately 27%. In recent years the competition between the companies in the LPG field has increased, and this has led, inter alia, to an increase in discounts to customers.
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Regarding the Gas Industry (Promoting Competition for Home Consumption Gas) Law, 5768- 2008, which was intended to allow greater mobility of the domestic consumers in the LPG industry and to increase competition in the LPG industry, see paragraph 4.18.5 below.
In May and October 2014, Pazgas received a demand from the Antitrust Authority to produce data regarding the LPG market. Pazgas produced all the required data.
4.8.3 Aviation Services
Aviation Services' competitor for providing jet fuel for airplanes at Ben-Gurion Airport is Mercury Aviation (Israel) Ltd.2 The sale of jet fuel at Ben-Gurion Airport (by the Group) is carried out by the R&W Division. The main competitors of the Company in this activity are the large fuel companies. Aviation Services is the only company that has a license to supply fuel at the domestic airports, which is valid until April 30, 2017. See details of Aviation Services' license to supply fuel and provide refueling services at domestic airports in paragraph 4.1.3 above.
4.8.4 Aviation Assets
Aviation Assets is the exclusive supplier of storage services and direct aviation fuels at Ben- Gurion airport. The prices of the services provided by it are controlled under a price control order.
4.8.5 Paz Lubricants
Operating in the field of lubricantsare the main fuel companies (Sonol, Delekol from the Delek Group and Dor Alon), Haifa (Shevach) Basic Oils Ltd. and importers of lubricants. In the field of chemicals, there are various sectors of operations (detergents, cosmetics, solvents, etc.) in which there are many suppliers.
4.8.6 Pazkar
In the field of sealing products, Pazkar's main competitors are local manufacturers (Bitum Petrochemical Industries Ltd. and others) and a large number of importers.
In the field of infrastructure products, Pazkar's main competitors are: ORL, Sonol, Delek and Dor Alon, which supply asphalt to concrete plants.
2 To the best of the Company's knowledge, the controlling shareholders of Mercury Aviation (Israel) Ltd., as of the date of this report, are: Mercury Air Group, which holds about 37.5%, ORL, which holds about 31.25% and the Dor Alon Group, which holds about 31.25%. A-111 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter A - Description of the Company's Business Part 4 - Description of the Company's Business by Divisions: the Industries and Services Division
4.8.7 Methods of Contending with Competition
Pazgas' reputation, experience, expertise, level of service and the safety that it provides to its customers are a tool for dealing with the competition in the LPG market.
The high product quality, the professionalism, reputation, customer support, operating and distribution system of Paz Lubricants and Pazkar, and the continuous investment in development and improvement of the products allow the Group to compete against the competitors in the industry.
The professional experience and reputation of Aviation Services in its fields of activity are a competition advantage.
The ability of the Group to give its business customers credit and the well-developed marketing systems of the companies in the Division are also competitive advantages.
For the Company's policy regarding customer credit, see paragraph 6.2.1.3 below.
4.9 Seasonal Factors in the Division
The amount of LPG sales by Pazgas and the sales of heating appliances by Paz Lubricants increases in the winter, namely in the first and fourth quarters of each calendar year, because they are used for heating.
Aviation Services and Aviation Assets both experience a significant increase in the demand for storage, supply and fueling services in the summer months (at Ben-Gurion Airport) and during the religious holidays because of an increase in the amount of flights.
The scope of Pazkar's sales is smaller in the winter months because of a decrease in sealing and transportation activity.
4.10 Production Capacity in the Division
The production capacity of the Paz Lubricants plant in the fields of lubricants and chemicals is approximately 80 thousand tons per annum. The average production capacity that is actually utilized by the Paz Lubricants plant in the fields of lubricants and chemicals is approximately 50%. The production capacity of the Paz Lubricants plant in the field of recycling is approximately 20 thousand tons per annum. The average production capacity that is actually utilized by the Paz Lubricants plant in the fields of recycling is approximately 15%.
The potential production capacity of the Pazkar plant is approximately 140 tons per annum. The average production capacity that is actually utilized by the Pazkar plant is approximately 55%.
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4.11 Fixed Assets, Land and Installations in the Division
4.11.1 Fixed Assets and Installations in the Field of LPG
Pazgas' fixed assets include a facility in Kiryat Ata (in an area where it has a capitalized lease from the Israel Land Authority) for storing, filling and distributing LPG and for inspecting the working order of portable canisters, Pazgas' offices throughout Israel, the logistics center in Rishon LeZion (which is situated on land that is partly owned by Pazgas and partly leased, as explained below), a facility for storing LPG in Be'er-Sheva (which is owned by Paz and leased by it to Pazgas), tankers for transporting gas, trucks for distributing portable gas canisters, gas accumulators, inverters, portable gas canisters, gas meters and gas regulators. In addition, Paz leases from EAPC, in long-term agreements, a storage capacity and movable tank filling services in Ashkelon.3 For additional details regarding Pazgas' contracts with EAPC, see paragraph 4.15.1 below.
4.11.1.1 LPG Storage, Filling and Distribution Facilities
The three facilities used by Pazgas have a combined maximum capacity of approximately 3,960 tons of LPG: Kiryat Ata - about 600 tons of LPG [in practice, as of the date of the report, the Kiryat Ata facility is in a trial run period (after the container burial work had been performed) and about 200 tons of LPG are temporarily stored therein], Be'er-Sheva - about 360 tons of LPG and EAPC - about 3,000 tons of LPG.
The Kiryat Ata Facility
Pazgas has a facility for storing LPG at Kiryat Ata.
The Kiryat Ata facility has a poison permit in effect until June 2, 2016, a fire extinguishing approval in effect until November 30, 2016 and a temporary operating permit in effect until April 15, 2016.
In 2015, work was carried out at the Kiryat Ata facility for upper burial of gas containers based on the requirements of the Ministry of Environmental Protection. The cost of the container burial amounted to approximately NIS 46 million, not including betterment tax.
As discussed above, on the date of the report, the Kiryat Ata facility is in a trial run period and operates in keeping with a temporary operation permit granted to Pazgas by the Ministry of National Infrastructures, Energy and Water Resources.
3 EAPC is the sub-concessionaire under a concession agreement for the Oil Pipe Concession Law, 5728-1968. EAPC has leased onshore and offshore areas from the Israel Land Authority for a period ending in March 2017. A-113 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter A - Description of the Company's Business Part 4 - Description of the Company's Business by Divisions: the Industries and Services Division
National Master Plan 32
In 2006, National Master Plan 32C was approved which was intended to regulate the burial of the LPG containers at the Kiryat Ata gas park and to regulate its activity as a site for a limited timeframe ("NMP 32C"). According to NMP 32C, the Kiryat Ata gas park will operate on a temporary basis until a central LPG site is constructed and put into operation in the north of Israel (according to a national master plan). In accordance with the provisions of NMP 32C and the directives of the relevant Government ministries, Pazgas completed the upper burial of the containers at the Kiryat Ata gas park.
In addition to NMP 32C, the National Planning and Building Council gave instructions to prepare National Master Plan 32D, for the location and designation of a site as a long-term central LPG site in the north of Israel ("NMP 32D").
In April 2011, the National Planning and Building Council approved LPG storage and distribution sites in the north of Israel as follows: the Karkaot Hatzafon site, the HaEmek Waste site and the Damon site. According to the decision of the National Planning and Building Council, the planning of a partial national master plan and the detailed planning of two sites were initiated: the HaEmek Waste Recycling site and the Damon site, including planned LPG pipes. Moreover, the National Council has ordered the preparation of a general national master plan for the Karkaot Hatzafon site.
In October 2013, the National Planning and Building Council decided that the Kiryat Ata gas park will continue to operate after the tanks are buried underground until the end of 2030 (namely 15 years from the date of terminating the work) and that the site's protection will be outlined by the Ministry of Environmental Protection following negotiations with the Ministry of National Infrastructures, Energy and Water Resources, the Home Front Command and the gas companies in a manner that will allow the continued commercial and public operation around the site.
With regard to the legal proceedings, including the indictments filed against Pazgas, officers of Pazgas and others, with respect to the operation of the site in Kiryat Ata, see paragraph 6.8 below.
The Be'er-Sheva facility
The Pazgas facility in Be'er-Sheva has been operating for decades on an area of approximately seven thousand sq. m., which is owned by Paz and leased to Pazgas. The Be'er-Sheva facility has a poison permit in effect until August 10, 2016 and a fire extinguishing permit in effect until March 31, 2016.
In January 2008, the Be'er-Sheva Municipality contacted Pazgas and other gas companies with a demand to relocate the gas activity to another site because its location interferes, according to the Municipality, with the continued development of the city.
In November 2010, the Government decided to close the gas facilities in Be'er-Sheva within a period that would not exceed 24 months. ("the Government's Resolution").
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In July 2015, Pazgas, the Municipality of Be'er-Sheva, the Ministry of Environmental Protection and the Ministry of National Infrastructures, Energy and Water Resources signed an agreement which was approved in August 2015 by the Ministry of the Interior and in January 2016 by the Government (in a resolution that superseded the Government's Resolution and adopted the principles of the outline). The agreement contains an outline for the discontinuance of Pazgas' operations in the Be'er-Sheva gas facility. The agreement establishes an interim period during which the Be'er-Sheva gas facility will operate in a condensed format from the date of signing the agreement through the date of evacuation scheduled for July 2017 ("the interim period"). At the end of the interim period, the storage of LPG and odorless gas in accumulators and the odorless gas filtering and treatment process will all be discontinued. According to the agreement, Pazgas will receive compensation in an amount which is immaterial to the Company (half of which has been received).
The municipality of Be'er-Sheva has undertaken to promote the allocation of an alternative area that will be used for the burial of gas containers. This area has been located, tested and found to be appropriate by the parties.
The shutdown of the Be'er-Sheva gas facility will not prevent the Company from making any other legal use of the real estate and buildings thereon nor will it adversely affect the Group's financial results in a material way.
Rishon LeZion
Pazgas' logistics facility in Rishon LeZion was built on a total area of approximately 8 thousand sq. m., of which approximately half is leased by Pazgas from a third party for a period until December 31, 2017. The remainder of the area of the logistics center is owned by Pazgas. The Rishon LeZion facility has a poison permit in effect until April 15, 2016 and a fire extinguishing permit in effect until February 2, 2017.
4.11.1.2 Other Equipment owned by Pazgas
Pazgas lends equipment that it owns (LPG tanks and accumulators, regulators and gas meters) to its customers in return for a deposit. The maximum amount of the deposit is determined and revised from time to time in orders issued by the Minister of National Infrastructures, Energy and Water Resources. In November 2015, the Control of Prices of Commodities and Services (Fixing Control Level and Maximum Prices of Gas Equipment Deposits) Order, 5775-2015 ("the Order") was issued. According to the Order, among others, a gas supplier may collect from a new home gas consumer a maximum deposit representing about half of the value of installing the borrowed equipment at the gas consumer's home. The Order also provides a mechanism for updating the deposit and the manner of calculation of the deposit that will be returned to the gas consumer after and before the Order becomes effective. The Order also states that in the event of theft or vandalism of gas equipment of a gas consumer, the gas supplier will be allowed to collect higher deposit rates from the gas consumer, all as elaborated in the Order.
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According to the Land (Changing a Gas Supplier in a Cooperative House) Law, 5751-1991, and the State Economy Arrangements (Legislative Amendments) (The Gas Industry - Changing a Gas Supplier) Regulations, 5751-1991, a gas supplier who receives a notice of a request to end a contract to supply gas is obliged to return the deposit to the customer who is entitled to a refund of the deposit, on the date when the gas facilities are dismantled, and no later than thirty days from the date of receiving the notice.
In February 2014, a letter was received from the Ministry of National Infrastructures, Energy and Water Resources regarding the rates of deposits on LPG equipment and their recovery ("the letter"). In the letter, the Ministry of National Infrastructures, Energy and Water Resources addresses various issues relating to this matter and announced that simultaneously with establishing an order for controlling the prices of deposits on gas tanks and loaned equipment, it intends to initiate an amendment to the State Economy Arrangements (Legislative Amendments) (The Gas Industry - Replacement of a Gas Supplier) Regulations, 5751-1991. Pazgas delivered its response to the letter in February 2014.
In January 2016, the Ministry of National Infrastructures, Energy and Water Resources submitted a draft of State Economic Arrangement Regulations (Legislative Amendments) (Gas Industry - Replacement of Gas Supplier) (Revised), 5775-2015 for approval of the Israeli Parliament's Economic Committee which propose amendments to the provisions for recovering deposit fees and the mechanism for removing gas containers and borrowed equipment when changing gas suppliers. Pazgas is studying the draft regulations and will provide its position in their respect.
The Company estimates that the amendment of the deposit rates and the aforesaid legislative amendments will not have any material effect on the Group's financial results.
4.11.2 Fixed Assets of Aviation Services
Aviation Services has designated vehicles, fuel tankers, tanks for storing fuel and general equipment.
4.11.3 Fixed Assets of Aviation Assets
Aviation Assets owns a park for storing jet fuel and aviation gasoline with a total area of approximately 23 thousand sq. m. at Ben-Gurion Airport. For further details, see paragraph 4.1.6 above.
4.11.4 Paz Lubricants Plant
Paz Lubricants has a plant with a total area of approximately 44 thousand sq. m., which is situated close to the Company's distribution facility in Haifa. The land is owned by the Group. The plant includes: lubricant mixing facilities, package filling facilities, a facility for recycling lubricants, facilities for producing and recycling solvents, a biological facility for treating waste, a central facility for treating emissions, storage facilities, laboratories, various buildings and Paz Lubricants' offices.
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Paz Lubricants is preparing for the conversion of its plant for natural gas operation. Paz Lubricants has signed an agreement with a natural gas distribution company and an agreement for the conversion of its plant to natural gas operation and intends to also sign an agreement for the purchase of natural gas. The planned date for the termination of Paz Lubricants' plant conversion is late 2016.
The information regarding the conversion of Paz Lubricants' plant to natural gas and the planned date for completion of the conversion work is based on the Company's evaluations and represents forward-looking information, as defined in the Securities Law. The Company has no guarantee that its evaluations will be realized, among others due to factors which are not under the control of the Company, consisting of changes in market terms and/or difficulties and/or delays in natural gas supply, regulatory changes and the materialization of any of the Company's risk factors as detailed in paragraph 6.11 below.
4.11.5 Pazkar Plant
Pazkar has a plant that is situated in the industrial zone of Alon Tavor, with a total area of approximately 52 thousand sq. m., for which it has a main lease from the Israel Land Authority until August 28, 2031, with an option to extend the period by another 49 years.
There are industrial buildings in the area of the plant, including production lines for asphalt sheets, facilities for producing asphalt creams and additional products, facilities for producing asphalt emulsions, a facility for producing wax emulsion, a tank park with a total volume of approximately 4,000 tons for treating and storing asphalt, workshops, offices, storage facilities, laboratories, installations and sheds with a total built area of approximately 16,000 sq. m.
Pazkar is preparing for the conversion of its plant to natural gas operation. In September 2014, Pazkar signed an agreement for the conversion of Pazkar's plant to LPG-backed natural gas use and an agreement with a natural gas distribution company and intends to sign an agreement for the purchase of natural gas. The planned date for completion of the conversion work is the third quarter of 2016.
The information regarding the conversion of Pazkar's plant to LPG-backed natural gas and the planned date for completion of the conversion work is based on the Company's evaluations and represents forward-looking information, as defined in the Securities Law. The Company has no guarantee that its evaluations will be realized, among others due to factors which are not under the control of the Company, consisting of changes in market terms and/or difficulties and/or delays in natural gas supply, regulatory changes and the materialization of any of the Company's risk factors as detailed in paragraph 6.11 below.
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4.12 Research and Development in the Division
Pazkar is continuously involved in the development of new products in its field of activity and introducing them to the market, as well as in the improvement of existing products that it manufactures.
The development works are carried out by development teams at the laboratories of the Pazkar plant. The development costs are not significant costs for the Group.
4.13 Intangible Assets in the Division
4.13.1 Trademarks
The Group has registered old and well-known trademarks that distinguish it from its competitors and constitute a significant asset in its activity. The main trademarks in the Division are: Pazgas, Paz Lubricants, Pazkar, Aviation Services and Aviation Assets.
The Group invests resources in developing and preserving goodwill and awareness for its brand names.
4.13.2 Distribution Rights
As part of the expansion of the retail activity, Pazgas has reverted to itself distribution rights in various geographic areas throughout Israel. The reversion of these rights was accompanied by payments to third parties. The payments to the aforesaid third parties are presented in the financial statements as distribution rights with a depreciated cost in a sum of approximately NIS 38 million.
For additional details regarding intangible assets, see Note 13 of the financial statements of December 31, 2015.
4.14 Human Capital in the Division
See part 6 below.
4.15 Raw Materials and Suppliers in the Division
4.15.1 Contracts with EAPC for Pazgas' Handling, Storage and Filling Services
Pazgas has long-term agreements for leasing four accumulators for storing LPG, with a capacity of 750 tons each, from EAPC. These accumulators were intended to allow Pazgas to store imported LPG. The lease period for the first and second accumulators will end in 2017, for the third accumulator in 2021, and for the fourth accumulator in 2025, this subject to the extension of EAPC's concession period, which ends in 2017.
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Pazgas imports LPG to Israel directly and receives unloading and storage services ("handling services") from EAPC, pursuant to an agreement that was signed between the parties and is valid until March 25, 2017. According to this agreement, EAPC undertook to provide Pazgas with LPG handling services, and Pazgas undertook to purchase the handling services in a minimal amount and at the tariffs fixed in the agreement.
In addition, Pazgas receives from EAPC filling services for mobile gas tanks by virtue of an agreement that was signed between the parties in April 2003, according to which Pazgas undertook to buy filling services with a minimum annual amount, at rates stipulated in the agreement. The duration of the agreement is until March 2017.
Pazgas is operationally dependent on EAPC for the handling and storage of LPG.
4.15.2 The Main Suppliers in the LPG Sector
Pazgas buys the LPG that it uses for its activity from the refineries and from imports. The rate of Pazgas' purchases from the various suppliers is as follows: from ORL - about 26% in 2014 and about 23% in 2015; from Paz Ashdod - about 14% in 2014 and about 10% in 2015; from imports - about 60% in 2014 and about 68% in 2015. Each month Pazgas orders LPG from the refineries, by means of a written order, which relates to the amount of purchases in the forthcoming month. Should Pazgas seek to buy additional amounts above the amount of the aforesaid order, on the basis of experience the refineries will agree to sell these amounts, if they have in their possession a sufficient inventory and subject to the restrictions in the State Economy Arrangements (Legislative Amendments) (Gas Sales by Refineries and Gas Suppliers) Regulations, 5769-2009 ("the Gas Sale Regulations"). The sale of LPG by Paz Ashdod is also subject to the restrictions of the terms of the merger between Paz and Paz Ashdod. When the refineries do not have adequate reserves in their possession, Pazgas imports the quantities of LPG needed and receives handling services from EAPC under an agreement with EAPC, as discussed in paragraph 4.15.1 above. The cost importing the LPG, which includes unloading costs, is higher than the cost involving the purchase from the refineries. In each of the months in 2014 and 2015, LPG was imported by Pazgas.
The distribution of LPG by the refineries is made in accordance with the Gas Sale Regulations and based on the proportional share that the gas companies bought from the refineries in the corresponding three months in the preceding year on average, and in the three months that preceded the month of distribution on average, and subject to a preferential allocation to new or small gas companies, but according to the terms of the merger between Paz and Paz Ashdod, the amount of LPG that will be supplied to Pazgas by Paz Ashdod needs to be determined in accordance with the relative amount supplied to Pazgas by Paz Ashdod in the corresponding calendar month in the previous year ("Pazgas' share").
In view of the Gas Sale Regulations, in order to adapt the terms of the merger to the Gas Sale Regulations, during 2009, 2013 and 2015, the Company applied to the Israel Antitrust Authority with a request to cancel the terms relating to Pazgas' share, in order that the Gas Sale Regulations should apply equally to all the gas companies. Following this request, since 2009, Pazgas received a request from the Antitrust Authority to send information and data. Pazgas sent the data. Following discussions held with the Antitrust Authority in 2013, the latter expressed its master consent to revise the merger terms so that the base year underlying Pazgas' share will be 2012.
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In a meeting held between the Company's representatives and the Antitrust Authority's representatives in 2015, the Antitrust Authority's representatives expressed their acceptance of the Company's position whereby there is a difficulty involving the simultaneous application of both the Gas Sale Regulations and the merger terms and also stated their master consent to revising the merger terms. The Company will continue to act towards the amendment of the terms of the merger between Paz and Paz Ashdod regarding LPG allocations from Paz Ashdod to Pazgas.
Pazgas has an LPG import agreement with an international trade company which is in effect until the end of 2017. The agreement is a master agreement whereby Pazgas orders on a monthly basis the amount of LPG it needs for the following month. The LPG is supplied to EAPC's port in Ashkelon by container ships for transporting LPG. In 2015, Pazgas imported LPG from a sole supplier.
Pazgas is dependent on the import supplier and on the refineries for the supply of LPG (although it is not dependent on a single refinery), in such a way that should the refineries stop supplying LPG, and Pazgas is compelled to increase the quantities of LPG that it imports, this is likely to involve significant expenses.
In view of the Gas Sale Regulations and the terms of the merger between Paz and Paz Ashdod, Pazgas does not have an advantage over its competitors because of the fact that the Company owns a refinery. See details of the Gas Sale Regulations in paragraph 4.18.6 below.
4.15.3 Paz Lubricants' Raw Materials and Main Suppliers
The main raw materials used by Paz Lubricants in the manufacturing processes of the lubricants are basic oils that are bought from suppliers in Israel and abroad, as well as various additives that are bought from suppliers abroad.
The main raw materials used by Paz Lubricants in the chemical production processes are oil products that are bought from the Company (on the basis of monthly purchases) and undergo additional refining and treatment processes at Paz Lubricants' plant.
The main raw materials used by Paz Lubricants for the recycling processes are used lubricants that are bought from various suppliers in Israel and undergo refining and processing processes at Paz Lubricants' plant and oil products purchased from the Company.
In addition, Paz Lubricants imports a variety of other finished products from additional suppliers abroad. Paz Lubricants is not dependent on any of its suppliers in its main spheres of activity.
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4.15.4 Main Raw Materials Used by Pazkar
The main raw materials used by Pazkar are asphalt, felt and polymers. Asphalt is the main raw material in some of Pazkar's products. Pazkar buys the asphalt from ORL through Paz in monthly purchases.
ORL is the sole manufacturer of asphalt in Israel. Pazkar is dependent on ORL for this product. Pazkar buys the raw materials of felt and polymers from several different suppliers.
4.15.5 Main Raw Materials and Suppliers used by Aviation Services and Aviation Assets
Aviation Services buys jet fuel from Paz and aviation gasoline from Paz and other suppliers.
Aviation Services and Aviation Assets are operationally dependent on the infrastructure companies (PEI and Delek Pi-Glilot), which provide them jet fuel by pipeline from the refineries.
4.16 Investments in the Division
In the past two years, the Company's material investment in the division consisted of Pazgas' investment in the upper burial of LPG containers in the Kiryat Ata storage facility. See details in paragraph 4.11.1.1 above.
4.17 Environmental Protection in the Division Environmental Risks and Ways of Managing them
4.17.1 Environmental Risks
Oil products are hazardous and/or pollutant substances by nature. The use of oil products in the Industries and Services Division may cause environmental risks, and especially air pollution, soil pollution and groundwater pollution. The growing environmental requirements underlying the receipt of licenses and permits involve considerable expenses and investments.
4.17.2 Major Ramifications of the Provisions of Law on the Company
The activity of the Company in the Industries and Services Division is subject to various legislative provisions regarding environmental protection, and various requirements of the Ministry of Environmental Protection as set out below.
4.17.2.1 LPG Marketing Activity
According to the Hazardous Substances Law, the holding of LPG on premises where the scope of LPG storage exceeds 8,000 kilograms mandates a poison permit. Pazgas has poison permits for the filling and distribution installations that it owns (the Kiryat Ata facility's is in effect until June 2016, the Rishon LeZion logistic facility's is in effect until April 2016 and the Be'er-Sheva facility's is in effect until August 2016).
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4.17.2.2 Marketing Activity for Lubricants and Chemicals
Among others, Paz Lubricants is engaged in manufacturing lubricants, chemicals and solvents and is therefore also subject to some of the legal provisions applicable to the R&W Division (the Water Law, the Hazardous Substances Law and the proposed Prevention of Soil Contamination and Rehabilitation of Contaminated Soil Law). See more details in paragraph 3.17.2 above.
Paz Lubricants and Paz Lubricants and Chemicals (Marketing and Trade) Ltd. (a subsidiary of Paz Lubricants) have poison permits for the various solvents and chemicals stored on the plant's premises or conveyed to and from the plant in effect until September 2016.
Paz Lubricants has a biological purification facility for waste leaving the plant (after it has been treated at another existing facility in Paz Lubricants).
Paz Lubricants has an RTO facility (a central facility for treating emissions based on thermal oxidation technology).
A practical land survey that had been executed by Paz Lubricants in its plant in 2014 detected three sources of pollution. In August 2015, the Water Authority approved a plan submitted by Paz Lubricants for pumping and treating the sources of pollution ("the plan"). The plan's execution began in January 2016 for a trial run period of six months. At the end of this trial period, the Water Authority will study the plan and its scope and adoption, and a decision will be made regarding any need for revising the approved plan. The Company estimates that the expected expenses to conduct the plan are immaterial to the Company.
Moreover, in March 2015, the Ministry of Environmental Protection demanded that Paz Lubricants conduct an active land survey. Paz Lubricants has received an opinion from the Water Authority according to which there is no need to conduct such a survey. The opinion was delivered to the Ministry of Environmental Protection.
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 Paz Lubricants' estimation of the results of the land survey conducted by it and the plan approved by the Water Authority. It is possible that actual costs will differ from the Company's estimation and have an adverse effect on the results of Paz Lubricants, also due to additional unforeseen costs and/or any changes in the plan required by the Water Authority and/or regulatory changes.
Paz Lubricants has the following business licenses: a business licenses for its processing and manufacturing activity, a business license for storing and selling hazardous substances at Paz Lubricants' laboratory and a business license for Paz Lubricants' laboratory, all in effect until March 2016.
As for the conversion of Paz Lubricants' plant to natural gas use, see paragraph 4.11.4 above.
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4.17.2.3 Pazkar's Activity
Pazkar manufactures sealing and insulation products and is therefore also subject to the legal provisions applicable to the R&W Division (the Water Law and the Hazardous Substances Law). See more details in paragraph 3.17.2 above.
The field of infrastructure and sealing products is subject to extensive supervision, whose purpose is to prevent harm to the environment. In recent years, a trend of stricter enforcement of provisions of applicable laws can be seen whose main repercussions involve investments that are required for treating air emissions.
Pazkar has a valid poison permit in effect until November 2017.
Pazkar treats liquid waste without dumping it into the sewage system, effective collection of fugitive air emissions and odors. Pazkar has an RTO facility (a central facility for treating emissions based on thermal oxidation technology).
Pazkar has a contingent business license from 2015. Pazkar meets most of the conditions stipulated in the business license and has applied for deferral of the requirement to meet the conditions until it begins operating using natural gas. Despite the favorable position expressed by the Ministry of Environmental Protection, no written approval has been received.
As for the conversion of Pazkar's plant to natural gas operation, see paragraph 4.11.5 above.
4.17.2.4 Activity of Aviation Assets
Aviation Assets is involved in storing aviation fuels at Ben-Gurion Airport and consequently some of the provisions of law that apply to activity in the R&W Division (the Water Law, the Hazardous Substances Law and the proposed Prevention of Soil Contamination and Rehabilitation of Contaminated Soil Law) also apply to it. For further details in this regard, see paragraph 3.17.2 above.
Aviation Assets has a poison permit in effect until May 2017.
4.17.2.5 Activity of Aviation Services
Aviation Services is involved in the distribution of aviation fuels and providing fueling services. Consequently, some of the provisions of the law that apply to the activity of the R&W Division (the Water Law, the Hazardous Substances Law and the proposed Prevention of Soil Contamination and Rehabilitation of Contaminated Soil Law) also apply to it. For additional details, see paragraph 3.17.2 above.
Aviation Services has a poison permit for its activity at Ovda Airport that is valid until February 2017 and a poison permit for its activity at Sde Dov Airport that is valid until February 2017. As for the other domestic airports, there is no need for a poison permit in view of the negligible amount of diesel oil, kerosene (jet fuel) and aviation gasoline that are stored therein.
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4.17.2.6 The Clean Air Law
The Clean Air Law concerns, inter alia, obtaining emission permits, monitoring the air quality from localized and fugitive emissions and the sanctions that can be imposed on bodies that operate without an emission permit or deviate from the terms of the emission permit, etc. Most of the Clean Air (Air Quality Values) (Temporary Provision) Regulations, 5771-2011, which were enacted pursuant to the law, came into force in March 2015, whereas some of the requirements to comply with the values provided in the regulations, which relate to emissions, came into force on December 31, 2012.
The Company's plants in this division are the Paz Lubricants plant and the Pazkar plant. The Ministry of Environmental Protection is applying some of the provisions of the Clean Air Law to the industry by stipulating additional conditions for a business license.
Paz Lubricants has an RTO facility (a central facility for treating emissions) that is based on thermal oxidation technology). Moreover, pursuant to the provisions of the Clean Air Law, in June 2014, Paz Lubricants received a plant emission permit for a period of seven years in effect until June 2021. At the end of 2016, Paz Lubricants' plant is expected to convert to natural gas operation. In view of the expected conversion to natural gas use, the adoption of some of the provisions of the plant emission permit was deferred.
Pazkar has an RTO facility for treating emissions. In the third quarter of 2016, Pazkar's plant is expected to convert to LPG-backed natural gas operation. In view of the expected conversion to natural gas use, Pazkar filed an application for the deferral of the adoption of some of the requirements in its business license. Despite the favorable position expressed by the Ministry of Environmental Protection, no written approval has been received.
In the Company's estimation, as a result of the law and the regulations, additional investments may be needed both at the Paz Lubricants and Chemicals plant and at the Pazkar plant. The Company cannot, at this stage, assess what will be the effect of the law and the regulations on the activity of Paz Lubricants and Pazkar. However, the Company estimates that the aforesaid legislation is not expected to have a significant adverse effect on the business of the Industries Division and/or to cause the Division significant expenses and/or to affect the competitive status of the Division.
The aforesaid information regarding the effects of the aforesaid law and regulations is forward-looking information as this term is defined in the Securities Law, and is based inter alia on the Company's estimation that the expenses required in order to comply with the requirements of the law and the regulations are not material.
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4.17.3 Events and Matters that have caused or are expected to cause Harm to the Environment
In tests that were carried out during 2005 on the earth around the facilities of Aviation Assets at Ben-Gurion Airport, soil pollution was discovered at a depth of about one meter. No pollution was found in the groundwater. Aviation Assets is working in accordance with the directives of the Ministry of Environmental Protection with regard to this pollution and it has carried out a soil study and drilled wells in order to monitor the groundwater. In view of the groundwater monitoring findings, effective from 2014, Aviation Assets is required to conduct tests once a year instead of twice a year.
In the context of infrastructure work carried out in early 2016 and in light of the findings of the land survey conducted, Aviation Assets is taking steps to clear the polluted soli from a small area in the Ben-Gurion Airport tank farm.
According to the findings of land surveys carried out during the years 2008-2010, an old oil spill was found in soil in the possession of Aviation Services at Sde Dov. Aviation Services is carrying out rehabilitation works for the soil and the groundwater. Following the rehabilitation work, the scope of the spill was greatly reduced, and Aviation Services is continuing operations as required, in coordination with the Ministry of Environmental Protection.
A practical land survey, conducted by Paz Lubricants in its plant in 2014, detected three sources of pollution. In August 2015, the Water Authority approved a plan submitted by Paz Lubricants for pumping and treating the sources of pollution ("the plan"). The plan's execution began in January 2016 for a trial run period of six months. At the end of this trial period, the Water Authority will study the plan and its scope and adoption and a decision will be made regarding any need for revising the approved plan. The Company estimates that the expected expenses to conduct the plan are immaterial to the Company.
In the Company's estimation, which is based on the results of previous soil studies and on the results of additional tests carried out by the Company, the costs of treating soil pollution are not expected to be significant to the Company.
The aforesaid information regarding the Company's estimation of the anticipated costs is forward-looking information as this term is defined in the Securities Law, and is based inter alia on the Company's tests. It is possible that the actual costs will be different from the Company's estimate and will adversely affect the results of Aviation Services or Aviation Assets and/or the results of Paz Lubricants, inter alia as a result of additional findings and/or additional costs that were not anticipated.
4.17.4 Legal and Administrative Proceedings and Related Environmental Costs that have been or will be incurred in respect thereof
4.17.4.1 Concluded Criminal Legal Proceedings
In 2015, no criminal legal proceedings filed against any of the companies in the Industries Division in the field of environmental protection were conducted or concluded.
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4.17.4.2 Pending Indictments
In 2015 and as of the date of this report, there are no indictments pending any of the companies in the Industries Division in the field of environmental protection.
4.17.4.3 Pending Civil Proceedings
As for a motion for recognizing a claim as a class action against the Company and Paz Lubricants, see paragraph 6.8 below. Beyond this motion, in 2015, there were no material civil proceedings pending against any of the companies in the Industries Division in the field of environmental protection.
4.17.4.4 Concluded Civil Proceedings
In 2015, no material civil proceedings against any of the companies in the Industries Division in the field of environmental protection were concluded.
4.17.5 The Company's Environmental Risk Management Policy and the Measures Adopted to Reduce Environmental Risks
For the Company's environmental risk management policy and the measures adopted to reduce environmental risks, see paragraph 6.7.3 below.
4.17.6 Amounts Awarded, Provisions and Environmental Costs
In 2015, no amounts were awarded against any of the companies in the Industries Division within the framework of legal proceedings involving the environment.
The following are details of the Company's expected environmental protection costs in 2016 and in subsequent years in the Industries and Services Division:
Actual costs Forecasted costs Forecasted annual costs in incurred in 2015 for 2016 the next three years NIS in millions Material costs 22 2 Material investments 30 5 2 Total 32 7 4
The anticipated investments, in the Company's estimation, for carrying out the provisions of the law in the field of environmental protection in the Industries and Services Division are not amounts that are significant for the Company.
The aforesaid information regarding the anticipated investments in environmental protection in the Division is forward-looking information, as this term is defined in the Securities Law, and is based inter alia on the Company's estimation that the regulations that will be enacted pursuant to the Clean Air Law and the Bill for Prevention of Soil Pollution and Rehabilitation of Polluted Soils, 2011 will be reasonable and acceptable. It is possible that the regulations will be strict and will require significant investments.
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4.18 Restrictions and Supervision of the Company's Activity in the Division
4.18.1 Quality Standards
Pazgas has a quality control system based on ISO 9001:2008.
The production plants of Paz Lubricants and Pazkar have quality control systems that are in compliance with ISO 9001:2008 and authorized by the Standards Institution of Israel (SII).
In March 2015, Paz Lubricants received certification for compliance with Israeli Standard 2004: ISO 14001 (environmental) and Israeli Standard 2007: ISO 18001 (safety).
In March 2016, Paz Lubricants was awarded the Golden Mark for 2016 from the SII for the adaptation of its management systems to the SII's quality benchmarks in the fields of environmental management systems, occupational health and safety management systems and quality management systems.
Pazkar has permits from the SII to mark products manufactured by it with regular standards and green standards. Moreover, Pazkar's products comply with various international quality standards in Europe and the United States.
Aviation Services and Aviation Assets operate in accordance with international standards (Joint Inspection Group (JIG)) and hold Israeli Standard 2008: ISO 9001. The control of operational quality of jet fuel is subject to the provisions of SI 6294 and the control of quality of the jet fuel is subject to the provisions of SI 5563.
4.18.2 Restrictions imposed by the Company's Merger with Paz Ashdod
According to the terms of the merger of Paz Ashdod with Paz on September 27, 2006, Paz Ashdod may only be involved in the marketing of LPG through a separate company that will serve as a supplier of LPG. Unless the General Director gives prior written approval, Paz Ashdod shall not supply any supplier of LPG, in which it has a right (Pazgas), LPG in a total monthly amount that exceeds "Pazgas' share" of the total amount of LPG that it will sell in that calendar month to LPG suppliers, all of which subject to conditions stipulated by the Antitrust Authority with regard to equal sales of LPG and distribution services for LPG by Paz Ashdod.
"Pazgas' share" is the total amount of LPG that was supplied to Pazgas by Paz Ashdod in the corresponding calendar month in the previous year, divided by the total amount of LPG supplied to the various LPG suppliers by Paz Ashdod in the corresponding calendar month of the previous year. According to the merger order, the validity of this restriction will be reexamined by the Antitrust Authority if provisions that Paz Ashdod has a duty to supply LPG on an equal basis are enacted in legislation or if the other refinery in the State of Israel is not subject to legislation regarding the duty to supply LPG on an equal basis, and it acts in a discriminatory manner towards gas suppliers, or if a major change of circumstances occurs in the competition conditions for the supply of LPG.
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In view of the Gas Sale Regulations, in order to adapt the terms of the merger to the Gas Sale Regulations, during 2009, 2013 and 2015, the Company applied to the Israel Antitrust Authority with a request to cancel the terms relating to Pazgas' share, so that the Gas Sale Regulations apply equally to all the gas companies. Following this request, since 2009, Pazgas received a request from the Antitrust Authority to send information and data. Pazgas sent the data. Following discussions held with the Antitrust Authority in 2013, the latter expressed its master consent to revise the merger terms so that the base year underlying Pazgas' share will be 2012.
In a meeting held between the Company's representatives and the Antitrust Authority's representatives in 2015, the Antitrust Authority's representatives expressed their acceptance of the Company's position whereby there is a difficulty involving the simultaneous application of both the Gas Sale Regulations and the merger terms and also stated their master consent to revising the merger terms. The Company will continue to act towards the amendment of the terms of the merger between Paz and Paz Ashdod regarding LPG allocations from Paz Ashdod to Pazgas.
According to the terms of the merger, Paz is required to maintain a complete corporate and accounting separation between the business of Paz Ashdod and/or Paz and the business of Pazgas.
It was also determined that any activity, property or service that belong on the date of the decision to Pazgas shall not be transferred to any person related4 to Paz Ashdod or Paz without the General Director's approval.
For additional details regarding restrictions on the sale of LPG by Paz Ashdod, which were imposed by the General Director, see paragraph 5.18.2.2 below.
According to the order for the merger between Paz and Paz Ashdod, the Antitrust Authority ruled that Aviation Assets will be subject to the provisions of Chapter D to the Restrictive Trade Practices Law and the duties applicable to holders of a monopoly for all intents and purposes, including the proscription of expressing an unreasonable refusal to provide services, proscription of conditioning the grant of services on terms that by nature or according to acceptable trade terms do not pertain to the issue of the engagement, proscription of establishing different engagement terms for similar transactions, proscription of distinguishing between customers based on their identity etc.
4.18.3 Recognized Supplier of the Ministry of Defense
Pazgas, Paz Lubricants, Aviation Services and Aviation Assets have been approved as recognized suppliers by the Ministerial Committee for approving recognized suppliers for the Ministry of Defense.
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4.18.4 Control of LPG Prices
Pursuant to the Control of Prices of Commodities and Services (Maximum Ex-factory Price of Liquefied Petroleum Gas) Order, 5760-2000, the refineries have a duty to report LPG prices (effective from February 2015, other than LPG that does not contain mercaptan) in accordance with the provisions of chapter 7 of the Control of Prices of Commodities and Services Law, 5656-1996. Moreover, the order prohibits discrimination between consumers (gas suppliers) in such a way that on the same date LPG is sold to different consumers (gas suppliers) at different prices. It also provides that should the refinery sell LPG at a price that exceeds the 'import price' as defined in the Order, it shall be subject to the provisions of chapter 6 of the Control of Prices of Commodities and Services Law, 5656-1996, which imposes a prohibition of raising prices without receiving approval.
Pursuant to the Control of Prices of Commodities and Services (Applying the Law to LPG) Order, 5770-2010, and its amendment of 2013, control is imposed at the level of reporting on the profits and prices of LPG, in accordance with the provisions of chapter 7 of the Control of Prices of Commodities and Services Law, 5656-1996.
In May 2013, Pazgas received a letter from the Ministry of National Infrastructures, Energy and Water Resources stating that in keeping with the reporting supervision of LPG prices and profits imposed on Pazgas and other LPG companies, the Director of the Fuel Administration and the Commissioner of Prices at the Ministry of National Infrastructures, Energy and Water Resources are considering recommending that control be imposed on the selling prices of LPG to the private sector through special systems and containers. In May and November 2013, Pazgas received drafts of studies prepared by the Ministry of National Infrastructures, Energy and Water Resources regarding the profitability of Pazgas' LPG activity. The drafts do not include any recommendation for establishing a controlled price and in the event that it is decided to impose price control, the controlled price will be based on the data of all the LPG marketing companies. In July and December 2013 and in January 2014, Pazgas filed its responses to the drafts. Pazgas addressed the errors committed in the various calculations and argued that they should be corrected before any decision is made regarding LPG price control in sales to the private sector through special systems and containers.
In August 2014, Pazgas received a demand from the Ministry of National Infrastructures, Energy and Water Resources to produce details which also stated that no decision has been made whether to enhance the degree of supervision in the industry. Pazgas produced the required details to the Ministry of National Infrastructures, Energy and Water Resources.
In February 2016, Pazgas received another demand for producing data from the Ministry of National Infrastructures, Energy and Water Resources in which it was also notified that the Ministry of National Infrastructures, Energy and Water Resources is preparing to reexamine the profitability of LPG used in the private sector. Pazgas is preparing to provide a response based on the data demand.
For the recommendations of the Committee for Socioeconomic Change (the Trajtenberg Committee), regarding the imposition of control on the ex-factory selling price of LPG and on the marketing margin for LPG, see paragraph 2.2.8.4 above.
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At this stage, Pazgas cannot estimate the ramifications of the imposition of control as aforesaid, if and to the extent imposed.
For details of the draft report issued by the Ministry of Finance regarding a new price control methodology, see paragraph 2.2.8.1 above.
4.18.5 The Gas Industry (Promoting Competition for Home Consumption Gas) (Legislative Amendments) Law, 5768-2008
The Gas Industry (Promoting Competition for Home Consumption Gas) Law provides, inter alia, a duty of carrying out periodic checks of the proper functioning of the gas system, a duty of the outgoing gas supplier to allow the incoming gas supplier (if the latter so pleases) to buy the stationary tanks (accumulators) in accordance with a price mechanism that is determined in the Control of Prices of Commodities and Services (Price of Stationary LPG Container) Order , 5769-2009 and financial sanctions for a breach of the provisions of the Law. Some of the provisions were enacted as a temporary provision. The temporary provision on the prohibition of carrying out operations to retain customers who have given written notice of replacing their gas supplier, for a period of six months from the date of receiving the written notice, is in effect until January 2019. The temporary provision on the grant of egalitarian service to new similar customers in the same geographical area (prohibition on unreasonable refusal and supply to similar new consumers under similar conditions) is also in effect until January 2019.
4.18.6 The State Economy Arrangements (Legislative Amendments) (Sale of Gas by Refineries and Gas Suppliers), 5770-2009 ("the Gas Sale Regulations")
The Gas Sale Regulations concern the regulation of the sale of gas by the refineries to the gas suppliers. The Gas Sale Regulations provide, inter alia, for the sale of gas in months when there is a shortage, while giving preference to small or new gas suppliers. According to the Gas Sale Regulations, the supply of LPG by the refineries to small or large suppliers is carried out in accordance with the proportional share of that gas supplier from the total gas amount purchased by the entire small or large suppliers, as applicable, from the refineries in the corresponding three months in the year preceding the shortage period on average, and in the three months preceding the month before the shortage month on average, and subject to preferred allocation to new or small gas companies. According to the Gas Sale Regulations, gas suppliers must file to the Ministry of National Infrastructures, Energy and Water Resources a CPA certified monthly report (by the 15th of every month) of the amount of gas ordered by it and received from each of the refineries as well as the amount of gas sold to and purchased from other gas suppliers and the amount of gas supplied to consumers.
In June 2015, the Ministry of National Infrastructures, Energy and Water Resources issued for public reference a proposed amendment for the Gas Sale Regulations which changes, among others, the surplus distribution and allocation mechanism, the procedure of assigning allocations in the event of large customer transfers, the procedure of assigning allocations 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 allocations in the event of home consumer transfers, alleging disproportionate impairment of its proprietary rights, and requested to add other topics regarding the calculation of the allocations in the event of large consumer transfers and the joining of new home consumers not as a result of gas supplier transfer.
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4.18.7 Business Licensing
All the Company's facilities where storage and distribution are carried out (including Paz Lubricants' plant, Pazkar's plant and Pazgas' storage and distribution facilities) require a business license. Most of the Company's facilities where storage and distribution are carried out in the Division have a business license.5 The Company is working to obtain a business license at all of its facilities in the Division.
4.18.8 Gas Supplier License and License to Engage in Gas Work
The provisions of the Gas (Safety and Licensing) Law, 5749-1989 ("the Gas Law"), impose a licensing duty on anyone who acts as a gas supplier. Pazgas has a gas supplier's license and is entitled under the terms of the license to engage in buying LPG, marketing it in movable and stationary tanks, filling and storing LPG in portable and stationary tanks, transporting LPG in an accumulator and portable tanks, storing LPG in an accumulator and supplying automotive LPG.
Under the Gas Law, the construction of a gas facility, which is not for personal consumption, requires a permit from the Director of Safety Issues at the Ministry of National Infrastructures Energy and Water Resources. Pazgas has appropriate permits for the facilities operated by it.
Moreover, a gas supplier is liable to ensure that anyone who is involved on his behalf in gas work will have a suitable license, according to the type of activity, in accordance with the licensing level provided in the Gas (Safety and Licensing) (Licensing of Persons Engaged in LPG Works), 5766-2006, which were enacted pursuant to the Gas Law. The gas supplier is liable to comply with all the safety requirements under every law.
As a gas supplier, Pazgas is also subject to the Control of Prices of Commodities and Services (Ensuring the Supply of Liquefied Petroleum Gas) Order, 5749-1989, which provides, inter alia, that a person may not act as a gas supplier unless he has received written approval from the Director (the person who is appointed by the Minister of National Infrastructures Energy and Water Resources that it has made the preparations necessary for complying with the provisions of this order.
Pazgas has internal control mechanisms that are intended to guarantee compliance with the criteria for receiving the aforesaid approvals and to protect the safety of its employees and customers, including a certificate of compliance with the ISO 9001:2008 standard, and an internal control system for compliance with this standard.
5 The gas park in Kiryat Ata, where there are three gas facilities, the one that serves Pazgas and the others that serve two other gas companies, does not have a business license but does have a temporary operating permit from the Ministry of National Infrastructures, Energy and Water Resources, a permit from the Israel Fire and Rescue Services and a permit from the Ministry of Environmental Protection. For details of legal proceedings involving the Kiryat Ata gas park, see paragraph 6.8 below. A-131 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter A - Description of the Company's Business Part 4 - Description of the Company's Business by Divisions: the Industries and Services Division
4.18.9 Safety in the Marketing and Supply of Gas
According to the Gas Law and the State Economy Arrangements (Legislative Amendments) (Gas Industry - Replacement of Gas Supplier) Regulations, 5751-1991, the incoming gas supplier has a duty to check the existing gas system and to ascertain that it is in proper condition before it begins to supply gas to the consumer.
The Control of Prices of Commodities and Services (Marking and Filling Gas Tanks) (Revised) Order, 5765-2005, which was issued pursuant to the Control of Prices of Commodities and Services Law, requires every gas tank to be marked in such a manner and with such markings as will make it possible to ascertain with certainty the supplier of the gas, and also to be marked with a warning as required by Israeli standards. This order prohibits a gas supplier from filling and/or moving and/or transporting and/or storing and/or allowing into his filling facility a gas tank that has on it the marking of another supplier [unless approval for this has been granted by the Commissioner of Safety and Gas Affairs and under the conditions prescribed in the Gas (Safety and Licensing) (Movable LPG Tanks) Order, 5775-2015] and/or to sell and/or market to the consumer LPG in a gas tank that has on it the marking of another supplier (except in cases where a special permit is given by the Director as defined in the Gas Law).
4.18.10 Standards
Pazgas - there are binding standards in Israel for gas containers, gas systems, the installation of a gas system, etc. The standards include, inter alia, a duty of marking, technical instructions, checking pressure and checking safety, which should be done before supplying gas.
A gas supplier may sell LPG in gas tanks that comply with Israeli Standard 70. As a part of the standard, the gas supplier is liable to make a preliminary periodic check of the gas tanks 15 years after they are made as well as regular periodic checks every 10 or 12 years, depending on the type of the LPG tank.
According to the provisions of Israeli Standard 158, gas facilities need to be checked once every five years Moreover, Israeli Standard 158 proscribes the use of atmospheric water heaters in residential apartments effective from the end of 2015.
4.18.11 The Proposed Liquefied Petroleum Gas Law, 5775-2015
The proposed Liquefied Petroleum Gas (LPG) Law aims to settle, among others, the following issues: the mandatory licensing of LPG suppliers (including via agent) and LPG contractors; the license term of LPG suppliers; the mandatory performance of tests of LPG installations and LPG-consuming devices before LPG is supplied and on a regular basis, as will be determined; the mandatory supply of LPG to consumers under written agreements only; the mandatory purchase of a liability insurance policy by LPG suppliers covering any possible event in an amount of at least US$ 5 million etc.
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In addition to the safety aspect, the proposed LPG Law recommends authorizing the Minister of National Infrastructures, Energy and Water Resources, in consultation with the Commissioner of Consumer Protection and with the approval of the Parliament's Economic Committee, to establish quality and scope benchmarks underlying the services provided by licensed LPG suppliers. In February 2016, Pazgas submitted its response to the proposed LPG Law in which it argues, among others, that the proposed amendment will unnecessarily impair many of the constitutional rights of LPG suppliers and their agents while unreasonably expanding the authorities of the Director General. In the Company's estimation, whether the proposed LPG Law is approved in its current format or in a different format, it will not have a significant effect on the activity and profits of the Company.
The above information regarding the implications of the proposed LPG Law on the Company represents forward-looking information, as defined in the Securities Law, which is based, among others, on the Company's evaluations. It is possible that the actual effect will be different from the Company's evaluations and prove to have an adverse effect on Pazgas, inter alia because of additional costs and/or over involvement by the regulator which cannot be anticipated by Pazgas and/or additional regulatory changes following the proposed law.
4.18.12 Restrictions and Supervision of the Company's Activity in Marketing Jet Fuel and Aviation Gasoline
The price that Aviation Assets charges its customers is determined in the Control of Prices of Commodities and Services (Price of Infrastructure Services for Fueling Airplanes at Ben- Gurion Airport) Order, 5768-2008 and the amendment to it in the Control of Prices of Commodities and Services (Price of Infrastructure Services for Fueling Airplanes at Ben- Gurion Airport) (Revised) Order, 5772-2012, enacted by virtue of the Control of Prices of Commodities and Services Law, 5756-1996.
The Control of Prices of Commodities and Services (Prices of Fueling Service for Airplanes at Ben-Gurion Airport) Order, 5756-1996, determines the maximum price that can be charged at Ben-Gurion airport for providing airplane fueling services by means of fueling tankers or by other means.
The price of aviation gasoline charged by Aviation Services is governed by the Control of Prices of Commodities and Services (Maximum Prices for Aviation Gasoline at Airports) Order, 5771-2011, as amended in the Control of Prices of Commodities and Services (Maximum Prices for Aviation Gasoline at Airports) (Revised) Order, 5773-2013.
The Fuel Excise (Exemption) Order, 5765-2005, provides, inter alia, that no excise duty will apply to fuel for the consumption of airplanes.
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4.18.13 Hazardous Substances Law
With regard to Pazgas' poison permits, see paragraph 4.17.2.1 above.
Paz Lubricants has a poison permit for the production and storage of the various solvents and chemicals stored in the area of the plant, which is valid until September 2016. Paz Lubricants and Chemicals (Marketing and Trade) Ltd. (a subsidiary of Paz Lubricants) has a poison permit for import, trade and conveyance valid until September 2016.
Pazkar's plant has a poison permit in effect until November 2017.
Aviation Services has a poison permit for its activity at Ovda Airport in effect until February 2017. Aviation Services has a poison permit for its activity at Sde Dov Airport, which is valid until February 2017. See more details in paragraph 4.17.2.5 above.
Aviation Assets has a poison permit for its activity at Ben-Gurion Airport in effect until May 2017.
4.18.14 Environmental Protection
Regarding issues relating to environmental protection in the Division, see paragraph 4.17 above.
4.18.15 Approved Enterprise Benefits
For details of tax benefits received by Pazkar for its approved enterprise in 2004 pursuant to the Law for the Encouragement of Capital Investments, 5719-1959, see Note 28.1.3.2 to the Company's financial statements as of December 31, 2015.
4.18.16 Essential Enterprise
Pazgas and Aviation Services have been declared essential enterprises in certificates given by the Ministry of Economy. According to these certificates, in a state of emergency, Pazgas' and Aviation Services' distribution and filling facilities are recruited into the service of the emergency economy in order to allow a continuous supply of gas and aviation fuels.
As for the proclamation of the Company and its filling stations as an essential enterprise, see paragraph 3.18.14 above. Regarding the Essential Interests Order issued to Paz Ashdod in the course of the privatization proceedings, see paragraph 5.18.6 below.
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4.18.17 State Economy Arrangement Regulations (Legislative Amendments) (Delivery of Information regarding Gas Supply), 5775-2015 ("the Information Delivery Regulations")
In June 2015, the Information Delivery Regulations became effective. These regulations require gas suppliers to include in the gas invoices to their consumers details of the addresses of additional consumers connected to the same central gas system or an ID code in the supplier's website that has access to these addresses. Also according to the Information Delivery Regulations, gas suppliers must deliver to the Director of the Gas Administration at the beginning of each month a report that specifies the average prices charged to home consumers in the two months that preceded the report, broken down by local authority, type of gas infrastructure (12/48 tanks, movable tanks, stationary tanks) and type of service (installation, connection, supply and payment of rental fees). The Director of the Gas Administration may publish the report on the Ministry of National Infrastructures, Energy and Water Resources' website. Moreover, gas suppliers with websites must publish the report online.
4.18.18 Draft State Economy Arrangement Regulations (Legislative Amendments) (Similar Conditions for Unreasonable Refusal), 5774-2015 ("the Unreasonable Refusal Regulations")
Article 17B to the State Economy Arrangements Law (Legislative Amendments), 5749-1989 prohibited gas suppliers from refusing to provide services to home gas consumers under similar conditions to the services rendered to similar home gas suppliers unless the gas suppliers demonstrate that there are reasons that justify it. This is a temporary provision that will expire on January 1, 2019. In May 2014, the Ministry of National Infrastructures, Energy and Water Resources issued the Unreasonable Refusal Regulations draft in which it sought to apply the provisions of Article 17B to the State Economy Arrangements Law with no time limitation. Pazgas submitted its response to the Unreasonable Refusal Regulations draft, stating, among others, as follows: since the validity of the temporary provision is limited, no indefinite regulations can be enacted by virtue thereof; moreover, the draft Unreasonable Refusal Regulations determine the ceiling price for gas consumers and therefore effectively imposes supervision at the level of determining prices by circumventing the provisions of the Control of Prices of Commodities and Services Law.
4.18.19 Draft Gas (Gas Events) Order, 5775-2015 ("the Draft Gas Event Order")
In June 2015, the Ministry of National Infrastructures, Energy and Water Resources issued for public review the Draft Gas Event Order which aims to impose certain duties on gas suppliers in order to streamline and improve their conduct during and after gas incidents. Pazgas submitted its response to the Draft Gas Event Order in which it proposed additional adjustments that will serve as best practices for gas suppliers during gas incidents. Pazgas also expressed its objection to certain provisions, mainly for reasons of unreasonableness (timing of reaching the installation, restriction on renewal of gas supply etc.).
4.18.20 Consolidated Environmental Protection Licensing Bill, 5775-2015 ("Consolidated Environmental Protection Licensing Bill")
As for the Consolidated Environmental Protection Licensing Bill, see paragraph 3.17.3.2 above.
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4.18.21 Draft State Economic Arrangement Regulations (Legislative Amendments) (Process of Choosing Initial Gas Supplier for Central Gas Supply System), 5775-2015 ("the Draft Regulations")
According to the Draft Regulations, each contractor who constructs a new residential building (in which at least 10% of the residential units have been sold) will be required to contact at least six gas suppliers for receiving price quotations for the supply of gas to the building between nine months and one year before the occupancy date of the building. The contractor will assign the price quotations to the residents who will decide on the initial gas supplier by a majority vote. Pazgas is studying the Draft Regulations and will submit its response thereto.
4.19 Significant Agreements in the Division
4.19.1 Regarding the contract between the Company and the Palestinian Authority, see paragraphs 3.5.2.2 and 4.5.2 above.
4.19.2 Regarding the purchases from ORL, see paragraphs 4.15.2, 4.15.3 and 4.15.4 above.
4.19.3 Regarding the agreements between Pazgas and EAPC, see paragraph 4.15.1 above.
4.19.4 Regarding the agreement between the Airports Authority and Aviation Assets concerning the liability for the quality of the fuel, see paragraph 4.1.6 above. For details of the insurance risk inherent in the gas quality liability, see paragraph 6.11.3.4 below.
4.19.5 Regarding the license agreement between Aviation Assets and the Airports Authority, see paragraph 4.1.6 above.
4.19.6 Regarding the agreement between Pazgas and an international trade company for the import of LPG, see paragraph 4.15.2 above.
4.19.7 Regarding the agreement between Aviation Services and the Airports Authority for the sale of jet fuel, aviation gasoline and refueling services in domestic airports, see paragraph 4.1.3 above.
4.19.8 Regarding the agreement between Aviation Services and the Airports Authority for the supply of refueling and related services at the Ben-Gurion Airport, see paragraph 4.1.3above.
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Part 5: The Refining and Logistics Division
5.1 General Information Regarding the Division
5.1.1 The Structure of the Refining Division and the Changes therein
5.1.1.1 Paz Ashdod - Introduction
Paz Ashdod imports and refines crude oil and intermediate substances into oil distillates (refined oil products) for sale in the local and foreign markets.
Paz Ashdod is the owner of the Ashdod Refinery, which began its activity in 1973 as a part of Oil Refineries Ltd. (ORL). Until they were split within the framework of the plan to privatize the refineries, the two refineries (in Ashdod and Haifa) operated as one entity by ORL.
Paz Ashdod is a company that was founded (under another name) by ORL and the State on January 4, 2006, for the purpose of taking over the activity and the assets of the Ashdod refinery. In September 2006 ("the completion date") the split between ORL and Paz Ashdod, according to which the assets and undertakings relating to the Ashdod Refinery were transferred and assigned from ORL to Paz Ashdod, was completed. For further details, see paragraphs 5.19.1-5.19.3 below.
For the terms of the merger between Paz Ashdod and Paz, see paragraph 5.18.2 below.
Paz Ashdod's refining capacity is about 5.4 million tons of crude oil per annum. Paz Ashdod's storage capacity is about 900,000 cubic meters.
The existing facilities at the Ashdod Refinery include facilities for refining and cracking crude oil, facilities for enhancing oil products, sulfur recovery units, alkylation facility, storage tanks (for raw materials, intermediate products and final products), systems for piping products to various sites outside the area of the refinery, distribution facilities for road tankers, various facilities for protecting the environment (mainly dealing with waste liquids and emission gases), a system for receiving natural gas from the national carrier system and two cogeneration power stations for generating electricity and steam for self-use of the Ashdod Refinery and electricity for sale to third parties.
Paz Ashdod imports crude oil through the Ashkelon terminal, which is owned by EAPC and is located on the coast of Ashkelon, thereby allowing for the unloading of large tankers. The unloading is carried out at the tank part of EAPC and from there the crude oil is transported using EAPC's infrastructures. Paz Ashdod also imports raw materials which are directly supplied to the Ashdod Refinery through the IEC's marine connector terminals in Ashdod. These terminals are also used to export most of the oil distillates by Paz Ashdod. EAPC's (unsupervised) rates are determined from time to time in negotiations with Paz Ashdod. The IEC's rates are determined in an agreement signed between the parties, as described in paragraphs 5.15.2 and 5.9.11 below.
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EAPC holds the majority of crude oil unloading and storage infrastructures. Paz Ashdod stores crude oil in EAPC. See details of the storage agreement with EAPC in paragraph 5.19.9 below.
Also, near the Ashkelon terminal, there is a tank farm owned by PEI which also serves Paz Ashdod for storing crude oil and oil distillates for short periods from time to time.
In order to transport intermediate products between the refineries and finished products to the distribution and storage terminals, Paz Ashdod mainly uses the national pipeline that is owned by OPP and PEI. The infrastructure prices of OPP and PEI are controlled pursuant to the Control of Prices of Commodities and Services (Infrastructure Prices in the Fuel Industry) Order, 5774-2014.
5.1.1.2 Oil Refining
The purpose of oil refining processes is to produce energy products from crude oil for various uses and applications. There are four main processes in the course of production:
Separation (refining) - processes whereby groups of products are obtained according to their natural characteristics.
Cracking processes - processes that change the chemical composition and physical properties of some of the substances that were separated, in order to obtain higher value products.
Distillation - improvement processes whose purpose is to purify and clean the products that are obtained from the separation and cracking processes.
Finishing - the products undergo processes so that they comply with the necessary specifications and standards that are determined by the SII and the legislature, or in agreements with specific customers.
5.1.1.3 The Refineries in Israel and the Competition in the Industry
As stated above, there are two refineries in Israel. The one in Haifa is owned by Oil Refineries Ltd, which is controlled by the Israel Corporation Ltd. The other is the Ashdod Refinery and is owned by Paz Ashdod.
The split and privatization of the refineries created competition between the two refineries, which led to the enhanced capacity of the refineries and a reduction in the scope of imports of oil distillates into Israel. Surpluses are used for exports.
Imports of refined oil products involve additional costs, including for unloading, transportation from the port to the distribution terminals, storage and maintaining an inventory at higher levels than purchasing from a local refinery, compliance with statutory requirements relevant to commercial and logistical import and management. Moreover, imports depend upon weather conditions, strikes and work stoppages at the fuel ports (Haifa, Ashkelon and Eilat) and the reliability of supply sources.
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In view of the shortage of LPG, the gas companies are required to import LPG in order to satisfy all the demands in the economy.
The Pi-Glilot terminals owned by the Delek Company (and especially the Pi-Glilot terminals in Ashdod) allow the Delek Company to increase the activity of importing refined oil products.
Paz Ashdod has tools to deal with imports, which derive both from its proximity to most of the consumption in Israel and from the synergy between it and Paz, which purchases on average about 49% of the Ashdod Refinery's products in order to market them (the decision on the scope of purchases of Ashdod Refinery products by Paz in order to market them is made on a monthly basis). See also paragraph 5.5.2 below.
The information included in this paragraph regarding the tools which Paz Ashdod employs for dealing with market competition is forward-looking information according to the definition of this term in the Securities Law. This information is based on the Company's estimation regarding activities and costs relating to imports, Paz Ashdod's location and the synergy with Paz. How it actually deals with this may be significantly different from what was described and/or foreseen above, inter alia because of a change in ownership, a change in regulations, etc.
5.1.1.4 Trends in the Field of Oil Refining in Israel and around the World
The refineries in Israel, as a part of the refining industry of the Mediterranean basin and Europe, are expected to contend in the coming years with the following issues:
(a) Increasingly strict product standards as a result of environmental protection requirements;
(b) Surpluses of fuel oil and gas oil as a result of changing over to the use of natural gas.
(c) Stricter supervision of the emission of pollutants into the air and the ground (groundwater) and odor hazards.
(d) Erection of advanced and efficient mega oil refineries in India and the Middle East.
These issues require the Company to make ongoing adaptations and upgrades of existing facilities.
In recent years, as a result of the crisis in global economy, the increase in oil prices until the third quarter of 2014, the deceleration in energy consumption around the world and the fall in demand, a large number of inefficient refineries around the world closed. In contrast, advanced mega refineries were erected in India and the Middle East, which offset the effect of the shutdown of many refineries. It should be noted that despite the construction of mega refineries as stated above, global growth forecasts predict shortage of oil distillates in the foreseeable future.
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The above information regarding global growth forecasts represents forward-looking information, as defined in the Securities Law, which is based on international forecasts. The actual supply of oil distillates could materially differ from the forecasts mentioned above, among others, due to global changes in the refining industry, regulatory changes etc.
5.1.2 Legislative and Regulatory Restrictions and Special Constraints that apply to the Field of Refining
For details regarding restrictions on the activity of Paz Ashdod within the framework of the privatization of the refineries and on the conditions for control of Paz Ashdod, see paragraph 5.18 below.
For details regarding restrictions on the activity of Paz Ashdod in the field of environmental protection and by virtue of additional statutory requirements, see paragraphs 5.17 and 5.18 below.
5.1.3 Changes in the Scope of Activity in the Field and its Profitability
See paragraphs 3.2.4, 3.3 and 3.5.4 of the Report of the Board of Directors.
5.1.4 Developments in the Markets of the Field of Activity
For changes in the prices of oil and in the indicative refining margin, see paragraph 2.2.3 above.
5.1.5 Changes in Technology that are Capable of Significantly Influencing the Field of Activity
In view of the rise in the prices of crude oil (in recent years until the third quarter of 2014) and the questions relating to environmental protection and the variety of sources of energy, governments companies around the world are investing in the development of alternative energy sources to oil.
For further details of the resolution of the Government of Israel to reduce dependence on oil for transport, which may lead to technological changes in the Division, see paragraphs 2.2.14 and 2.2.15 above.
The Company does not expect, in the coming years, a significant decrease in demand for oil products, as a result of the development of alternative energy sources as aforesaid. The Company is examining various possibilities of manufacturing and marketing alternative oil products as a part of the Company's existing basket of products, in accordance with regulatory developments in the field.
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The expectation that there will be no significant decrease in demand for oil is forward-looking information, as this term is defined in the Securities Law, and it is based on the Company's estimation with regard to the speed and possibility of finding effective energies that are capable of replacing oil. It is possible that in practice the Company's estimates will not be realized, inter alia because of the great uncertainty that prevails in this field. It is possible that in the future there will be a significant increase in demand for alternative energy sources, for the following reasons: a significant decrease in the prices of the alternative energy, Government incentives to use alternative energy sources and an increase in the availability of these alternatives.
5.1.6 The Critical Factors for Success in the Division and the Changes therein
The critical factors for success in the Refining Division are: the refining margin around the world; technological, financial and administrative ability in order to preserve, maintain and improve the Ashdod Refinery's installations; optimization of the supply and production chain, access to a local market, an ability to comply with product standards and changing regulatory demands and to adapt the Ashdod Refinery to these standards and requirements; managing an inventory and hedging risks that derive from fluctuations in prices.
5.1.7 Changes in Suppliers and Raw Materials
In recent years, Paz Ashdod has expanded its range of suppliers and raw material sources, in a manner that allows it to buy raw materials at competitive prices, to optimize the combination of refined products, to avoid dependence on suppliers and to achieve operative flexibility.
5.1.8 The Main Barriers to Entry and Exit in the Division and Changes therein
The main barriers to entry in the field of activity are the considerable financial resources needed to build refineries, a long building period, the need for a large area of land to build a refinery, proximity to the sea, specific knowledge and skill, strict licensing requirements and market size restrictions (the two refineries in Israel - ORL and Ashdod Refinery - together with the import of distillates provide Israel's entire consumption needs and more. Therefore, the relatively small size of the Israeli market is a barrier to entry in this field).
The significant barrier to exit in this field is the value of the facilities at the refinery and the environmental protection ramifications on the land where they are situated, which limit possible future uses. The Company undertook in the purchase agreement to continue to operate the Ashdod Refinery as a going concern for a period of at least ten years from the completion date.
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5.1.9 Alternatives to the Products Manufactured in the Refining Field and Changes therein
Natural gas has become a significant source of energy in the Israeli economy and has replaced a significant percentage of the use of fuel oil, gas oil for heating and LPG, especially for producing electricity and for industry, which forced the Company to find alternatives for the fuel oil and diesel oil markets and increase Paz Ashdod's export volume. See more information in paragraphs 2.2.14 and 2.2.15 above.
5.1.10 Structure of the Competition in the Division and Changes therein
See paragraph 5.8 below.
5.2 Products and Services in the Division
5.2.1 Main Products and Services
Paz Ashdod is mainly involved in the refining of crude oil. There are many products that are produced from crude oil, and they include a significant number of chemical compounds:
Light gases - for self-use as energy source at the Ashdod Refinery.
LPG (a mixture of propane and butane) - used mainly for domestic cooking and as a raw material for industry. The quantity of LPG manufactured by the refineries in Israel is less than the local consumption and therefore there is a need to import LPG. Nonetheless, the entry of natural gas has reduced and is likely to continue reducing the need to import LPG.
Naphtha - used as a raw material mainly in the petrochemical industry.
The various kinds of gasoline - used for operating gasoline motors. The demand for gasoline increases in proportion to the rate of increase of motorization in Israel and in proportion to the increase in available income, despite the improvement in the energy utilization of motors and a changeover to electric ignition. As a rule, the global demand for gasoline increases mainly due to increase in mileage and in the demand for large vehicles in the United States (as a result of low oil prices) and due to the transition to gasoline-powered vehicles in China.
Jet fuel (kerosene) - fuel for jet airplanes and for heating. The demand for jet fuel depends mainly on the volume of air traffic which is also affected by oil prices and global growth rates.
The various kinds of diesel - transport diesel for diesel engines (transport and industry), diesel for domestic heating and gas oil. The global demand for transport diesel has been experiencing moderate growth as a result of the increased motorization rate, the transport systems in developed countries and the development of infrastructures in developing countries. Nonetheless, there is no changeover in Israel from gasoline to transport diesel to gasoline for transport, mainly as a result of the domestic tax policy. The demand for gas oil consumed in the State of Israel has dropped and is expected to continue to drop as a result of the introduction of natural gas.
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The above information regarding the demand for diesel and gas oil represents forward-looking information, as defined in the Securities Law, which is based on the anticipated replacement of diesel and gas oil by natural gas. The actual demand for diesel and gas oil could materially differ from the forecasts mentioned above, among others, due to failure to supply natural gas, transport diesel prices versus natural gas prices, regulatory changes etc.
Fuel oil of various kinds - heavy fuel that is used for industrial ovens and to produce electricity. The demand for fuel oil in Israel is decreasing as a result of the introduction of natural gas.
The main intermediate substances (products that are used as mixing products and/or raw materials for other and/or end products in export markets) that the Ashdod Refinery produces are naphtha, cracked gasoline, propylene, butylene and mixing products for fuel oil ("the intermediate substances").
The gasoline and transport diesel products manufactured by the Ashdod Refinery and marketed in Israel comply with the European Euro 5 standard.
Paz Ashdod also produces electricity by cogeneration for its own use and for sale to third parties, produces steam for its own use (for additional details, see paragraph 5.11.3 below) and provides logistic and purchasing services for the Group.
5.2.2.1 The Distribution Site in Haifa
Paz has a distribution and storage facility in Haifa, which is used as the main distribution and storage facility of the Company for its customers in the north of Israel. The Refinery Division is responsible for operating the facility.
5.3 Breakdown of Income and Profit from Products and Services in the Division
The following table shows figures of the breakdown of Paz Ashdod's income from external sources according to the main products in the Refining and Logistics Division (the figures do not include inter-divisional sales within the Group):
Revenues from external factors 2015 2014 2013 Products and NIS in % of Group NIS in % of Group NIS in % of Group services millions revenues millions revenues millions revenues Diesel oil 1,428 11% 2,276 12% 2,467 13% Gasoline and 2,114 16% 3,354 18% 3,324 17% naphta Fuel oil 956 7% 1,650 9% 1,714 9%
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The gross profit from sales in the Refining Division amounted to approximately NIS 560 million in 2015, a gross profit of approximately NIS 292 million in 2014 and a gross loss of approximately NIS 134 million in 2013.
The gross profit (loss) margin of total sales of the Division (including sales to the Group) in 2015 was approximately 6%, in 2014 - approximately 2% and in 2013 - approximately (0.9%).
For an explanation regarding the developments in the gross profit (loss), see paragraph 3.3.2 of the Report of the Board of Directors.
The prices of crude oil that Paz Ashdod buys and that constitute its main expenses are the result of trading in international markets. The prices of Paz Ashdod's products are affected by the prices determined in international trade.
The refining gross margin represents the difference between the income from the sale of the basket of products and the cost of the raw materials (mainly crude oil) and the cost of the energy required to refine them. The profitability of refining is influenced by three main variables: (a) the price of crude oil (including premiums as elaborated below); (b) the scope of demand for oil products in the Mediterranean basin and in Europe and global refining ability - these two factors determine the supply of the products on the market and consequently their price; and (c) the range of products manufactured by the Ashdod Refinery, which is influenced by the types of crude oil, by the production facilities and the refining technology. Since only the latter factor is within Paz Ashdod's control, profits in this field depend mainly on trends in the global market.
Paz Ashdod's refining margin includes income from distribution and from electricity generated at the cogeneration power stations that form an integral part of Paz Ashdod.
As customary in this industry, with respect to each type of crude oil, an additional premium is paid, calculated in relation to the Brent price per oil barrel or diesel oil price. These premiums vary from time to time according to market conditions and constitute a basic risk which cannot be hedged.
The actual refining margin is also influenced by the time gaps between the date of buying the crude oil and the date of selling the products refined from it, and the scope of the hedges on the prices of crude oil and the products.
The hedges are intended to deal with the exposure that is created when the price for the crude oil bought by Paz Ashdod is determined and that exists until the date of determining the sale prices for the manufactured products. In the first half of 2014, the Company's policy was to hedge its entire inventory. Since the second half of 2014, the Company decided to hedge only part of the inventories. It should be noted that in any case, the risk deriving from crude oil price fluctuations and its effect on inventory cannot be fully hedged, inter alia for the following reasons:
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1. The difference between the type of crude oil that Paz Ashdod buys and the type of crude oil that is the basic asset that the derivatives protect is a basic risk that derives from the disparity between the protecting derivative and the physical asset.
2. The effect of market expectations (curve structure – calendar spread) on the prices of Brent-type oil futures on the ICE. This effect can have a positive (contango) or negative (backwardation) effect. It should be noted that there are derivatives that make it possible to moderate the aforesaid exposure and Paz Ashdod makes use of these from time to time. From the second half of 2014, the market curve structure is contango.
For additional details of the Company's hedging policy and the hedges that the Company carries out for the inventory, see paragraph 3.3.2 to the Report of the Board of Directors and Note 30 to the financial statements as of December 31, 2015.
5.4 New Products in the Division
There are no new products in the division.
5.5 Customers of the Division
5.5.1 Customer Characteristics
Most of the fuel products produced at the Ashdod Refinery are sold on the local market to the fuel companies and the gas companies (which only buy LPG). The remaining products are exported to various customers around the world, especially to trading companies abroad.
Paz Ashdod's main customer is Paz. In 2015, approximately 49% of Paz Ashdod's sales were to Paz and/or other companies in the Paz Group.
Dor Alon is Paz Ashdod's second largest customer after Paz. See details of the agreement signed with Dor Alon in paragraph 5.19.7 below.
In 2015, the sales turnover of oil products in the local market constituted about 74% of the total sales of Paz Ashdod, as compared with about 71% in 2014.
Most of the intermediate substances are sold to ORL (including Carmel Olefins Ltd. ("COL")) in accordance with an agreement that was signed between the companies. Intermediate substances are also sold for export. Any malfunction at COL's facilities is likely to reduce the production volume of Paz Ashdod's products. For additional details, see 5.19.5.1 below.
Paz Ashdod sells oil products to its main customers in the local market (who are not the Company) on the basis of framework agreements as stated in paragraph 5.7 below and on the basis of monthly orders.
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Paz Ashdod entered into agreements for the sale of electricity to third parties and the IEC. For further details regarding the cogeneration power stations, see paragraphs 5.11.3 and 5.16 below.
In the Company's estimation, the termination of Paz Ashdod's agreements with one or more of its customers other than Paz is not expected to have a significant influence on the results of Paz Ashdod's activity for the following reasons: the Company has the ability to buy and market to other end customers (instead of the agreements that will be terminated) most of the quantities manufactured, there is a relatively stable demand for products, the Ashdod Refinery is located close to most of the consumption centers and Paz Ashdod has the ability to export surplus products.
The information included in this paragraph according to which the termination of agreements with one or more of Paz Ashdod's main customers is not a major risk is forward-looking information, as this term is defined in the Securities Law. This information is based on the Company's estimation regarding trends in the field of refining and marketing in Israel. The termination of agreements as aforesaid may have a significant adverse effect on the financial results of Paz Ashdod, inter alia as a result of legislative changes, import advantages and additional factors.
5.5.2 Breakdown of Sales in the Refining Division by Customers
The following table shows the sales of Paz Ashdod (without excise and VAT) to customers (the figures include sales between companies in the Group):
2015 2014 2013 NIS in % of Paz's NIS in % of Paz's NIS in % of Paz's Customer billions revenues billions revenues billions revenues Paz 6 4.8 49% 7.1 47% 7.0 46% Others in Israel 2.5 25% 3.7 25% 3.5 22% Exports 2.5 26% 4.3 28% 4.9 32% Total 9.8 100% 15.1 100% 15.4 100%
5.6 Marketing and Distribution in the Division
5.6.1 Marketing and Distribution
The marketing of oil products on the local market is done through the R&W Division.
The direct delivery of oil products to the customer's site is a part of the Refining Division and is carried out by means of infrastructure that belongs to OPP, the Ashdod Refinery and ORL. For additional details, see paragraph 5.1.1.1 above.
The transport prices for direct delivery by pipeline are determined in the Infrastructure Price Control Order.
6 Sales to the Paz Group are eliminated in Paz's consolidated financial statements. A-146 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter A - Description of the Company's Business Part 5 - Description of the Company's Business by Divisions: the Refining and Logistics Division
Regarding the restrictions that apply to the Company on the sale of LPG products, see paragraph 5.18.2 below.
Paz Ashdod sells oil products and intermediate substances on the international market. These sales are partly made in SPOT transactions to transient customers and partly on the basis of master agreements that allow customers to order oil distillates from time to time.
Paz Ashdod sells electricity to the IEC and to third parties.
5.6.2 Dependency on Pipeline Infrastructure
Paz Ashdod is dependent operationally on the infrastructure companies (EAPC, PEI, OPP and the IEC) which convey the products in pipelines to and from Paz Ashdod's facilities. In addition, Paz Ashdod is dependent on EAPC for storing crude oil. It should be noted that while PEI and OPP are subject to provisions and orders that require them to provide the services to the refineries and the fuel companies, EAPC and the IEC are not bound by these provisions and orders, yet EAPC has a local monopoly on sending crude oil by pipeline from the EAPC port in Ashkelon to the Ashdod Refinery and on storing crude oil.
5.7 Order Backlog in the Division
The sales of Paz Ashdod to its customers on the local market are mainly carried out on the basis of monthly orders. Paz Ashdod signed general framework agreements with some of its customers, which stipulate, among others, the manner of making the orders, the general terms for making the sale, price formulae, payment terms and collateral. The size of the monthly orders is usually determined on the date of the order.
Moreover, Paz Ashdod undertook in annual agreements to some of its customers to supply products to customers who undertake in advance to buy defined quantities each month. The scope of the sales under these agreements, out of the total sales of the Group in 2015, is immaterial.
5.8 Competition in the Division
In the local refined oil products market, Paz Ashdod competes against ORL and importers of refined oil products. ORL has a monopoly on some refined oil products. In the Company's estimation, Paz Ashdod's market share or all the refined oil products in Israel in 2015 is approximately 40%, and in the international market Paz Ashdod's share is negligible. In the Company's estimation, the import of refined oil products into Israel is not a significant part of the total market.
Paz Ashdod is exposed to the import of refined oil products in the Mediterranean basin and from the Far East, of which some are geographically close to Israel and others are close to the sources of crude oil.
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The refinery products are commodities, and the import of these products constitutes an alternative to local production. However, potential importers of refined oil products to Israel face several obstacles:
a. The cost of importing refined oil products into Israel is higher than the cost of importing crude oil and refining it in Israel;
b. The import of limited amounts is not economic, whereas the import of large quantities requires storage facilities and inventory management resources that increase the finance costs;
c. The refineries make repurchases of large quantities, and therefore they may benefit from preferential trade terms;
d. Private imports expose the importers to risks in holding an inventory of refined products, inter alia because of the large fluctuations in the prices of refined products around the world;
e. It is necessary to import products that comply with the Israeli standard, and not all the refineries around the world are capable of production in accordance with this standard;
f. Imports require expertise and may expose the importer to risks, such as logistical problems (delays) and defective quality.
Among the positive factors that influence or that may influence the competitive standing of Paz Ashdod, it is possible to list the following: (a) the proximity of the Ashdod Refinery to the national consumption center, since two thirds of the consumption of oil products in Israel is in the geographic area that is closer to the Ashdod Refinery than ORL; (b) the Company buys a substantial part of the products of the Ashdod Refinery for marketing in Israel; (c) the high cracking ability relative to output that allows a high quality combination of products; (d) the Ashdod Refinery's products are sold by Paz to the Palestinian Authority (which in 2015 represented a material customer of the Company) (for details of the agreement with the Palestinian Authority, see paragraph 3.5.2.2 above); (e) the Ashdod Refinery's products are sold to Dor Alon, a large customer of Paz Ashdod; (f) geographic proximity to the EAPC terminal n Ashkelon that imports crude oil and to the IEC's connectors in Ashdod; and (g) use of natural gas for the refining process. The use of natural gas contributes to reducing the Ashdod Refinery's energy costs, the continuity of the facilities' operation, the reduction in wear and tear of the facilities and a reduction in polluting emissions into the air from its facilities.
For details of the agreement for the purchase of natural gas from the Tamar Reservoir, see paragraph 5.19.4 below.
One of the negative factors that affect or may affect the competitive standing of the Company in the field of refining is the existence of only one refining track, without any backup.
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In the global refined oil products market, the amounts that Paz Ashdod exports are negligible in relation to the global market and do not affect the international trading network given that dozens of thousands of tons of distillates are sold on a daily basis in the global oil distillate market. The price of oil distillates exported by Paz Ashdod is determined according to quoted international prices of distillates.
The export of oil distillates involves various costs which are higher than the related costs of selling distillates in the local market. These costs include fuel transport and delivery to the export terminal, loading, docking charges and various fees, marine transport from the export terminal to the target port and compliance with the applicable laws. Exports also depend on weather conditions and fuel port activity (Haifa, Ashkelon and Eilat).
5.9 Seasonal Factors in the Division
As a rule, there is no seasonal factor in Israel that affects the Refining Division. However, the amounts of gas oil, kerosene and LPG sold for domestic heating increases in the winter, i.e., in the first and fourth quarters of each calendar year, because of the heating of homes by means of various heating systems. Moreover, there is a seasonal factor in the consumption of jet fuel in accordance with the seasonal fluctuations that are characteristic of the activity of the aviation companies. Paz Ashdod adapts the production mix to the seasonal factors in the Division. Moreover, there is a seasonal factor in product prices in accordance with the global trend that is affected, inter alia, by supply and demand.
5.10 Production Capacity in the Division
The Ashdod Refinery's maximum refining capacity is estimated at approximately 5.4 million tons of crude oil per annum. The maximum refining capacity is determined depending on the type of raw material being processed.
The following table shows details of the products and quantities which were produced from the crude oil that was refined:
Year 2015 2014 2013 Tons in Tons in Tons in Product thousands Rate thousands Rate thousands Rate Gasoline and naphtha 1,863 37% 1,786 37% 1,689 36% Diesel oil 1,538 31% 1,542 32% 1,417 30% Jet fuel and kerosene 550 11% 542 11% 547 12% Other 196 4% 217 4% 240 4% Fuel oil 871 17% 771 16% 838 18% Total 5,018 100% 4,858 100% 4,731 100%
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5.11 Fixed Assets, Land and Installations in the Division
5.11.1 General
Paz Ashdod's facilities are installed in Ashdod, and they include preliminary refining units (refining of raw materials), a catalytic cracker and a catalytic reformer, sulfur removing units and two sulfur recovery units, two cogeneration power stations, an alkylation facility, additional production units, infrastructure (buildings, storage tanks, pipes, etc.), product distribution facilities for road tankers (gas, refined oil products, and fuel oil), service facilities (steam boilers, pressed air, water processing, waste processing, fire extinguishing equipment) and an inventory of ancillary materials and spare parts. Regarding the land on which Paz Ashdod's facilities are situated, see paragraph 5.11.5 below.
According to Paz Ashdod's balance sheet as of December 31, 2015, the cost of the land, the buildings, projects that were carried out and/or are in progress, machines and equipment is approximately NIS 4,412 million. The accumulated depreciation in their respect amounts to approximately NIS 1,350 million, so that the net depreciated cost amounts to approximately NIS 3,062 million.
5.11.2 Main Facilities
The following table shows details of the main production units in Paz Ashdod:
Estimated refining capacity Facility (barrels per day) Raw material refining unit 110,000 Vacuum distillation unit 46,000 Visbreaking unit 26,000 Catalytic cracker 36,000 Catalytic reformer 12,000 Sulfur removing unit for naphtha 24,000 Sulfur removing unit for kerosene 15,000 Sulfur removing unit for diesel 33,000 Sulfur removing unit for gasoline (catalytic cracker) 21,000 MTBE unit 900 Alkylation facility 3,600
Paz Ashdod also has two sulfur recovery units, two cogeneration power stations, a biological plant for treating waste and a road tanker distribution terminal.
In addition, there is a distribution terminal for road tankers at the Ashdod Refinery.
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Once in every four-five years approximately, the Ashdod Refinery carries out a thorough periodic renovation of the production facilities (in addition to regular maintenance). The last periodic renovation cost approximately NIS 135 million which is depreciated in the Company's financial statements until the date of the next periodic renovation.
The next periodic renovation at the Ashdod Refinery's production facilities is scheduled for 2017.
Moreover, every 20 years or so, a multiannual renovation is performed on the catalyst cracker. The next renovation work is planned for 2017 at an estimated cost of approximately NIS 36 million which is depreciated in the Company's financial statements until the date of the next multiannual catalyst cracker renovation.
5.11.3 Cogeneration Power Stations
Paz Ashdod operates two cogeneration power stations on its premises and generates electricity for the Refinery's needs and for sale to private consumers and/or the IEC and steam for the refining processes at the Ashdod Refinery. The power stations operate on natural gas thereby greatly contributing to the reduction of greenhouse gas emissions and to the upgrading of the Ashdod Refinery's energy conversion efficiency. Each power station consists of a turbine for producing electricity and a steam boiler that is based on residual heat and also a transformation station that connects the Ashdod Refinery to the high voltage grid of the IEC.
The first power station (constructed in 2009) generates electricity at a capacity of approximately 49 megawatts per hour and approximately 60 tons of steam per hour ("the first power station").
The second power station (constructed in 2012) generates electricity at a capacity of approximately 60 megawatts per hour and approximately 60 tons of steam per hour used for the Ashdod Refinery's needs ("the second power station").
Following the Electricity Authority's demand that Paz Ashdod pay ex-post fees to the IEC (calculated at the marginal cost of production of electricity and arising from the added cost borne by the IEC due to the supply of power to Paz Ashdod's customers) for the period from December 2011 through August 2012 (during which there was a general shortage of natural gas in Israel), in the context of a hearing proceeding at the Electricity Authority, Paz Ashdod and the Electricity Authority reached a settlement according to which Paz Ashdod will pay the IEC ex-post fees for the abovementioned period in an amount that is immaterial to Paz Ashdod. See additional details in Note 33.2.4 to the Company's financial statements as of December 31, 2015.
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In August 2015, Resolution no. 4 (989) of the Electricity Authority was issued, which establishes rates for electricity system management services (system tariffs) applicable to all private consumers ("the Resolution"). According to an appendix attached to the Resolution, Paz Ashdod estimates that its future income from the sale of electricity is expected to be reduced by approximately NIS 20 million per annum 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 is required to pay for system management services supplied by the IEC to the two cogeneration power stations operated by it an amount of approximately NIS 45.6 million for the period from June 2013 through September 2015.
Based on the opinion of its legal advisors, Paz Ashdod's management believes that the Resolution is illegal, oversteps its authority and in Paz Ashdod's opinion is against the Government's policy of encouraging competition in the electricity sector through private electricity manufacturers. In September 2015, Paz Ashdod filed a petition with the High Court of Justice against the Resolution. Based on its legal advisors, the Company's management estimates that it is more likely than not that the petition pertaining to the retroactive charge will be accepted.
See additional information in an immediate report of August 11, 2015 (TASE reference: 2015- 093918).
It should be noted that since the price of natural gas which Pas Ashdod purchases is linked to the electricity production rate (including the floor price), Paz Ashdod estimates that the impairment of its future income will be compensated, in whole or in part, by the decrease in the electricity rates by about 7% effective from September 2015.
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 estimates. The effect could differ from the above mentioned effect in view of the High Court of Justice's decision in the petition and regulatory changes.
See additional information on Paz Ashdod's planned additional investment in another cogeneration power station in paragraph 5.16 below. See additional information on the agreement for the purchase of natural gas from Tamar Partnership in paragraph 5.19.4(b) below.
5.11.4 Tanks
Paz Ashdod has more than 66 storage tanks (not including LPG storage tanks). Paz Ashdod's storage capacity totals approximately 900 thousand cubic meters.
Paz Ashdod continues to act to increase its tank capacity for refined oil products. For additional details, see paragraph 5.16 below.
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5.11.5 The Land on which the Refinery is built
Paz Ashdod is the owner of the rights to be registered as the owner and long-term lessee of an area of approximately 1,080,000 square meters in Ashdod, on which, among others, the Ashdod Refinery is situated ("Paz Ashdod's land"). Paz Ashdod's land is used for the activity of the Refining Division, which includes production, storage, services and administrative needs.
The right of ownership in Paz Ashdod's land is subject to the registration of an easement in favor of the State with regard to the undertaking to refrain from changing the designated use or from actually using the Paz Ashdod's land for any other purpose without the consent of the Comptroller-General, the General Director of the Ministry of National Infrastructures, Energy and Water Resources and the Director of the Israel Land Authority. Paz Ashdod is acting to register the rights in its name.
For details of the amendment to the license agreement that settles Paz Ashdod's rights in the land, see paragraph 5.19.3 below.
5.12 Research and Development in the Division
Paz Ashdod is acting to improve processes by adopting technologies that have been developed by companies that have knowledge in the field.
5.13 Intangible Assets in the Division
5.13.1 Licenses
For details of the essential permits and licenses for the activity of the Ashdod Refinery, see paragraph 5.18 below.
For details regarding licenses for the production of electricity and for producing water, see paragraphs 5.18.4.3 and 5.18.4.4 below.
5.13.2 Trademarks
All of the trademarks of Paz Ashdod have been registered with the Registrar of Trademarks. The main trademark of Paz Ashdod is: Paz Refining.
Paz Ashdod has knowledge with regard to operating special installations that was acquired from third parties.
For additional details about intangible assets, see Note 13 of the Company's financial statements as of December 31, 2015.
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5.14 Human Resources in the Division
For details of human resources in the Division, see paragraph 6.1.8 below.
5.15 Raw Materials and Suppliers in the Division
5.15.1 Raw Materials
The main raw materials of the Ashdod Refinery are crude oil and direct fuel oil (that is used as a raw material in the process). The crude oil market and its products are an advanced commodities market with very high negotiability both in current trading and futures trading. The trading takes place with large international bodies. The main source for raw materials is the Black Sea countries and the countries of the former Soviet Union (Russia, Kazakhstan, Azerbaijan and Turkmenistan). Other available sources (within reasonable geographical proximity to the Refinery) are the countries of West Africa and Northern Europe.
5.15.2 Purchasing and Suppliers
Paz Ashdod buys crude oil from several international crude oil suppliers and from two local suppliers. The contract with the crude oil suppliers is made mainly on the basis of SPOT transactions. Paz Ashdod buys some of the crude oil on the basis of framework agreements with the large trading companies. For additional details, see paragraph 5.19.10 below.
Paz Ashdod does not have any significant difficulty in obtaining crude oil, and it is not dependent on any particular supplier. However, several sources for supplying crude oil in our area are unavailable to Paz Ashdod for geopolitical reasons. Moreover, the availability of tankers for bringing crude oil to Israeli ports is limited and several international shipping companies refrain from doing business with the refineries in Israel, a fact that also increases costs.
The information included above regarding the fact that there is no difficulty in obtaining crude oil is forward-looking information, as this term is defined in the Securities Law. This information is based on the Company's estimation with regard to the Company's abilities to buy and import crude oil, taking into account, inter alia, the geopolitical situation and the costs and availability of transport. There is no certainty that changes in these factors will not adversely affect the availability of Paz Ashdod's sources or on the costs incurred by the Group.
Paz Ashdod is dependent on the ports that are used for importing crude oil, and especially on the IEC's marine connector terminals in Ashdod and the EAPC's storage terminal in Ashkelon.
The construction work of the new marine port in Ashdod, which has been taking place since 2015, imposes constraints and conditions on the operation of the IEC's marine connectors which are also used by Paz Ashdod. To the best of Paz Ashdod's knowledge, in order to retain and expand the availability of the connectors (a plan which is currently still in the design stage), the Ministry of National Infrastructures, Energy and Water Resources is looking into several alternatives, including the option of relocating the connectors north of their current position.
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Paz Ashdod estimates that during the transition period until a permanent solution is established for the full operation of the connectors, certain disruptions are likely to occur with the connectors' availability. Since according to the agreement signed between Paz Ashdod and the IEC the IEC undertook to provide Paz Ashdod all the necessary infrastructure services for the IEC's marine connectors in Ashdod, Paz Ashdod applied to the IEC and the Ministry of National Infrastructures, Energy and Water Resources and demanded that the IEC guarantee that the availability of the connectors is not impaired and that all the necessary steps for achieving this purpose are taken.
Paz Ashdod is preparing for the relocation of part of its export activity to the Ashkelon port during the transition period and until a permanent solution is established for the full operation of the connectors, this in addition to the IEC's preparations for the continued supply of ship tying and untying services in Ashdod.
Insofar as a permanent solution for the full operation of the connectors is not established before the planned deadline (July 2017), Paz Ashdod is liable to sustain additional costs from the relocation of the activity to Ashkelon and the extension of ship waiting times.
At this stage, Paz Ashdod cannot assess the costs that may be incurred as a result of restrictions on the availability of the connectors as described above.
See additional information on the agreement signed with the IEC in paragraph 5.19.11 below.
The following table shows figures of the amount of purchases of crude oil from main suppliers relative to Paz Ashdod's total purchases:
% of purchases % of purchases % of purchases Main supplier in 2015 in 2014 in 2013 Supplier A 50% 60% 58% Supplier B 10% 10% 5% Supplier C 19% 18% 13% Supplier D (new supplier in the report year) 8% - - Other 13% 12% 24% Total 100% 100% 100%
Paz Ashdod buys the majority of natural gas from a single supplier (Tamar Reservoir) for operating several facilities at the Ashdod Refinery, including for the operation of the cogeneration power stations. Paz Ashdod has a dependency on the Tamar Reservoir. Some of the natural gas which Paz Ashdod consumes is purchased according to the agreement with the Yam Tethys Partnership and supplied from the Tamar Reservoir.
As for agreements for the supply of natural gas, see paragraph 5.19.4 below.
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5.15.3 Fluctuations in Prices
There are major fluctuations in the prices of crude oil, the prices of the products and the refining margin. These fluctuations are influenced, inter alia, by the following factors: changes in supply and demand, political circumstances, production capacity, the climate and speculative activity of financial organizations.
5.15.4 Quality of the Products
Paz Ashdod sustains control and quality control processes in accordance with the standards that govern it. Paz Ashdod operates a laboratory that is authorized by the Israel Laboratory Accreditation Authority. In its transactions, Paz Ashdod is liable for the quality of its products in accordance with standards or in accordance with agreements with its customers.
5.16 Investments in the Division
Investments Made in Recent Years
In 2011-2015, the Company invested an aggregate amount of approximately NIS 1.7 billion in various projects carried out by it, the principal ones are as follows:
Alkalization unit which converts LPG olefin components into high octane gasoline components in order to improve the basket of products produced and to replace the import of mixture components with its own production;
A second cogeneration power station operating on natural gas which provides steam to Ashdod Refinery at a scope of up to about 60 tons per hour and electricity at a scope of up to some 60 megawatts an hour;
Project for increasing the output of the catalytic cracker which consisted of treating the catalytic cracker unit and the raw material refining unit and constructing a new sulfur removal unit;
Adding crude oil tanks with a capacity of approximately 60,000 cubic meters and the construction of an advanced mixing system for crude oil and adding tanks for refined oil products with a capacity of approximately 80,000 cubic meters, together with an upgrade of the pumping system.
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Additional investments planned by Paz Ashdod:
(a) Additional LPG tanks with a capacity of about 2,500 tons at an estimated cost of approximately $ 13 million. The permits for the project's performance have been obtained and the project is expected to commence in 2017 and conclude in 2018.
(b) Off-gas recovery (OGR) facility for recovering and processing refinery gas (which is a product of the main substances used in the Ashdod Refinery) is planned for 2016 and 2017 in which the refinery gas will be separated into its various components (which individually have a higher economic value), so that instead of using the refinery gas, the Refinery will use natural gas whose cost is significantly lower than that of the products made from the refinery gas. The project's planned cost is estimated at approximately $ 35 million and the term of the return on the investment is expected to be short. The project is contingent on signing another agreement for the purchase of natural gas and on the economic feasibility of the facility as it will be after an agreement for the purchase of natural gas is signed.
(c) A third cogeneration power station - the Company is exploring the possibility of constructing a third cogeneration power station with a capacity of about 64 megawatts. The Company has received a contingent electricity license from the Public Utilities Authority - Electricity.
Paz Ashdod also invests every year in dozens of projects for process upgrading in the Ashdod Refinery's facilities in an amount which is expected to aggregate to approximately NIS 55 million.
The information included in this paragraph with regard to the estimated costs of construction of the LPG storage tank, the OGR facility and the dozens of additional process upgrading projects is forward-looking information, as this term is defined in the Securities Law, which is based on the Company's estimates. The Company cannot be certain that its estimates will be realized, inter alia because of factors that are not within the Company's control, which include changes in market conditions, regulatory changes, the availability of natural gas, changes in production costs, changes in the prices of raw materials and the realization of any of the Company's risk factors set out in paragraph 6.11 below.
5.17 Environmental Protection in the Division - Environmental Risks and Ways of Managing Them
5.17.1 Environmental risks
The use of oil products in the Refining Division arising from the Ashdod Refinery's operation may cause various environmental risks, particularly air pollution, soil pollution, groundwater pollution and pollution of the marine environment. Oil products are by their nature dangerous substances and/or pollutants and they may harm health. The ever-increasing requirements in the field of environmental protection as a condition for obtaining licenses and permits necessitate major expenses and investments.
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5.17.2 Major Ramifications of Legal Provisions on the Company
5.17.2.1 Refineries around the world are compelled to contend with environmental protection problems, as standards for product specifications continually become stricter and the requirement for minimizing emissions from production processes grows. The position in Israel is similar, and the authorities responsible for environmental protection are making the requirements for the quality of air, water, soil, etc., stricter. As a result, from time to time, more stringent mandatory standards,legal provisions and various requirements are introduced that apply to Paz Ashdod.
Paz Ashdod operates in accordance with legislation and/or instructions given to it by the competent authorities in the field of environmental protection with regard to maintaining air quality, the quality of waste water dumped into the sea, treatment and removal of solid or poisonous waste, and the prevention of soil and groundwater pollution by oil products. The provisions that apply to Paz Ashdod find expression, inter alia, in the Clean Air Law, special conditions in a business license for preventing air pollution, emission permits, sea dumping permits, poison permits, etc. From time to time, Paz Ashdod is required to carry out monitoring and surveys on large scales in the air in the plant's premises, surveys in the marine environment and a hydrologic survey.
Paz Ashdod has authorization for the ISO-14001 standard which is an environmental protection management standard.
5.17.2.2 Hazardous Substances Law
Oil products and additional substances, in the amount stored by Paz Ashdod, are poisons that require a poison permit pursuant to the Hazardous Substances Law. Paz Ashdod has a poison permit that is valid until January 2017.
As a part of the provisions of the Hazardous Substances Law, refined products are only sold by Paz Ashdod to someone who holds a valid poison permit in accordance with the quantity defined in the law.
5.17.2.3 The Environmental Protection (Polluter Pays) (Legislative Amendments) Law, 5768-2008 ("the Environmental Protection Law")
The Environmental Protection Law states that anyone who obtains a benefit or gain (including cost saving) as a result of the violation of an environmental law [including a violation of the Water Law, the Clean Environment Act, the Hazardous Substances Law, the Law for the Prevention of Sea Pollution (Dumping of Waste) and the Law for the Prevention of Sea Pollution from Land Sources] may be fined at the amount of the benefit and/or gain in addition to any other penalty. The Environmental Protection Law raises the maximum penalty bar and classifies a violation of the Water Law, among others, as a strict liability offense. In addition, the Environmental Protection Law authorizes the legislator to levy financial sanctions in the event of violation of the Law for the Prevention of Sea Pollution from Land Sources and/or the Hazardous Substances Law. The Company estimates that the provisions of the Environmental Protection Law do not have a material impact on the Refining Division's fields of operation and/or will not cause the Refining Division any material expenses and/or affect the Company's competitive position.
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5.17.2.4 The Water (Prevention of Water Pollution) (Fuel Lines) Regulations, 5766-2006 (in this paragraph: "the Water Regulations")
The Water Regulations were intended, inter alia, to address the concern of pollution that may be caused to the environment as a result of a leak from a fuel line. The amendment provides that in addition to examining that the fuel line is intact, including by means of patrols in the area, where there is a concern of a leak, environmental tests should also be made in order to discover any potential damage that may be caused to the environment as a result of a potential leak. The amendment also stipulates the manner of dealing with contaminated soil, where the pollution is caused as a result of a leak in a pipe.
Paz Ashdod has a limited number of fuel lines (only eight lines spanning a few hundred meters), and it is acting in accordance with the provisions of the Water Regulations and carrying out checks and inspections as required.
5.17.2.5 The Clean Air Law
The Clean Air Law and the regulations enacted pursuant thereto determine strict procedures for obtaining emission permits, the monitoring of air quality from fugitive emissions and a series of sanctions. For further details of the provisions of the Clean Air Law and the regulations enacted pursuant thereto, see paragraph 4.17.2.7 above.
The Ministry of Environmental Protection is imposing some of the provisions of the Clean Air Law on the industry, by determining additional conditions for a business license, such as imposing a demand for carrying out a technology gap study with regard to air emissions, carrying out a processes study and preparing models for dispersing pollutants.
In November 2014, Paz Ashdod obtained an emission permit for its plant for a period of seven years from December 1, 2014. In the context of the plant's emission permit, the emission permits of the 142 diesel oil sulfur removing unit and of the second cogeneration power station were consolidated. Paz Ashdod is in compliance with the terms of the plant's emission permit and performs consecutive monitoring of the air quality parameters.
5.17.2.6 The proposed Prevention of Land Contamination and Rehabilitation of Contaminated Land Law, 5771-2011
For details regarding the draft Prevention of Land Contamination and Rehabilitation of Contaminated Land Law, see paragraph 3.17.3.2 above. The Refining Division operates in accordance with the instructions of the Ministry of Environmental Protection and the Water Authority with respect to preventing and rehabilitating soil pollution. Despite the fact that the draft law has not yet been approved, the Ministry of Environmental Protection included some of the provisions in the draft law as additional conditions underlying Paz Ashdod's business license. If the draft law is approved in its present format this will increase the expenses incurred to Paz Ashdod in meeting the business license conditions and/or legal provisions. For further details of soil contamination, see paragraph 5.17.3 below.
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5.17.2.7 Consolidated Environmental Protection Licensing Bill, 5775-2015 ("Consolidated Environmental Protection Licensing Bill")
As for the Consolidated Environmental Protection Licensing Bill, see paragraph 3.17.3.2 above.
5.17.2.8 Sea Dumping Permit
Paz Ashdod has a sea dumping permit under the Sea Pollution from Land Sources Prevention Law, 5748-1988 ("the sea dumping permit"). The sea dumping permit is contingent on meeting several conditions, such as continuous monitoring of waste water dumped into the sea, carrying out a marine monitoring plan and reporting to the authorities about findings and external lab test results. The sea dumping permit required Paz Ashdod to construct and operate a biological facility for treating waste in such a manner that the concentration of the pollutants in the waste dumped into the sea will comply with the criteria required by the Sea Dumping Permits Committee ("the Committee"). Paz Ashdod has installed and operates a biological treatment facility for waste. According to the conditions of the dumping permit, Paz Ashdod is required to recover for reuse 50% of the quantity of water that is dumped into the sea. Paz Ashdod recovers much higher quantities than what is required by the dumping standard.
In December 2014, Paz Ashdod received a dumping permit from the Ministry of Environmental Protection which is in effect for a period of five years until December 31, 2019. In the context of the dumping permit, the sea dumping standards with respect to Paz Ashdod's waste were aggravated in a manner which Paz Ashdod deviates from the best available technology (BAT) regulations. Paz Ashdod filed a petition for a rehearing (pursuant to the Regulations for the Prevention of Sea Pollution from Land Sources, 5750-1990) to the Committee which was accepted. The rehearing was held in the Committee in July 2015. The Committee's decision has yet to be rendered.
In March 2016, Paz Ashdod received a notice from the Ministry of Environmental Protection whereby the latter intends to levy an administrative monetary sanction on Paz Ashdod in the amount of approximately NIS 18.6 million for the alleged violation of the conditions underlying the sea dumping permit in 2013 by virtue of the Ministry of Environmental Protection's authority pursuant to the Law for the Prevention of Sea Pollution from Land Sources, 5758-1988. Paz Ashdod categorically dismisses the arguments of the Ministry of Environmental Protection and intends to deliver its response to the Ministry of Environmental Protection within the predetermined deadline in keeping with its right to argue and hold any other legal proceeding that is available to it pursuant to the law. See additional information in an immediate report of March 9, 2016 (TASE reference: 2016-01-003276).
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5.17.2.9 Oil Sludge
The (solid) oil sludge in Paz Ashdod accumulates in the waste treatment unit and at the bottom of the storage tanks. The treatment and removal of the oil sludge is required by the Hazardous Substances Law and the Business Licensing (Removal of Hazardous Substance Waste) Regulations, 5750-1990. The sludge from the waste treatment unit undergoes a process in which the sludge becomes thicker, undergoes an extraction process and is removed to a waste disposal site in Ramat Hovav. The tank sludge, which does not undergo a recycling process, is removed to the dangerous waste disposal site in Ramat Hovav.
5.17.2.10 Approval for Transferring Used Catalyst for Burning at a Plant
Paz Ashdod has an approval for transferring used catalyst that is regarded as dangerous waste under the Business Licensing (Removal of Dangerous Product Waste) Regulations, 5751- 1990, for burning at the Nesher Ramla plant. The approval is in effect perpetually. In addition, Paz Ashdod transfers used catalyst for burial also at Ramat Hovav.
5.17.2.11 Permit to Use Radioactive Substances
Paz Ashdod has a permit to use a radioactive substance or a product that contains a radioactive substance in effect until July 2016, and permits to set up a radioactive facility.
5.17.2.12 For details of additional regulatory approvals in the field of environmental protection, see paragraph 5.18.4 below.
5.17.3 Events and Matters that Have Caused or are Expected to Cause Harm to the Environment
Several polluted areas have been located in the Ashdod industrial zone since the 1980s, which may endanger the quality of groundwater, inter alia, as a result of fuel originating from various facilities that are located in the vicinity of the polluted areas, including the Ashdod Refinery. Paz Ashdod is taking actions with regard to the pollution of groundwater (a floating oil spill, which was discovered in the area under the productions areas at the Ashdod Refinery, among others through several drainage holes that created a hydrologic depression, thereby preventing the spread of the pollution to other areas. In 2006-2007, Paz Ashdod reached an arrangement with the Water Authority according to which Paz Ashdod carries out hydrologic monitoring by drilling approximately 37 monitoring and pumping holes. Paz Ashdod sends the results from the drilling to the Water Authority and the Ministry of Environmental Protection. The results of the drilling attest to a significant reduction in the oil layer, which does not spread to the peripheral monitoring holes at the Ashdod Refinery. Paz Ashdod estimates that the treatment of the groundwater in the area of the Ashdod Refinery in the coming years will continue as agreed with the Water Authority and in coordination with the Ministry of Environmental Protection. The costs of the pumping and hydrologic monitoring in accordance with the agreement with the Water Authority amounted in recent years to a few million NIS per annum. Paz Ashdod estimates that the annual costs in the next few years will be similar.
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According to the requirement of the Ministry of Environmental Protection, Southern District, Paz Ashdod carried out a historical soil survey of its land. The study surveyed underground infrastructures, production facilities, waste treatment facilities and historic contamination incidents. The survey did not detect any findings that require immediate treatment.
In February 2015, Paz Ashdod paid the Ministry of Environmental Protection a monetary sanction in an amount that is immaterial to the Company in connection with the event of spillage of waste water from Paz Ashdod's offshore pipeline near Ashdod due to the alleged breach of the sea dumping permit.
See details of the Ministry of Environmental Protection's notice of March 2016 whereby it intends to levy an administrative monetary sanction on Paz Ashdod on the alleged grounds of violation of the conditions underlying the sea dumping permit in 2013 in paragraph 5.17.2.8 above.
For details of conditions in Paz Ashdod's business license that concern environmental protection, see paragraph 5.18.4.1 below. For details of Paz Ashdod's permits and additional approvals regarding environmental protection, see paragraph 5.18.4 below.
At the Haifa facility, which is operated by Paz Ashdod, there has been a shallow underground oil spill for decades. In the Company's estimation, the oil spill apparently arises from fuel activity that took place on the site in the distant past. The spill is being treated in accordance with the requirements and methodology determined by the Ministry of Environmental Protection and the Water Authority. Thus, inter alia, a historical soil survey and monitoring drillings were carried out to locate the size of the spill, from which it transpired that the limits of the spill do not deviate from the limits of the area of the Haifa facility. The Company has been carrying out pumping activity which is liable to continue for several years at a cost that is not expected to be material to the Company.
This information is forward-looking information, as this term is defined in the Securities Law, It is possible that in practice the cost of treating the spill will be different from the Company's assessments, inter alia, because of the requirements of the Ministry of Environmental Protection and the manner of implementing them.
5.17.4 Legal and Administrative Proceedings and Related Environmental Costs that have been or will be incurred in respect thereof
5.17.4.1 Concluded Criminal Proceedings
In 2015, no criminal legal proceedings filed against Paz Ashdod in the field of environmental protection were conducted or concluded.
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5.17.4.2 Pending Indictments
In 2015 and as of the report date, there have been and/or are no indictments pending against Paz Ashdod in the field of environmental protection.
See details of the Ministry of Environmental Protection's notice of March 2016 whereby it intends to levy an administrative monetary sanction on Paz Ashdod on the alleged grounds of violation of the conditions underlying the sea dumping permit in 2013 in paragraph 5.17.2.8 above.
5.17.4.3 Pending Civil Proceedings
In 2015, there were no material civil proceedings pending against Paz Ashdod in the field of environmental protection.
5.17.4.4 Concluded Civil Proceedings
In 2015, no material civil proceedings against Paz Ashdod in the field of environmental protection were concluded. See details of an administrative proceeding that was concluded in February 2015 in paragraph 5.17.3 above.
5.17.5 The Company's Policy for Managing Environmental Risks and Measures Taken to Reduce the Environmental Risks
Regarding the Company's policy for managing environmental risks and measures taken by the Company to reduce the environmental risks, see paragraph 6.11.2.6 below.
5.17.6 Amounts Awarded, Provisions and Environmental Expenses
In 2015, no amounts were awarded against Paz Ashdod in the context of any environmental litigation.
In 2015, total environmental expenses that the Company incurred in the Refining Division were approximately NIS 30 million, of which approximately NIS 13 million constituted material operating expenses and approximately NIS 17 million constituted material capital investments.
The following are details of expected environmental costs in 2016 and in the next three years in the field of environmental protection in the Refining Division:
Forecasted annual Actual costs Forecasted costs costs for the next three incurred in 2015 for 2016 years NIS in millions Material costs 13 18 18 Material investments 17 44 23 Total 30 62 41
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The Company has made a provision in its books in the sum of approximately NIS 12 million for anticipated costs of environmental protection issues in the Refining Division, with regard to dealing with air and soil quality, dealing with the oil layer at Paz Ashdod's land, removing waste, carrying out surveys, etc. This amount is divided into approximately NIS 6 million for treatment and prevention and approximately NIS 6 million for repairing deficiencies. The provision is based on the estimation of the management of Paz Ashdod and the estimates of experts. The Company estimates that the provision fairly reflects the material expenses anticipated in the field of environmental protection known to the Company in the Refining Division.
The Company's estimates with regard to the expenses that will be required in the field of environmental protection are forward-looking information, as this term is defined in the Securities Law, and may differ from the amounts stated above as a result of the uncertainty of the instructions of regulations and the requirements of the authorities that may be stricter in the future.
5.17.7 Additional Details
Within the framework of the agreement for the transfer of ORL's assets and liabilities to Paz Ashdod ("the split agreement"), the liability for every payment, expense, damage, obligation or undertaking of any kind for environmental protection, which derives from the activity of the Ashdod Refinery, was transferred from ORL to Paz Ashdod in respect of the period under ORL. The split agreement mentions several major issues relating to environmental protection, with regard to which ORL received warnings regarding the breach of the required conditions before the Paz Ashdod sale. See details of the split agreement in paragraph 5.19.2 below.
5.17.8 Insurance Coverage
Paz Ashdod has a combined liability insurance policy, which includes, among others, liability insurance coverage that is imposed on Paz Ashdod pursuant to the law due to personal injury and/or damage to tangible property sustained as a result of accidental and unexpected pollution, with a liability limit of US$ 100 million per insurance event and on a cumulative basis.
Paz Ashdod also has an insurance policy covering certain expenses and liabilities arising from non-accidental environmental pollution with a liability limit of US$ 10 million per insurance event and US$ 20 million on a cumulative basis. It should be noted that in view of this liability limit and the restricted nature of the insurance policy, it does not cover Paz Ashdod's complete exposure to pollution risks that are not caused by an accidental and unexpected event.
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5.18 Restrictions and Supervision of the Company's Activity in the Division
5.18.1 Control Permit
The holding in Paz Ashdod is subject to several conditions that are provided in the Government Companies (Declaration of Essential State Interests in the Ashdod Oil Refinery Ltd.) Order, 5766-2006 ("the Essential Interests Order") (see details in paragraph 5.18.6 below), the control and holding of means of control in Paz Ashdod permit that was received on September 27, 2006, from the Prime Minister and the Minister of Finance ("the Ministers") by virtue of the Essential Interests Order, which was amended on February 28, 2007, September 28, 2008, January 3, 2013, May 18, 2014 and October 7, 2014 (collectively: "the control permit"), and the approval of the General Director of the Antitrust Authority for the merger as set out below.
The Essential Interests Order provides that control of Paz Ashdod or the holding of means of control, of a certain kind, in Paz Ashdod in an amount of 24% or more require the prior written approval of the Ministers. The holding restrictions that apply pursuant to the Essential Interests Order and pursuant to the control permit as set out below apply with certain changes also to charging and transferring shares.
The control permit was awarded personally to the following individuals: Messrs. Zadik Bino, Gil Bino, Hadar Bino-Shmueli and Dafna Bino-Or (the last three were added to the control permit in January 2013, and they have for several years held, together with Mr. Zadik Bino, shares of Bino Holdings, one of the controlling owners of the Company) ("the Bino Group"), Lee Lieberman, Joshua Lieberman, Barry Lieberman, Casey Harris, Michael Abeles, Helen Abeles (the aforementioned members of the Lieberman and Abeles families collectively: "the Lieberman Group") (collectively, jointly and severally: "the permit owner"). The aforesaid individuals are principal shareholders in Paz, as stated in regulation 21A of Chapter D - Additional Details about the Company.
The control permit was given subject to the following principles:
According to the control permit, the permit owner was approved as the controlling shareholder and to hold 24% or a larger share of the means of control in Paz Ashdod, subject to compliance with the requirements, conditions and undertakings set out in the control permit (in practice, a rate in excess of 30% is required as discussed below). The control permit provides, inter alia, that (a) the permit owner shall retain control and the means of control in Paz Ashdod through the Paz Company, which alone shall hold control and the means of control directly; (b) The Permit Owner shall not make an change in the holdings of means of control and the owners of control in Paz, as compared with the prevailing situation at that time, except for transfers, directly or indirectly, between (1) the Lieberman Group and the companies controlled by it inter se; (2) the individuals holding the Bino Companies (Bino Holdings Ltd. and Barbino Ltd.) inter se (provided that at all times someone from the Bino Group will hold all of the control and ownership of the Bino companies) and between the Bino Companies inter se;
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(c) in addition, an increase or decrease of the amount of the permit owner's holding of means of control in Paz will be allowed as long as, to the satisfaction of the Companies Authority, at all times Paz is controlled by the permit owner alone, and the total amount of the holdings of the permit owner alone exceeds 30% (the amount of holdings was changed from 50% to 36% in an amendment of January 2013 and from 36% to 30% in an amendment of October 2014) of each type of the means of control and there is no body that holds a larger amount of means of control in the Company of one or more kinds than the permit owner; (d) the relative amount of the holdings of Mr. Zadik Bino and the Bino companies out of the total holdings of the permit owner in Paz shall not be less than 60%; (e) the aforementioned is provided that as a result of the change in holdings as discussed above, none of the provisions of chapter H2 of the Government Companies Law, 5735-1975 or the Essential Interests Order is breached.
According to the amendment to the control permit of October 2014, the following conditions were added to the control permit: (a) the Company will appoint all the directors in Paz Ashdod; (b) the Company will notify the Companies Authority of any change in the holdings of interested parties in the Company, the status of holdings of interested parties in the Company and the results of general meetings in the Company (including by providing details of the voting of interested parties in the Company) immediately after these details are made public. See more details in an immediate report of October 22, 2014 (TASE reference: 2014- 01-178920).
Any change in the direct or indirect control of Paz Ashdod is subject to the approval of the Ministers under the Essential Interests Order, and therefore a change in the control of Paz that is capable of resulting in a change of the control of Paz Ashdod requires approval as aforesaid. With regard to additional provisions that apply to Paz as the controlling owner of Paz Ashdod under the Essential Interests Order, see paragraph 5.18.6 below. As for the Law for the Encouragement of Competition and Minimization of Market Concentration, see paragraph 2.2.8.3 above.
On May 18, 2014, the control permit was amended to allow the Company to hold Pi-Glilot Oil Terminals and Pipelines Ltd. ("Pi-Glilot") until no later than December 31, 2014. In November 2014, the Company applied to the Companies Authority to eliminate the section in the control permit that addresses the sale of the Company's holdings in Pi-Glilot in view of the fact that Pi-Glilot has not been operating in the oil industry for years and its activity has no bearing on the Company's and/or Paz Ashdod's activity. The response of the Government Companies Authority has not yet been obtained. However, in light of the process for the sale of the Company's interests in Pi-Glilot and the revocation of the agreed order (which had been signed by the fuel companies and Pi-Glilot and dictated the voluntary liquidation of Pi-Glilot following the sale of its business activity, excluding its real estate rights), the Company is of the opinion that the limitations imposed in the control permit regarding the Company's holdings in Pi-Glilot's shares no longer apply.
As for the revocation of the agreed order, see paragraph 3.11.2 above.
See details of the sale of the Company's interests in Pi-Glilot in paragraph 3.11.2.1 above.
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5.18.2 Approval of the General Director of the Antitrust Authority
On September 27, 2006, the Company and Paz Ashdod received the approval of the General Director of the Israel Antitrust Authority for the merger between them subject to compliance, inter alia, with the following conditions regarding the activity of Paz Ashdod:
5.18.2.1 Prohibition of Agreements between Paz Ashdod and another Refinery
(a) A complete separation shall be maintained between the activity of Paz Ashdod and the activity of any other refinery in Israel.
(b) Therefore, Paz Ashdod is prohibited from signing and/or making any agreement, arrangement or understanding between Paz Ashdod and another refinery in Israel and/or any person associated with it, including an agreement relating to a joint purchase of raw materials, cooperation in the sale or marketing of products or the use of production, storage or distribution facilities, pipelines, port infrastructure or unloading facilities without the prior approval of the General Director. On November 23, 2006, the Antitrust Authority gave approval to Paz and its associated companies other than Paz Ashdod or the Ashdod Refinery, to make regular purchases of finished refined products from ORL. The permit was given for purchases on ordinary market terms.
(c) At the same time, Paz Ashdod may enter into an agreement with another refinery in Israel for the purchase or supply of fuel, provided that the agreement is necessary to provide an immediate solution to production faults, and it does not exceed in scope and duration what is needed to provide an immediate solution to the production faults.
An agreement to transfer intermediate products between ORL and Paz Ashdod of March 9, 2006 does not require approval from the General Director.
On April 10, 2011, the Antitrust Authority approved another agreement regarding the supply of intermediate products between Paz Ashdod and Carmel Olefins Ltd. (a subsidiary of ORL). For further details, see paragraph 5.19.5.1 below.
(d) On October 24, 2007, the Antitrust Authority gave approval to Paz Ashdod to lease ships from ORL to transport crude oil and refined products. The approval was extended to December 31, 2016.
(e) On March 24, 2009, the Antitrust Authority approved an arrangement between the refineries according to which each of the refineries would provide a fixed monthly amount of diesel oil and gasoline 95 to the other refinery and its owners. Paz Ashdod supplies the amount to ORL at the OPP/PEI facilities in the south of Israel, whereas ORL supplies the amount to Paz Ashdod by sending it by pipeline to Paz's facilities in the Bay of Haifa. This arrangement is subject to several conditions and its validity was extended until December 31, 2016 since no importer of oil distillates was willing to enter into an arrangement for the exchange of distillates with ORL in a fixed identical monthly amount throughout 2016, as conditioned by the Antitrust Authority in 2014 with respect to the activity starting from 2015.
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It should be noted that in the approval granted in December 2015 with respect to the activity in 2016, the Antitrust Authority expressed its position whereby the sought arrangement raises competition issues and insofar as Paz Ashdod wishes to uphold the arrangement, it must submit an application for restrictive agreement exemption by April 1, 2016. Until such date, Paz Ashdod will be able to submit its position.
Paz Ashdod believes that the arrangement does not impair competition. Rather, the arrangement encourages competition and allows Paz Ashdod to supply oil distillates in the north of Israel and ORL to supply oil distillates in the south of Israel, all while saving transmission and transport costs. Paz Ashdod is preparing for a hearing to be held at the Antitrust Authority.
(f) On November 24, 2013, the Antitrust Authority approved the sale of LPG from Paz Ashdod to ORL Trading Ltd. (a wholly-owned subsidiary of ORL) ("ORL Trading"). This approval was awarded after the Director of the Fuel Administration instructed Paz Ashdod to allocate to ORL Trading LPG for supply to the Palestinian Authority, a large consumer pursuant to Regulation 10 to the State Economy Arrangements (Legislative Amendments) (Gas Sales by Refineries and Gas Suppliers) Regulations, 5769-2009.
5.18.2.2 Restrictions regarding LPG
(a) The merger terms impose several conditions and restrictions on Paz Ashdod in order to ensure an equal supply of LPG and of LPG distribution services to the various suppliers.
(b) The Ashdod Refinery is prohibited from discriminating and/or stipulating conditions for the supply of LPG and/or distribution services that inherently or according to accepted commercial terms are irrelevant to the subject of the transaction and/or require the purchase of other products from it and/or from any other person connected with it.
(c) The Company or Paz Ashdod may apply to the General Director with a request to cancel any of the restrictions regarding equal supply, for the reason that there has been a material change in circumstances in competition in the supply of LPG.
5.18.2.3 Sale to Gas Suppliers
(a) Paz is required to supply LPG to Pazgas at the amount that Pazgas bought in the corresponding calendar month in the previous year ("Pazgas' share"). For restrictions on this matter, see paragraph 4.18.2 above.
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(b) In 2009, 2013 and 2015, the Company applied to the Antitrust Authority with a request to cancel the conditions of the merger relating to the quotas of LPG for Pazgas, on the grounds that the Gas Sale Regulations render the merger conditions in this matter superfluous and are inconsistent with the restriction on the allocation of LPG according to the merger. Following discussions held with the Antitrust Authority in 2013, the latter expressed its master consent to revise the merger terms so that the base year underlying Pazgas' share will be 2012. Paz Ashdod operates in accordance with this consent, under the necessary adjustments made in certain months in view of the periodic renovation Paz Ashdod executed in 2012. In a meeting held between the Company's representatives and the Antitrust Authority's representatives in 2015, the Antitrust Authority's representatives expressed their acceptance of the Company's position whereby there is a difficulty involving the simultaneous application of both the Gas Sale Regulations and the merger terms and also stated their master consent to revising the merger terms. The Company will continue to act towards the amendment of the terms of the merger between Paz and Paz Ashdod regarding LPG allocations from Paz Ashdod to Pazgas.
See details of the Gas Sale Regulations in paragraph 4.15.2 above.
5.18.2.4 Accounting, Corporate and Interest Separation between Paz Ashdod and the Company and Pazgas
In the General Director's Approval, it was determined that a condition for approving the merger was that there should be a complete separation between the business of the Ashdod Refinery and/or the Company, on the one hand, and the business of Pazgas, from a corporate and an accounting perspective. An activity, asset or service of Pazgas that existed on the date of the General Director's decision may not be transferred to a person associated with Paz Ashdod or the Company unless the General Director gives approval for this.
5.18.2.5 Restriction on Import Infrastructure and Infrastructure used in Refineries in Israel
(a) Paz Ashdod shall not enter, directly or indirectly, into an arrangement to buy, lease or operate infrastructure needed to maintain, operate or develop activity for the import of oil products or LPG into Israel, including a facility for conveyance by pipeline, unloading, storage or distribution of oil products or LPG, or to receive such a right, nor shall it begin to implement such an arrangement without the prior approval of the General Director.
(b) Paz Ashdod shall not enter, directly or indirectly, into an arrangement to buy, lease or operate infrastructure needed for the activity of another refinery in Israel or for its ability to compete with Paz Ashdod, including a facility for production, conveyance by pipeline, unloading, storage or distribution of oil products or LPG, nor shall it begin to implement such an agreement or arrangement without the prior approval of the General Director.
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5.18.3 Regulatory Approvals
5.18.3.1 Business License
Paz Ashdod has a perpetual business license. Paz Ashdod has approval from the Fire and Rescue Services in effect until October 2016.
According to the conditions established by the Ministry of Environmental Protection, Paz Ashdod's business license requires Paz Ashdod to carry out a process and fugitive emissions study, to prepare a plan to reduce emissions and a model for dispersing pollutants, to carry out a technology gap survey at the production facilities and to submit a plan for bridging the gaps. Paz Ashdod is implementing the conditions underlying its business license.
5.18.3.2 License for Manufacturing Fuel
Paz Ashdod is registered as a fuel company and is licensed to carry out refining, marketing, import, export, storage, transport by pipeline and distribution of fuel under section 12(a) of the State Economy Arrangements (Legislative Amendments for Achieving Budgetary Goals and Economic Policy for the 2001 Fiscal Year) Law, 5761-2001. Paz Ashdod has received a license for the production of fuel from the Tax Authority, as required under the Excise on Fuel Law, 5718-1958. The license is renewed each year.
5.18.3.3 Water Production and Supply License
Paz Ashdod has a license for the production and supply of water, as required under the Water Law, which is renewed automatically each year.
5.18.3.4 License to Produce Electricity
Paz Ashdod has two licenses for producing and supplying electricity in two cogeneration power stations. Paz Ashdod has a contingent electricity license for constructing a third cogeneration power station. For further details regarding the cogeneration power stations, see paragraphs 5.11.3 and 5.16(b) above.
5.18.3.5 Special Permit to Work during the Weekly Rest and Essential Enterprise Certificate
Paz Ashdod has a special permit to work during the weekly rest, which was given pursuant to the Hours of Work and Rest Law, 5711-1951, and also an essential plant certificate. The permit is annual, and it stipulates the number of workers that can be employed on rest days and their jobs. The aforesaid permit and certificate are valid until September 2017. Moreover, in accordance with specific needs that arise, from time to time, Paz Ashdod receives specific permits to work during the weekly rest.
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5.18.3.6 Import Permit
In its normal course of work, Paz Ashdod imports various essential components for operating the Ashdod Refinery, in accordance with an import permit pursuant to the Free Import Order, 5766-2006.
The import permit held by Paz Ashdod is valid until March 2017.
5.18.3.7 Export Licenses
In the ordinary course of business, the Ashdod Refinery exports oil products. As a part of the processes required for exports, an export license is require from the Fuel Administration at the Ministry of National Infrastructures, Energy and Water Resources. Export licenses are given specifically for each export. In addition, export transactions to the European Union require the registration of products in accordance with European regulations (the Registration, Evaluation, Authorization and Restriction of Chemicals (REACH) protocol). Paz Ashdod complies with these requirements.
5.18.3.8 Gas Supplier License
Paz Ashdod's operations in the fields of production of LPG, storage of LPG in accumulators, marketing LPG to licensed gas suppliers and filling road tankers with LPG require a gas supplier license. The renewal of Paz Ashdod's license is being delayed for reasons that are not related to Paz Ashdod. Paz Ashdod continues to take steps to have the license renewed and simultaneously argues that it should not be required to hold a gas supplier license.
5.18.3.9 License to Operate an LPG Filling Facility
The operation of an LPG filling facility by Paz Ashdod requires a license. The renewal of Paz Ashdod's license is being delayed for reasons that are not related to Paz Ashdod. Paz Ashdod continues to take steps to have the license renewed.
5.18.3.10 Security Arrangements
The Regulation of Security in Public Bodies (Amendment of the Schedules to the Law) Order, 5767-2007, includes Paz Ashdod in the Second Schedule and the Fourth Schedule of the Regulation of Security in Public Bodies Law, 5758-1998, and imposes on Paz Ashdod special provisions regarding the regulation of security at its facilities.
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5.18.4 Standards
5.18.4.1 General
There are official standards in Israel for some of the oil products that Paz Ashdod sells. However, sometimes the specifications according to which the Paz Ashdod supplies its products are determined in an agreement between Paz Ashdod and the customer, so that the relevant products are made in accordance with a stricter standard that required by law.
5.18.4.2 Euro 5
The fuel products that are produced by Paz Ashdod comply with the Euro 5 international standard, which was intended to reduce the effect of motor care emissions on the environment.
5.18.4.3 The LPG Standard
The Gas (Safety and Licensing) (Application of Standard 1134) (Temporary Provision) Regulations (Amendment), 5767-2007, provide that the maximum permits amount of the olefin components in the production of LPG will be an amount of up to 20%. Paz Ashdod has filed an application in this respect and is acting to have the LPG standard amended in such a manner that, among others, the maximum allowed composition of olefin components will be 30% and the quota of LPG directed to the domestic market can hence be increased.
5.18.4.4 The Standards Institution of Israel ("SII")
Paz Ashdod is in compliance with the requirements of the SII and has been found to be in compliance with the requirements of Israeli and international standards for a combined quality control system: ISO-9000-2000, ISO-14001, ISO-18001, ISO-17025.
5.18.5 The Essential Interests Order
Within the framework of Paz Ashdod's privatization process, the State announced the Essential Interests Order, which gives details of the following interests of the State with regard to Paz Ashdod: (1) maintaining the character of Paz Ashdod as an Israeli company, whose business center and management will be in Israel; (2) preventing exposure or disclosure of confidential information, for reasons of state security; (3) promoting competition and preventing market concentration in the fuel industry; (4) preventing a situation in which Paz Ashdod is influenced by hostile parties or parties that may harm the security of the State or its foreign relations; (5) ensuring the continuous existence of crude oil refining activity and the supply of its products in Israel.
By virtue of this Order, a control permit was issued, as described in paragraph 5.18.1 above.
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In order to ensure the safeguarding of these interests, the Essential Interests Order provides various restrictions and obligations with regard to the holdings in Paz Ashdod:
(a) Paz may not transfer control or means of control in an amount above 24% in Paz Ashdod to another party, including by way of Paz Ashdod issuing shares, as long as the transferee does not have a control approval or approval from the Ministers (the Prime Minister and the Minister of Finance) to hold means of control (as applicable), as required under the Essential Interests Order. If control as aforesaid is transferred without approval, the existing control permit will expire.
(b) It is prohibited to hold excessive holdings (holdings that require obtaining a permit without one having been given) without approval from the Ministers. Paz Ashdod and the Ministers may apply to the court to order a person that has excessive holdings to sell them, to appoint a receiver or to grant other relief. Moreover, the exercise of a right by virtue of excessive holdings will not be valid against Paz Ashdod, including for the purpose of receiving a dividend, appointing a director or CEO, and voting at the general meeting of Paz Ashdod.
(c) The Ministers may cancel the permit or make it conditional in any case where there is a material change in the details of the permit owner or the details submitted with the application or where the Ministers are of the opinion that there is a real concern that the essential interests of the State may be prejudiced.
(d) Paz Ashdod should report immediately any major disruption, major change or major reduction that is expected to occur in its capacity or ability to supply refined oil products in Israel, whether as a result of an event that is not within Paz Ashdod's control or as a result of its actions. The Ministers have a right to appoint an operator for the Ashdod Refinery in order to ensure that essential activity takes place, if the Ashdod Refinery has ceased, or there is a concern that it will cease, to carry out essential activity.
(e) The following actions require prior written approval from the Ministers: (a) voluntary liquidation; (2) a compromise or settlement between Paz Ashdod and its creditors or shareholders; (3) a merger; (4) a split, apart from a split that relates solely to the transfer of Paz Ashdod's that are not used for the refining of crude oil.
(f) Restrictions were imposed on cross-holdings of a controlling owner or on someone who holds more than 5% of Paz Ashdod, so that he cannot be a controlling owner or someone who holds 5% or more of the means of control in ORL, or a corporation that holds port infrastructure to import or export oil products in Israel, or of distribution terminals in accordance with the conditions provided in the Essential Interests Order.
(g) It should be noted that according to the Essential Interests Order, Paz Ashdod is obliged to give the Fuel Administration information regarding the amount of refined products that are produced, supplier, imported or held by Paz Ashdod.
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5.18.6 Price Control
According to the Control of Prices of Commodities and Services (Maximum Ex-factory Prices of Oil Products by Oil Refineries Ltd.) Order (Amendment), 5766-2005 ("the Price Control Order"), on January 1, 2007, control by way of imposing maximum ex-factory prices of oil products was eliminated, excluding LPG (effective from February 2015, control does not apply to LPG which contains mercaptan), and was replaced by control by way of monthly and annual reports submitted to the Commissioner regarding profits, quantities of oil products and prices determined by Paz Ashdod.
Even after the control was eliminated, the Control of Prices of Commodities and Services (Maximum Ex-factory Prices of Oil Products by Oil Refineries Ltd.) Order, 5753-1992, continues to apply, on the price level, to several oil products, such as fuel oil 4000 (3.5% sulfur) and various types of asphalt, which are not being manufactured by Paz Ashdod as of the date of this report.
The price of gasoline 95 octane continues to be controlled at filling stations rather than at the refinery, pursuant to the Control of Prices of Commodities and Services (Maximum Prices at Filling Stations) Order, 5762-2002. For control of gasoline 95 octane and control at the reporting level on transport diesel at filling stations, see paragraphs 3.18.8.1 and 3.18.8.3 above.
For details of the Control of Prices of Commodities and Services (Maximum Ex-factory Price for Liquefied Petroleum Gas) Order, 5760-2000, see paragraph 4.18.4 above.
Within the framework of the recommendation of the Committee for Socioeconomic Change (the Trajtenberg Committee), the Government required the Prices Committee to examine the level of reporting required at the refinery gates. For further details, see paragraph 2.2.8.4 above.
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, in a request to receive data pertaining to Paz Ashdod's sales. Paz Ashdod has delivered the requested data.
For details of a draft report issued by the Ministry of Finance regarding a new price control methodology, see paragraph 2.2.8.1 above.
5.18.7 State Economy Arrangements (Legislative Amendments) (Providing Egalitarian Service) Regulations, 5767-2006
These regulations impose a duty on the refineries to enter into contracts with the various gas suppliers in an equal manner, including with regard to the amount and quality of the gas sold, the infrastructure services that are provided by the refinery to the supplier, and the credit terms for consumers.
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5.18.8 State Economy Arrangements (Legislative Amendments) (Gas Sales by Refineries and Gas Suppliers) Regulations, 5769-2009 ("the Gas Sale Regulations")
The Gas Sale Regulations concern the regulation of the sale of gas by the refineries to the gas suppliers, and they regulate, inter alia, the sale of gas in shortage months, thereby protecting small gas suppliers.
In June 2015, the Ministry of National Infrastructures, Energy and Water Resources issued for public reference a proposed amendment to the Gas Sale Regulations. Pazgas submitted its reference to the proposed amendment in writing and verbally (in the context of a hearing) and also delivered its suggestions for amending the Gas Sale Regulations with respect to such issues as production forecasts, mandatory sales quotas, mandatory supply quotas to gas suppliers and large gas consumers and the surplus gas distribution mechanism after the initial allocation to the gas suppliers. See additional information in paragraph 4.18.6 above.
5.18.9 The Proposed Liquefied Petroleum Gas Law, 5775-2015 ("the proposed LPG Law")
See details of the proposed LPG Law in paragraph 4.18.11 above. In February 2016, Paz Ashdod submitted its response to the proposed LPG Law in which it argues, among others, that the production of LPG should not be included in the scope of the proposed LPG Law given that it is a highly complicate process that requires unique expertise that can only be found in a refinery and given that the refinery also manufactures LPG in accordance with generally accepted international standards.
5.18.10 Car Operation (Engines and Fuel) (Distribution of Fuel in Tankers) Order, 5768-2007
See additional information in paragraph 3.18.18 above.
5.18.11 Control of Prices of Commodities and Services (Infrastructure Charges in the Fuel Industry), 5756-1995
The infrastructure services with regard to oil products in Israel, which include, inter alia, loading and unloading services at a port, pipeline services for oil products, storage services for oil products, etc., are provided at rates that were determined in the Infrastructure Prices Control Order. This order is intended to control the maximum price charged for the various infrastructure services: the order states the infrastructures to which it applies and determines maximum prices for those infrastructure services. In addition, the order provides a rate for distributing oil products for some of the distribution sites in Israel.
5.18.12 Draft Fuel Industry Law
For details of the draft Fuel Industry Law, 5772-2012, see paragraph 2.2.8.2 above.
5.18.13 Taxation Benefit pursuant to the Law for the Encouragement of Capital Investments, 5719- 1959
For details of a strategic decision made by the Company regarding the Law for the Encouragement of Capital Investments, 5719-1959, see Note 28.1.3 to the financial statements as of December 31, 2015.
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5.19 Significant Agreements in the Division
5.19.1 The Paz Ashdod Purchase Agreement
On July 12, 2006, a purchase agreement was signed (which was consummated on September 28, 2006) according to which Paz bought from the State of Israel and ORL all of the issued share capital of the company that owned the Ashdod Refinery, whose name was then changed to Paz Ashdod ("Paz Ashdod shares"), in return for a sum of approximately NIS 3,251 million ("the purchase agreement").
According to the purchase agreement, Paz undertook to operate Paz Ashdod as a going concern for a period of at least ten years from the completion date, September 2006, and to act as the controlling shareholder of Paz Ashdod, so that Paz Ashdod would carry out its undertakings pursuant to the agreement.
According to the purchase agreement, the transfer of control in Paz Ashdod is subject to the transferee taking upon himself Paz's undertakings pursuant to the purchase agreement. Any change in the control of Paz Ashdod, whether direct or indirect, is subject to the approval of the Prime Minister and the Minister of Finance under the Essential Interests Order, and therefore a change in the control of Paz that is capable of resulting in a change of control in Paz Ashdod requires approval as aforesaid.
The holding of Paz Ashdod is subject to several conditions that are set forth in the merger approval terms and in the Essential Interests Order, as detailed in paragraphs 5.18.2 and 5.18.6 above.
5.19.2 The Split Agreement
On March 9, 2006, several agreements (which were later amended) were signed between Paz Ashdod and ORL. These regulate various aspects of the split between ORL and the Ashdod Refinery: the agreement to transfer assets and liabilities ("the split agreement"), the services agreement and the intermediate products transfer agreement. For details of the intermediate products transfer agreement, see paragraph 5.19.5.1 below. The services agreement has ended.
The debts and liabilities assigned to Paz Ashdod included a third of the debts of ORL to banks (which were paid by Paz Ashdod during 2007), a third of its debts to bondholders (see paragraph 6.4.4 below), undertakings to the employees, debts and undertakings for claims (see paragraph 6.1.8 below) and debts and undertakings for environmental protection matters (see paragraph 5.17.6 above).
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5.19.3 The Amendment to the Authorization Agreement
On December 2, 2002 and July 27, 2006, the State and ORL signed an authorization agreement and an amendment to the authorization agreement ("the authorization agreement amendment").
Under the authorization agreement amendment, any change in the designated use or the actual use of the land assigned to Paz Ashdod according to the split agreement ("Paz Ashdod's land") requires the consent of the Comptroller General, the Director General of the Ministry of National Infrastructures, Energy and Water Resources and the Director of the Israel Land Authority, and it may be given subject to conditions and a payment. Any breach of these terms or a failure to obtain the necessary consents will entitle the State to take back immediately all of the rights in Paz Ashdod's land with regard to which the breach was committed. It should be noted that an easement has been registered in favor of the State over Paz Ashdod's land, with regard to Paz Ashdod's aforesaid undertakings. Moreover, Paz Ashdod undertook that these undertakings would be included in any future agreement between it and any third party with regard to a transfer of any kind of rights in Paz Ashdod's land.
Paz Ashdod undertook to refrain from carrying out any transaction in Paz Ashdod's land unless the other party to the transaction commits itself to Paz Ashdod's undertakings as stated above. A caveat has been registered on Paz Ashdod's land with regard to this undertaking.
A "change in the designated or actual use" includes, under the Authorization Agreement Amendment, a change in the designated use or actual use of Paz Ashdod's land for a different purpose than the purposes that were permitted under the plans that applied to Paz Ashdod's land on the date on which the Amendment came into effect, or an actual use of Paz Ashdod's land for a purpose other than oil refining, infrastructure (a water purification unit, any other water infrastructure unit, a power station, any other electricity infrastructure unit, a gas and fuel storage facility, any other gas infrastructure facility, gas conducting facilities, any other gas infrastructure facility, or infrastructure lines and connection facilities as defined in section 274B(c) of the Municipalities Ordinance), a fuel station or derivative industries (industries where the main raw material comes from oil products manufactured in the refinery).
According to the authorization agreement amendment, Paz Ashdod will pay the State annual amounts that range between $ 0.75 million and $ 2.9 million, which will be determined in accordance with the amount of Paz Ashdod's annual pre-tax profit (which will be defined and measured in accordance with consolidated financial statements) ("the annual profit"), as follows:
(a) A fixed annual amount of $ 0.75 million.
(b) Additional annual amounts as follows:
Bracket 1 - for pre-tax annual profit between $ 0-10 million - 8%. Bracket 2 - for pre-tax annual profit between $ 10-17.5 million - 10%. Bracket 3 - for pre-tax annual profit between $ 17.5-22.5 million - 12%.
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In any case, the annual amount of the payments shall not exceed a sum of $ 2.9 million. It should be noted that the amounts are converted into NIS in accordance with a minimum exchange rate of NIS 4.8 per dollar, and will be adjusted for the Consumer Price Index (the base index being the index for May 2002). It should also be noted that Paz Ashdod is liable to pay the State a quarterly advance payment, no later than end of the first month of each quarter, in an amount of 20% of the annual payment that was calculated for the previous year. The Company made a provision in its books for the current value of the fixed component ($ 0.75 million), which amounted, as of December 31, 2015, to approximately NIS 49 million.
5.19.4 Agreements to Purchase Natural Gas
(a) In September 2004, Paz Ashdod entered into an agreement to buy natural gas with Noble Energy Mediterranean Ltd., Delek Drilling (Limited Partnership), Delek Investments and Properties Ltd. and Avner Oil Exploration Ltd. (Yam Tethys reservoir) ("the Yam Tethys Agreement" or "the Yam Tethys Partnership", as applicable). According to the Yam Tethys Agreement, the annual amount of gas that Paz Ashdod is able to buy from the Yam Tethys Partnership is an amount of daily quantities, where the maximum and minimum amounts that may be purchased have been defined for Paz Ashdod in advance. The duration of the Yam Tethys Agreement is ten years from the date when the natural gas supply began or the date of buying the whole quantity of gas defined in the Yam Tethys Agreement, whichever is the earlier. The consideration for the natural gas purchased is calculated in accordance with a formula that is set out in the Yam Tethys Agreement, and is subject to a defined price ceiling. The prices of natural gas in force around the world today are higher than the maximum price stated in the Yam Tethys Agreement.
In June 2014, Paz Ashdod and the Yam Tethys Partnership signed an agreement whereby the period of the Yam Tethys Agreement will be extended until the earlier of December 31, 2016 or until the entire outstanding natural gas amounts that should be supplied to Paz Ashdod pursuant to the Yam Tethys Agreement that have not been supplied due to the shortage in natural gas from the last quarter of 2011 through April 2013 are supplied.
During 2015 and as of the date of these financial statements, Paz Ashdod continues to consume natural gas that is partly supplied according to the Yam Tethys Agreement. The gas is supplied from the Tamar Reservoir.
(b) On April 2, 2012, an agreement was signed for the supply of natural gas between Paz Ashdod and the partners in the Tamar Project ("the Tamar Agreement" or "the Tamar Reservoir Partnership", as applicable), according to which Paz Ashdod purchases from the Tamar Reservoir Partnership natural gas for the purpose of operating Paz Ashdod's existing facilities, including the operation of the cogeneration power stations. For further details regarding the cogeneration power stations, see paragraphs 5.11.3 and 5.16 above.
Pursuant to the Tamar Agreement, the Tamar Reservoir Partnership will supply Paz Ashdod with natural gas on a total scale of up to approximately 111,800,000 MMBTU throughout the period of the Tamar Agreement ("the total contractual amount").
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The supply period is 15 years or until Paz Ashdod consumes the total contractual amount, whichever is the earlier ("the supply period"). The parties have a right to extend the supply period for a period of up to an additional year, if by that date the total contractual amount has not yet been consumed. The supply period began in April 2013.
It should be noted that during different periods during the supply period, different gas quantities will be supplied, which will be added to the gas quantities that will be supplied to Paz Ashdod pursuant to the Tamar Agreement and that during the supply period Paz Ashdod will be required to sign an additional agreement for the supply of natural gas.
The Tamar Agreement includes additional consents that are customary in agreements of this kind, such as: compensation mechanisms in the event of insufficient supply, a "Take or Pay" payment mechanism for a minimal annual quantity of gas in an amount and in accordance with a mechanism that were determined in the Tamar Agreement, the quality of the gas, a liability limit, an arbitration mechanism, etc. Moreover, the Tamar Agreement includes arrangements relating to changes in regulations and/or any additional taxation, if levied, on the Tamar Reservoir Partnership.
The price of the gas that was determined in the Tamar Agreement is linked to the electricity production price, as determined from time to time by the Public Utility Authority - Electricity ("the Electricity Authority"), and includes a "minimum price". See additional information of the Tamar Agreement in an immediate report of April 2, 2012 (TASE reference: 2012-01-091482).
Pursuant to the Electricity Authority's decision from June 2012, in February 2013, an amendment to the Tamar Agreement was signed whereby Paz Ashdod was given the option to reduce the minimum annual amount of natural gas that Paz Ashdod undertook to buy or pay for (Take or Pay), so that this would be 50% of the average annual amount that Paz Ashdod actually consumer in the three years preceding the notice regarding the exercising of the option, subject to the adjustments set out in the agreement. If the minimum annual amount is reduced as aforesaid, the other amounts of natural gas determined in the Tamar Agreement will be reduced accordingly.
Paz Ashdod will be entitled to exercise the aforesaid option by way of giving notice to the Tamar Reservoir Partnership during a period that will begin at the end of the fourth year from the date when the supply of natural gas in commercial quantities to Paz Ashdod begins ("the commercial operation date") or on January 1, 2018, whichever is later, and will end at the end of the seventh year from the commercial operation date or December 31, 2020, whichever is later. If Paz Ashdod gives notice that it is exercising the option as aforesaid, the amount will be reduced relative to the amount stipulated in the Tamar Agreement, at the end of a year from the date of giving the notice. For further details, see the immediate report of February 19, 2013 (TASE reference: 2013- 01-042276).
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On December 28, 2015, the Antitrust Authority issued a resolution according to which contingent exemption will be granted to the restrictive agreements signed between the partners in the Tamar Reservoir and the natural gas consumers (including Paz Ashdod) ("the General Director's Resolution"). It should be noted that before the General Director's Resolution was issued, the Antitrust Authority avoided initiating any enforcement measures against any of the parties to the Tamar Agreement (based on decisions made by it).
According to the General Director's Resolution, the consumers (including Paz Ashdod) will be able to exercise the right granted to them to notify the partners in the Tamar project of the reduction of the natural gas quota stipulated in the Take or Pay clause (up to a quantity equivalent to half of the average annual quantity consumed in the three years preceding the date of notification) over a period ending on the later of: (a) the period from January 1, 2020 through December 31, 2022 (instead of the period from January 1, 2018 through December 31, 2020 which was stipulated in the agreement) or (b) the period beginning on the fifth anniversary of the date of supply of natural gas (instead of the fourth anniversary as was stipulated in the agreement) and ending on the seventh anniversary. Following the General Director's Resolution, Paz Ashdod will take steps opposite the Tamar Reservoir Partnership to revise the agreement signed between the parties.
At this stage, the Company cannot assess the ramifications of the General Director's Resolution on the Company since they mostly depend on the state of the market as it will be during the relevant years underlying the exercise of said right. See more information in an immediate report of December 29, 2015 (TASE reference: 2015-01- 081559).
On July 22, 2013, the Electricity Authority issued updated tariffs and also announced a change in the weighted production cost in the "basic production component" which also forms the basis for the linked price that Paz Ashdod should pay Tamar Reservoir Partnership for natural gas. In the update, the Electricity Authority also established other tariffs for the weighted production cost. Tamar Reservoir Partnership argues that it is entitled to the highest of the tariffs that were published. Tamar Reservoir Partnership also claims that the change in the recognized production cost represents a material change in the method of calculating the natural gas price and therefore Tamar Reservoir Partnership is entitled to request a change in the linkage mechanism of the natural gas price determined in the agreement between the parties. Paz Ashdod rejected Tamar Reservoir Partnership's arguments and stated that the lower tariff of the tariffs issued should apply, as also clarified by the Electricity Authority. The dispute between the parties has yet to be resolved. In February 2015, the Electricity Authority updated the tariffs and cancelled the maximum tariff thereby defining the period underlying the dispute. Based on Paz Ashdod's legal counsel, the Company estimates that when the dispute between the parties is heard, the Company's position will be accepted. It should be noted that there is no certainty that the Company's position will be accepted.
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(c) In November 2012, Paz Ashdod and Tamar Reservoir Partnership signed an agreement whereby Tamar Reservoir Partnership will provide Paz Ashdod condensates (liquid byproducts produced by the condensation of natural gas) from the Tamar Reservoir, used as a raw material in the refining process in the Ashdod Refinery. The agreement is in effect for a period of five years from the date of beginning the supply of condensates which began in April 2013 simultaneously with the beginning of the supply of natural gas from the Tamar Reservoir. According to the agreement, the consideration payable to Tamar Reservoir Partnership was based on Brent prices less a predetermined margin. The agreement also stipulates daily, monthly and annual limitations on amounts to be supplied.
(d) In September 2014, Paz Ashdod and Tamar Reservoir Partnership signed a spot agreement for the purchase of additional quantities of natural gas that will be supplied to Paz Ashdod, at its request, in the event that Tamar Reservoir Partnership has excess natural gas. The agreement was signed for a period of 90 days and will be automatically renewed each time for an identical period with a possibility of cancelling the agreement by providing a seven-day notice. The agreement does not prescribe a liability to supply and/or purchase any quantities.
(e) 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.
5.19.5 The Relationship between Paz Ashdod and ORL after the Split
The relationship between Paz Ashdod and ORL after the split is regulated in several agreements and in the guidelines of the various authorities as set out below.
5.19.5.1 The Intermediate Substance Transfer Agreement
(a) The Intermediate Substance Transfer Agreement, which was signed between ORL and Paz Ashdod on March 9, 2006 ("the Transfer Agreement") regulates the financial and operative mechanism for transferring intermediate substances between the two refineries, so that the companies can operate optimally, buy and sell intermediate substances from and to one another and take advantage of a surplus or shortage of intermediate substances that exists in the two refineries. The transfers are carried out by means of OPP's pipelines, which constitute a part of the national carrier system, by ships that use the IEC's marine connector terminals in Ashdod and by road tankers. The transfer agreement came into force in September 2016 and was extended until September 2016. With the consent of the parties, the Transfer Agreement can be extended for additional periods, of twelve months each. The Antitrust Authority has confirmed that this agreement does not constitute a restrictive arrangement that requires approval or an exemption.
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(b) In December 2010, an agreement was signed between Paz Ashdod and ORL for the sale of propylene (olefin components) which came into effect upon the completion of the projects at Paz Ashdod in 2011 and 2012 for a period of ten years. The agreement replaces the previous agreement of April 2009. Within the framework of the agreement, ORL undertook, inter alia, that COL would not discriminate against Paz Ashdod in relation to ORL in the purchase of propylene and that in the event of a planned renovation and/or a malfunction, COL would buy propylene from Paz Ashdod and ORL pro rata in accordance with their average share in the current supply before the renovation or malfunction. In April 2011, the Antitrust Authority approved the agreement.
5.19.5.2 Future Agreements and Arrangements between ORL and Paz Ashdod
In the General Director's Approval, restrictions were placed on other agreements and arrangements between ORL and Paz Ashdod. For details see paragraph 5.18.2 above.
5.19.6 Gas Supply Agreement between Israel Natural Gas Lines Ltd. ("INGL") and Paz Ashdod
In May 2008, Paz Ashdod entered into an agreement to receive natural gas supply services from INGL. The agreement is valid from May 1, 2008 until the date on which the agreement (which is unlimited in time) is terminated or November 1, 2015, whichever is the earlier ("the transfer period"). Paz Ashdod is entitled, subject to the terms of the agreement, to extend the agreement by an additional two years by giving prior written notice at least twelve months before the end of the transfer period (any extension as aforesaid will be subject to the standard general terms of INGL that will apply on the date of the extension). A request for the extension of the transfer period was delivered by Paz Ashdod and the parties are continuing to follow the provisions of the agreement. The agreement provides that the liability for the delivery of the gas lies with Paz Ashdod. In addition, Paz Ashdod undertook to indemnify INGL for any loss, damage or expense that INGL suffers as a result of an act or omission of Paz Ashdod or for any damage that will be caused to the State of Israel as a result of Paz Ashdod not complying with the statutory requirements or because of a breach of its undertakings regarding the agreement. Paz Ashdod signed a letter of waiver in which it waived every claim or demand for damage that it will suffer in military areas by INGL or the Ministry of Defense. The agreement provides several grounds that entitle the parties to the agreement to terminate it. The payment for the natural gas supply is in accordance with the formula and milestones determined in the agreement. In addition to the payment for the supply, Paz Ashdod is liable for fixed payments such as balancing payments.
5.19.7 Master Agreement between Dor Alon and Paz Ashdod
In June 2007, a master agreement was signed between Paz Ashdod and Dor Alon, which provides general terms that regulate the manner of making the monthly purchase order, the product price formulae, the payment terms, including making advance payments, and the credit terms and supply terms. The parties signed addendums to the master agreement, in which terms were agreed for annual purchases of transport diesel, 95 octane gasoline and jet fuel. In December 2015, another addendum to the master agreement was signed between the parties regarding the purchases that will be made in 2016. Dor Alon is a large customer of Paz Ashdod.
5.19.8 Master Agreements for Sale of Oil Products to Fuel Companies
The agreements to sell oil products to the fuel companies contain general provisions that regulate the manner of making the monthly purchase order, the product price formulae, the payment terms, including making advance payments, and the credit terms and supply terms.
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5.19.9 Agreement to Build and Lease Crude Oil Storage Tanks
In 2008, Paz Ashdod entered into an agreement with EAPC according to which EAPC built two tanks for storing crude oil, with a total nominal capacity of 96,000 cubic meters each, for Paz Ashdod. The building of the tanks was completed at the end of 2010. The cost of building the two tanks totaled approximately $ 20 million. According to the agreement, when the building of the tanks is completed, EAPC leases the tanks to Paz Ashdod for the storage of crude oil, in return for payment of rent of approximately NIS 2.4 million per annum (linked to the index of July 2007). The lease period is 14 years from the date on which the building of the tanks is completed. Moreover, Paz Ashdod was given two additional option periods of three years each, and a total of another six years, for an annual lease fees of approximately NIS 10.5 million and subject to the condition that if EAPC's concession is not extended in 2017 and the Ministry of Finance does not agree to the continuation of the agreement, the agreement will be cancelled and EAPC will return to Paz Ashdod part of the payment made to it.
In January 2012, Paz Ashdod entered into an agreement with EAPC for the lease of additional storage tanks and for infrastructure services for seven years starting from January 2012. According to the agreement, Paz Ashdod leased tanks from EAPC with a total capacity of approximately 363 thousand cubic meters, in return for the payment of rent that was agreed between the parties in the agreement. At the beginning of 2013, Paz Ashdod ended the lease of a tank with a capacity of approximately 96 thousand cubic meters out of the total tank space stated above, with a corresponding reduction in the rent.
5.19.10 Agreements to Buy Oil
In December 2014, a master agreement was signed between Paz Ashdod and a crude oil supplier for the purchase of 12-24 crude oil cargos per annum, each of an amount of between 80 and 130 thousand tons, which gives Paz Ashdod maximum operational and financing flexibility. The agreement is valid until January 2017. The agreement also includes an option for extension of the credit terms stipulated therein by 20 days in return for market interest as discussed in paragraph 6.2.3 below.
In November 2015, Paz Ashdod and the same crude oil supplier signed another master agreement according to which Paz Ashdod will purchase from the crude oil supplier 12-36 cargos of fuel oil (a raw material used by Paz Ashdod in its activities) of 31.5-38.5 thousand tons per annum based on a fixed price formula. In addition Paz Ashdod will sell the crude oil supplier at least one cargo a month of cracked fuel oil (one of Paz Ashdod's products) for a period of 12 months.
5.19.11 Agreement with the IEC
In February 2014, the Company and the IEC signed an agreement for a period of 10 years (subject to Paz Ashdod's right to terminate the engagement early against paying predetermined compensation). The agreement settles the infrastructure services (tying, untying, unloading and loading of tankers for importing fuel oil and exporting fuel products) provided to Paz Ashdod by the IEC in the Eshkol power station's marine sections in Ashdod. In return for the infrastructure services, Paz Ashdod pays the IEC a predetermined amount for each tanker that is loaded or unloaded in addition to a fixed annual fee. See details of the effect of the construction work on the new marine port in Ashdod on the operation of the IEC's marine connectors in Ashdod in paragraph 5.15.2 above.
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Part 6: Further Information about the Company
6.1 Human Capital
6.1.1 Description of the Organizational Structure
For the organizational structure of the Divisions of the Paz Group, see paragraph 1.1.4 above.
6.1.2 Employees Employed by the Paz Group, according to its Divisions
Division 31.12.2015 31.12.2014 Retail and Wholesale 992 1,122 Industries and Services 804 810 Refining and Logistics 387 389 Employees not assigned to divisions 104 112 Total employees (*) 2,287 2,433
(*) The number of employees, excluding employees of Nituv, as of December 31, 2015 is 1,702.
6.1.3 The Company's Investments in Courses and Training
The Group holds training seminars for its employees, which are adapted to the unique needs of each activity, inter alia in order to develop the professional, technical and managerial capabilities of the Group's employees and improve the Group's performances. The Group holds a periodic course for training managers as a managerial reserve and the Group's employees attend study seminars and professional conventions. Pazgas operates a technical college for energy and safety, which, among others, trains employees in the fields of safety and gas.
6.1.4 Enforcement Programs and Code of Ethics
6.1.4.1 The Company practices an internal enforcement program in the field of environmental protection and safety, whose purpose is to ensure compliance with the provisions of the law and the Company's procedures. For additional details, see paragraph 6.7.3 below.
6.1.4.2 The Company practices an internal enforcement program in the field of securities law in conformity with the Streamlining of Enforcement Proceedings at the Securities Authority (Legislative Amendments) Law, 5771-2011, and the criteria for the recognition of internal enforcement programs in the field of securities that were published by the Israel Securities Authority in August 2011.
6.1.4.3 The Company practices an internal enforcement program in the field of restrictive trade practices.
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6.1.4.4 The Company has an internal enforcement program relating to labor laws, see more information in paragraph 6.1.13 below.
6.1.4.5 The Company has a code of ethics according to which it conducts its business, while observing the principles of the law, morality and business ethics.
6.1.5 Remuneration Plans for the Employees
6.1.5.1 Employee Options
On November 4, 2009, the Board of Directors of the Company approved an option plan for employees, officers of the Company and the subsidiaries and for the Company's regular service providers. The plan is under the capital gains track through a trustee pursuant to the provision of Article 102 to the Israeli Income Tax Ordinance, 1961 and the ruled enacted thereunder.
For further details of the option plans, see Note 21 to the Company's financial statements as of December 31, 2015.
For details of the exercise of employee options, see Note 19 to the Company's financial statements as of December 31, 2015.
6.1.5.2 The Grant of Options to the CEO of the Company
For details of the grant of options to the CEO of the Company, see Note 21 to the Company's financial statements as of December 31, 2015.
6.1.5.3 Stock-based Payment in the Form of Restricted Stock Units (RSUs)
For details of an RSU-based payment plan approved by the Company's Board of Directors on May 20, 2015 to the Company's CEO, senior officers (who are not directors) and other managers in the Company see Note 19.3 to the Company's financial statements as of December 31, 2015 and the Company's immediate reports of May 20, 2015 (TASE reference: 2015-01-023547), June 24, 2015 (TASE references: 2015-01-056148, 2015-01-056154 and 2015-01-056157) and June 29, 2015 (TASE reference: 2015-01-059820, 2015-01-059826 and 2015-01-059829).
See details of the Company's remuneration policy in paragraph 6.1.6.2 below.
6.1.6 Benefits and the Nature of Employment Agreements
Most of the employees of the Group are employed on the basis of personal employment agreements. Some of the employees of Paz Ashdod and Pazkar are employed on the basis of a special collective employment agreement. In addition, the Company has entered into agreements with several manpower companies.
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6.1.6.1 Personal Employment Agreements
The personal employment agreements, on the basis of which most of the Group's employees are employed, include the terms of employment of the employees which are standard terms and/or terms that are governed by applicable laws and have no special impact on the Group.
6.1.6.2 Contracts with Senior Officers and Senior Management Employees
The agreements of senior employees include standard terms and/or terms which are governed by applicable laws and have no special impact on the Group. For additional details of the employment agreements, letters of release and indemnification and insurance policies of officers in the Company, see Chapter D - Additional Details about the Company.
In September 2013, the following the approval of the Company's Remuneration Committee and Board of Directors, the Company's shareholders' meeting approved a remuneration policy for officers in the Company pursuant to the Companies Law (Amendment No. 20), 5772-2012 ("the remuneration policy"). On October 1, 2014, following the approval of the Company's Remuneration Committee and Board of Directors, the Company's shareholders' meeting approved certain adjustments to the Company's remuneration policy. The Company's remuneration policy states, among others, that the officers will be entitled to an annual grant in respect of a year in which the payment of an annual grant to non-officer employees in the Company is approved.
See details of the remuneration policy and the remuneration terms for senior officers in paragraph 8 to Chapter D - Additional Details about the Company
6.1.7 The Employment of the CEO of the Company
For details, see Note 34.1.2 of the Company's financial statements for 2015 and paragraph 8.1.2 to Chapter D - Additional Details about the Company.
6.1.8 Paz Ashdod Employment Agreements
6.1.8.1 Collective Agreements
Approximately 331 of Paz Ashdod's employees are subject to collective agreements.
On June 14, 2006, and in the proceedings to split ORL, three special collective agreements were signed between Paz Ashdod and the New General Federation of Workers: a collective agreement regarding the transfer of employees from ORL to Paz Ashdod ("the transfer agreement"), a collective agreement that includes various general employment provisions ("the collective employment agreement of 2006") and a collective agreement regarding early retirement ("the retirement agreement").
In August 2011, a collective agreement was signed between Paz Ashdod, the workers' committee and the New General Federation of Workers for a period of five years. At the end of the period, the agreement will be extended automatically for a period of two additional years, unless both parties mutually agree otherwise ("the 2011 agreement").
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In July 2014, Paz Ashdod and the New General Federation of Workers signed an addendum to the 2011 agreement that settles the employment and terms of employment of some of the Company's employees who were relocated to Paz Ashdod effective from November 1, 2013 ("the 2014 addendum").
In 2016, Paz Ashdod intends to have the 2011 agreement renewed.
The following are the main principles of the agreements:
(a) The transfer agreement regulates the transfer of the employees of the Ashdod Refinery from ORL to Paz Ashdod. The employees who were transferred under the transfer agreement kept their rights and the collective agreements that applied to ORL's employees will continue to apply to Paz Ashdod's employees who are subject to the collective agreement, unless they were expressly changed. The transfer agreement is valid until the last of the long-standing employees to which the agreement applies stops working, and it exhausts all of the claims of the employees of Paz Ashdod and the New General Federation of Workers for the split and sale of Paz Ashdod.
(b) The collective employment agreement of 2006 determines, inter alia, provisions regarding the dismissal of long-standing employees, salary additions, rights of new employees, and a provision that Paz Ashdod shall be entitled to employ in a personal agreement only an employee who has the rank of department manager or higher. The provisions prohibiting discrimination against and the dismissal of long-standing employees, as defined in the agreement, shall apply until the last of the long-standing employees stops working.
(c) The 2011 agreement extends the validity of the collective employment agreement of 2006, subject to several changes, including: salary additions, a new rating scale, rights of new employees and an update of various payments. The 2011 agreement provides that the parties will not engage in industrial action throughout the five year period on the matters regulated therein.
(d) The retirement agreement is for a fixed period, until the date on which the last of the employees to whom the agreement applies reaches compulsory retirement age, and it determines the entitlement and retirement terms for the long-standing employees to whom the agreement applies.
(e) The 2014 addendum defines the employment terms of the Company's employees who were relocated to Paz Ashdod effective from November 1, 2013 and is based on the terms of the 2011 agreement, under the necessary adjustments.
(f) Paz Ashdod's employees and pensioners are entitled to rights by virtue of customs that are not stipulated in the collective employment agreements that apply to them. Within the framework of the split it was agreed that the rights of Paz Ashdod's employees and pensioners by virtue of these customs would not be prejudiced by the split. The Company has made a provision for these rights, which it estimates covers its liabilities to the existing pensioners of the Company.
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6.1.8.2 Agreement between Paz Ashdod and the Ashdod Early Pension Company Ltd.
On June 14, 2006, an agreement was signed between Paz Ashdod and the Ashdod Early Pension Company Ltd. ("the AEP agreement" and "AEP", respectively). The AEP agreement provides that Paz Ashdod will deposit with AEP a sum of NIS 100 million ("the loan") for guaranteeing Paz Ashdod's compliance with the retirement agreement.
On December 31, 2009, a special collective agreement was signed between Paz Ashdod, the Paz Ashdod employees' committee and the New General Federation of Workers. In this, the parties agreed that the AEP agreement and the loan would be replaced with a trust agreement. According to the trust agreement, NIS 36 million of the loan was returned to Paz Ashdod, and the balance which as of the date of this report is approximately NIS 69 million, was left in a long-term deposit with a trustee, while AEP was voluntarily liquidated. It should be noted that as of the report date, the amount of Paz Ashdod's liability according to the AEP agreement is approximately NIS 42 million. See also Note 7c to the Company's financial statements as of December 31, 2015
6.1.8.3 Personal Employment Agreements at Paz Ashdod
Paz Ashdod can employ only senior employees, above the rank of department manager, on the basis of personal contracts. The employees that were employed on the basis of personal employment agreements on the completion date (September 2006) had a right, inter alia, to a compensation grant, beyond their right to severance pay under the law.
6.1.8.4 Early Retirement Plan
Starting from 2014, Paz Ashdod implements a specific retirement plan of its employees. The Company recorded provisions for voluntary retirement in amounts that are immaterial to the Company.
6.1.9 Pazkar Agreements
Some of the Pazkar employees are employees on the basis of a special collective employment agreement that was signed between Pazkar, the worker's committee of the Pazkar Plant and the New General Federation of Workers (Afula Workers Council), which is valid until April 30, 2018. According to the agreement, the salary of the employees shall be determined in accordance with the grading table that exists at the plant, which contains 15 grades. Moreover, the employees are entitled to various benefits such as: study fund, an additional amount for working in shifts, etc.
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6.1.10 Other
On November 29, 1978, a general collective agreement was signed in the filling station sector, between the Organization of Agents and Owners of Filling Stations in Israel (the employers' organization) and the New General Federation of Workers, which regulated the employment conditions and various social benefits of employees at filling stations. The provisions of this agreement were extended in an extension order to all the employees and employers at filling stations in Israel. In 1991, a notice was sent by the CEO of the Organization of Agents and Owners of Filling stations to the Director of Labor Relations at the Ministry of Economy with regard to the cancellation of the aforesaid collective agreement. This cancellation of the collective agreement (and of the extension order with regard thereto) was not registered by the Director of Labor Relations at the Ministry of Economy. In the opinion of Paz's legal advisors, the aforesaid collective agreement and the extension order that was made were cancelled. Several opposing verdicts have been rendered in this issue by regional courts in proceedings filed against the other fuel companies but no decision has been given by the National Labor Court. In the Company's opinion, if it is determined that the collective agreement (and the extension order) was not cancelled, this will not have a material adverse effect on the Company.
6.1.11 Employment through Manpower Companies
The Company uses the services of manpower companies in order to receive manpower services and/or services for selecting and finding manpower.
6.1.12 Liability for Termination of Employer-Employee Relations
The Group's liabilities for the termination of employer-employee relations in respect of the employees of the Group are mostly covered by means of accruals in managers' insurance policies and/or pension funds and/or the various provident funds. The amount of the aforesaid liabilities, which is included in the financial statements of the Company, reflects the entire outstanding liability that is not covered by means of the aforesaid accruals, on the basis of an actuarial opinion.
For further details of the Company's liabilities for employees who have retired and who are not covered by provisions as aforesaid, see Note 18 to the Company's financial statements as of December 31, 2015.
6.1.13 The Law for Enhancing the Enforcement of Labor Laws, 5772-2012 (in this paragraph - "the Law")
The purpose of the law is to streamline and increase the enforcement of the employment laws, both with respect to employers directly and with respect to persons who order services from service contractors in the fields of cleaning, guarding and security services, and meal services, by means of civil, administrative and criminal measures. The Law allows financial sanctions to be imposed on an employer and someone ordering services and on the CEO of the employer or of the person ordering services, without any possibility of indemnification or insurance.
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The Company appointed the Vice-President of the Human Resources, Computing and Administration Department as the Group's Chief Compliance Officer in the field of labor laws. The Company determined mechanisms, work processes and ways of entering into contracts with service contractors, including dealing with complaints of employees of the service contractor, adapting contracts with service contractors, obtaining licenses, obtaining guarantees, obtaining periodic confirmations of accountants and obtaining salary component tables from the service contractors, all pursuant to the Law. Moreover, the Company is acting to implement an internal enforcement program on the subject of labor laws.
6.2 Working Capital
The Company's working capital as of December 31, 2015 is composed of current assets in a sum of approximately NIS 3.0 billion, less current liabilities in a sum of approximately NIS 2.9 billion. Out of the total current assets, a sum of approximately NIS 1.6 billion reflects the balance of trade receivables and a sum of approximately NIS 1.0 billion reflects the inventory balance. Of the total current liabilities, a sum of approximately NIS 1.6 billion reflects the balance of trade payables and a sum of approximately NIS 0.5 billion reflects the balance of loans and short-term credit.
6.2.1 Inventory Holding Policy
6.2.1.1 Crude Oil, Refined Oil Products and Intermediate Products
The inventory level of crude oil and its products is determined in accordance with the needs of Paz Ashdod, which are affected, inter alia, by the economic viability of holding inventories of crude oil and inventories of products, the expected demands for the forthcoming period and the availability of the products. The R&W Division holds an operating inventory at filling stations and at the Haifa facility.
The Group's inventory is estimated at the cost or market price, whichever is the lower, and the cost is calculated mainly on the "First In First Out" (FIFO) or moving average basis.
Paz Ashdod's policy is to hold an inventory of crude oil and products at a level that guarantees optimal continuous operation of the refinery and an uninterrupted supply of oil products to the local market and abroad. Starting from the third quarter of 2014, in view of the decline in crude oil price and the change in the market curve structure, Paz Ashdod increased its inventory of oil.
The main factors that determine the amount of the inventory are:
(a) The need for inventory to fill the bottom of tanks and pipes;
(a) The need to maintain several types of crude oil for preparing optimal refining mixtures;
(c) The period of time for transporting the crude oil, dealing with it and transferring it to the Ashdod Refinery;
(d) The availability of ships for transporting crude oil and intermediate products;
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(e) The state of the crude oil and refined oil products market, and expectations regarding future prices [crude oil price, crude oil premium price and the market structure (Backwardation/Contango];
(f) The need to hold an available operating inventory of finished products for continuous supply to Paz Ashdod's customers;
(g) The need to hold a reasonable inventory of products in case of a planned or unplanned stoppage of the refinery facilities.
The Company performs hedges on inventories based on its policy. The Company's policy is that the unhedged inventory shall not exceed 250 thousand tons or $ 300 million, whichever is lower. The management of the amount of unprotected inventory is carried out in a flexible manner in accordance with the market position and the Company's assessments regarding changes in price. See more details of the inventory hedging policies in Note 30.4.3.2 to the financial statements as of December 31, 2015 and in paragraph 3.3.2 to the Report of the Board of Directors.
In 2015, the Group held an average inventory of crude oil for approximately 27 days (approximately 382 thousand tons) and an inventory of refined products and intermediate products for an average of approximately 22 days (approximately 305 thousand tons).
Fluctuations in the value of oil products that the Company holds as inventory affect the Company's financial results. For more details, see paragraph 6.11.2.1 below.
6.2.1.2 Industries and Services Division Inventory
Paz Lubricants' operating inventory ranges between 90-130 days. The operating inventory of Pazkar ranges between 30-50 days, and the operating inventory of Pazgas (including inventory in accumulators and tanks on customers' premises) ranges between 12-23 days.
6.2.1.3 Customer Credit
In the R&W Division, in 2015, the Company gave credit to its private customers in the filling stations (excluding electronic refueling customers) usually on terms of current + 3 days (most of the payments are made by credit card). The Company gave credit to business customers and agents depending on the type of customer. The average number of credit days to business customers and agents was 41 days. The Company gave car fleet customers for electronic refueling an average credit of current + 23 days. The credit is determined inter alia in accordance with the financial strength of the customer, the level of collateral that the customer gives and additional criteria that the management of the Company determines.
The credit given to the customers of the Group in the R&W Division includes the component of excise. The Company is liable to transfer the excise to the tax authorities approximately ten days after the date of supply, and thus the Company is liable to bear the finance costs for the disparity in number of days of credit that it gives as compared with the credit it receives.
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In the Industries and Services Division, the average number of credit days extended by the Company to customers was 87 days as of December 31, 2015.
In the Refining Division, the credit extended by the Company to customers is as follows:
In the local market - on average current + 15. For foreign customers - 3-10 credit days.
In 2015, the average credit days given by the Refining Division to customers outside the Group were approximately 18 days.
The Group is exposed to non-payment of credit that is not covered by collateral or covered by partial collateral. In recent years the amount of bad debts in the Group was not in significant amounts.
The types of collateral that the Group usually receives from its customers are: charges on assets (fixed or floating charges), assignments of rights, bank guarantees, documentary letters of credit, personal guarantees, promissory notes, third party guarantees, deposits, credit insurance (on the date of publishing this report, the majority of the customers of a subsidiary in the Industries Division have credit insurance) and advance payments.
The following table shows details of the average number of credit days for external customers of the Company:
December 31, 2015 Average Average credit scope credit days (NIS in millions) Filling sites (including Pazomat) 28 587 Wholesale Subdivision customers (excluding Pazomat) 41 707 Subtotal R&W Division 35 1,294 Industries and Services Division customers 87 294 Refining Division customers 18 250 Total 41 1,838
6.2.2 Doubtful Accounts
For details, see Note 2.5.2.4 to the Company's financial statements as of December 31, 2015.
6.2.3 Suppliers' Credit
As of December 31, 2015, the credit of suppliers of crude oil products and intermediate substances is approximately NIS 1.1 billion.
The Company has an agreement with an oil supplier according to which the credit extended to the supplier can be extended by about 20 days at market interest.
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As of 2015, the average credit days of suppliers of crude oil products and intermediate substances, excluding the above extension option, are about 45 days. The average credit days including the extension option remain unchanged.
As of December 31, 2015, the credit scope of other suppliers is approximately NIS 0.5 billion and the average credit days of the other suppliers is approximately 91 days.
See additional details in paragraph 5.3 to the Report of the Board of Directors.
6.3 Investments
The following table shows the amount of investments in fixed assets and other assets (according to the cash flow figures), and the amounts of depreciation and amortization made by the Group:
2015 2014 2013 NIS in millions Investments in fixed assets 216 221 571 Investments in other assets 5 1 4 Total investments 221 222 575 Depreciation and amortization 396 403 388
For further details regarding the main investments of the Group, see paragraphs 3.16, 4.16 and 5.16 above.
6.4 Financing
6.4.1 Financing Resources
As of December 31, 2015, the Company finances its activity mainly from shareholders' equity and retained earnings in an amount of approximately NIS 3.6 billion (not including the deduction of a negative capital reserve), from debentures that were issued to the public, whose balance as of December 31, 2014 amounts to approximately NIS 3.9 billion and from loans from banks, whose balance as of December 31, 2015 amounts to approximately NIS 0.5 billion.
See details of long-term bank deposits placed by the Company in Note 7d to the Company's financial statements as of December 31, 2015.
The Company's operating working capital (trade receivables and inventory less trade payables) as of December 31, 2015 amounts to approximately NIS 1.1 billion, as compared with approximately NIS 0.5 billion as of December 31, 2014.
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6.4.2 Raising of Debentures in the Company
6.4.2.1 Debentures (Series A, B, C and D)
For details of debentures (series C and D) issued by the Company, see Note 14.6 to the Company's financial statements as of December 31, 2015 and Appendix B to the Report of the Board of Directors.
6.4.2.2 Financial Covenants - Right to demand Immediate Repayment of Debentures (Series C to D)
For details, see Note 14.6 to the Company's financial statements as of December 31, 2015.
6.4.3 Shelf Prospectus
On May 28, 2013, the Company published a shelf prospectus that allows, among others, the expansion of the outstanding debentures (series C), the issuance of outstanding debentures (series D) (from June 2014) and the issuance of shares, new series of debentures (series D-M), series of convertible debentures (series N-W), options for the Company's shares (series 2-11), options for debentures (series 12-21) and marketable securities (series 1-10). For details of the shelf prospectus, see immediate report of May 28, 2013 (TASE reference: 2013-01-075490).
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).
The Company intends to act towards the approval of a new shelf prospectus that will be in effect from May 28, 2016 and will supersede the shelf prospectus of May 2013.
6.4.4 Paz Ashdod Bonds
6.4.4.1 General
According to the split agreement, one third of the debts of ORL to the bondholders were assigned to Paz Ashdod (based on bonds held by ORL prior to the split). The bonds are repayable in quarterly payments. The last repayment date is December 2019.
In 2008, the trust deeds of the bonds were amended in the context of which the items regarding the conditions for the immediate repayment of Paz Ashdod's bonds, including the liabilities to meet certain financial covenants, were cancelled and replaced by an item which allows each holder of Paz Ashdod's bonds to demand, at any time, the immediate repayment of the entire unsettled balance of Paz Ashdod's bonds by providing an advance notice of at least one month, based on the conditions stipulated in the amended trust deeds.
As of December 31, 2015, the balance of Paz Ashdod's bonds totals approximately NIS 23 million. Paz holds an amount of approximately NIS 18 million of these bonds. The balance of bonds in the Company's financial statements as of December 31, 2015 is approximately NIS 5 million.
The weighted interest rate of Paz Ashdod's bonds is 6.0%.
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6.4.4.2 Undertaking not to Create Additional Charges
Paz Ashdod committed itself to an undertaking made by ORL to the trustee of the Paz Ashdod bondholders, not to record charges in favor of third parties on any of its existing or future assets, including in favor of a third party who financed the purchase of the asset. Moreover, Paz Ashdod committed itself to an undertaking made by ORL to the trustee for the holders of Paz Ashdod's bonds, not to carry out any leasing transactions if the amount of the transaction exceeded $ 10 million.
Notwithstanding the aforementioned, Paz Ashdod will be entitled: (1) to deliver, assign and transfer from time to time documents relating to export or import of goods to the bank, which will give (full or partial) credit to finance that export or import, and the aforesaid documents will serve that bank as collateral for the obligations and undertakings of Paz Ashdod to that bank for that credit; (2) to create a fixed charge on fixed assets only, in favor of a third party who will give (full or partial) credit directly for the purchase of those fixed assets, on condition that the aforesaid charge will apply only to that credit and will apply only to those fixed assets that were bought as aforesaid (for this purpose, the term 'fixed assets' means machines, equipment, devices, facilities, spare parts and real estate, including all the rights and insurance rights in the aforesaid assets and every part of the aforesaid assets).
6.4.5 Credit from Banks and Financial Institutions
As of December 31, 2015, the Company has bank credit in an overall amount of approximately NIS 0.5 billion. See details in paragraph 5.1 to the Report of the Board of Directors.
6.4.5.1 The average (effective) interest rate in the Group on bank loans and loans from financial institution:
2015 Average rate Long-term loans * Short-term loans NIS loans 1.1% 1.9% 0.8% Loans in foreign currency 1.2% - 1.2%
* A long-term loan repaid in 2015.
6.4.5.2 Variable Interest Rate Credit
In 2015, the Company received credit in NIS bearing variable interest, calculated in accordance with the Bank of Israel interest plus a margin, and credit in foreign currency bearing variable interest, calculated at the rate of Libor plus a margin. The range of interest rates for the credit of the Paz Group for 2015 was approximately 0.4%-2%.
All of the NIS and foreign currency loans that the Company received are at variable interest plus a fixed margin or at variable interest, based on market terms. For further details regarding the credit lines made available to the Company by banks and the use thereof, see paragraph 6.4.6 below.
For a description of the terms of the debentures and the interest thereon, see paragraph 6.4.2 above.
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6.4.6 The Company's Credit Lines and the Terms Thereof, and the Credit Balance used as of the Date of the Report
For details of the average scope of short and long-term loans and debentures, see paragraph 5.1 to the Report of the Board of Directors. As of December 31, 2015, the balance of loans taken by the Group from banks amounts to approximately NIS 0.5 billion, see more details in paragraph 6.4.5 above.
As of the report date, the Company does not have any secured credit facilities.
6.4.7 Guarantees Given by the Group
For details of guarantees that were given by the Group, see Note 31.10 to the Company's financial statements as of December 31, 2015.
6.4.8 The Company's Assessment regarding the Need to Raise Money
In the Company's estimation, it has the ability to raise the money that it needs, from time to time, in order to finance its normal course of business and in order to carry out the required investments.
The Company examines, from time to time, the need to raise debt or capital for the Company or to diversify the Company's financing resources. Should the Group decide to make additional investments and/or should it need additional resources for other reasons, the Company does not expect difficulties in obtaining financing.
6.4.9 The Company's Credit Rating
For details of the Company's credit rating, see an immediate report of January 31, 2016 (TASE reference: 2016-01-019711) and Note 14.5 to the Company's financial statements as of December 31, 2015.
6.4.10 Charges
As of December 31, 2015, the Group has no liabilities that are secured by any charges.
6.5 Taxation
For details, see Note 28 to the Company's financial statements as of December 31, 2015.
6.6 Environmental Protection
For additional details, see paragraphs 3.17, 4.17 and 5.17 above.
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6.7 Additional Information regarding the Company - Environmental Risks and Ways of Managing Them
6.7.1 Environmental Risks
The Company has operated and continues to operate on a regular and continuous basis to minimize and prevent potential environmental risks, and it invests significant resources in the field of environmental protection.
For details regarding the potential environmental risks, see paragraphs 3.17.1, 4.17.1 and 5.17.1 above.
6.7.2 Major Ramifications of Legal Provisions on the Company
For details of the major ramifications of provisions of law in the field of environmental protection on the Company, see paragraphs 3.17.2, 4.17.2 and 5.17.2 above.
6.7.3 The Company's Policy in Managing Environmental Risks and Measures Taken to Reduce the Environmental Risks
The Management of the Group has adopted a policy on environmental protection, safety and hygiene. According to the policy that was adopted, Paz regards itself as bound to nurture a policy that focuses on a strict observance of safety, hygiene and environmental protection as a supreme policy. The purpose of this policy is to prevent environmental, safety and hygiene hazards that derive from the production processes and marketing of the products sold by the Company, protection of the Company's employees and the public, and minimizing the existing risk level, while aspiring towards a continual improvement and saving of resources.
The Company has an internal enforcement policy whose purpose is to ensure compliance with the provisions of the law and the Company's procedures in the field of environmental protection, safety and hygiene, while constantly improving its environmental performance. The internal enforcement plan includes an assimilation of the requirements of the law in the activity of the Group, and its de facto application is checked regularly by the management of the Company. The enforcement plan is carried out by the Company together with and under the supervision of the best experts in the field.
6.7.4 Amounts Awarded, Provisions and Environmental Expenses
In 2015, no amounts were awarded against the Company and against officers therein within the framework of environmental proceedings concluded as of the date of issuance of this report, as stated in paragraphs 3.17, 4.17 and 5.17 above.
See details of the Ministry of Environmental Protection's notice of March 2016 whereby it intends to levy an administrative monetary sanction on Paz Ashdod on the alleged grounds of violation of the conditions underlying the sea dumping permit in 2013 in paragraph 5.17.2.8 above.
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Regarding the Company's exposure as a result of the proceedings as stated in paragraphs 3.17, 4.17 and 5.17 above, which are pending against the Company, see Note 33.2 to the financial statements as of December 31, 2015.
In 2015, the total environmental expenses that the Company incurred amounted to NIS 106 million, of which approximately NIS 25 million were operational expenses and approximately NIS 81 were capital investments.
The following table contains details of the total expected environmental expenses for 2016 and expected expenses for subsequent years in the Company's fields of environmental protection:
Forecasted annual Actual costs Forecasted costs costs for the next three incurred in 2015 for 2016 years NIS in millions Material costs 25 29 30 Material investments 81 98 46 Total 106 127 76
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6.8 Legal Proceedings
Following are details of the material legal proceedings against the Company as of the report date. The claim amounts are nominal as of the date of filing of the claims:
Serial Amount of the No. The parties claim Nature of the claim Chances of the claim 1 Claim by disabled IDF Declaratory A claim by a disabled IDF veteran from December 2012 to In the opinion of the Company's Management, which is veteran operating a declare the set of agreements signed with the Company as based on the opinion of its legal counsel, the Company has filling station against void, inter alia, as a non-exempt restrictive arrangement reasonable chances that are greater than the chances of the Paz and Paz's consisting of discriminatory terms in a standard contract. disabled operator of the station. On the other hand, there is a counterclaim The Company filed a counterclaim whereby if the claim is real chance, smaller than 50%, that the outcome will be granted, it will be entitled to usage fees for its proprietary different. rights in the land on which the filling station is located and alternatively entitled to recovery of its investments in the filling station. 2 Paz's appealregarding Declaratory An appeal filed by the Company in March 2015 on a verdict In the opinion of the Company's Management, which is real station rendered in December 2014 in which the Court ruled that the based on the opinion of its legal counsel, the chances of the plaintiffs had legally cancelled a settlement agreement appeal to be accepted are higher than 50%. (which transferred the station's operation to the Company) due to its violation by the Company. The verdict also ruled that the previous series of agreements signed between the parties (including the retail agreement and the sublease agreement) expired with the cancellation of the settlement agreement and therefore the Company has no rights in the filling station. 3 Claim by disabled IDF Declaratory A claim by a disabled IDF veteran from March 2013 to In the opinion of the Company's Management, which is veteran operating a declare the set of agreements signed with the Company as based on the opinion of its legal counsel, the Company has filling station against void, inter alia, as a non-exempt restrictive arrangement reasonable chances that are greater than the chances of the Paz and Paz's consisting of discriminatory terms in a standard contract. disabled operator of the station. On the other hand, there is a counterclaim The Company filed a counterclaim whereby if the claim is real chance, smaller than 50%, that the outcome will be granted, the Company will be entitled to usage fees for its different. proprietary rights in the land on which the filling station is located and alternatively entitled to recovery of its investments in the filling station.
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim Sludge related claims 4 Claim by disabled IDF Declaratory A claim by a disabled IDF veteran from October 2014 to In the opinion of the Company's Management, which is veteran operating a declare the set of agreements signed with the Company as based on the opinion of its legal counsel, the Company's filling station against void, inter alia, as a non-exempt restrictive arrangement chances in respect of the declaratory relief claim are greater Paz and Paz's consisting of discriminatory terms in a standard contract. than the chances of the disabled operator of the station but on counterclaim The Company filed a counterclaim whereby if the claim is the other hand, there is a real chance, smaller than 50%, that granted, it will be entitled to usage fees for its proprietary the outcome will be different. rights in the land on which the filling station is located and alternatively entitled to recovery of its investments in the filling station. Compensation is also claimed for damages caused by the plaintiff. 5 Claim filed by a disabled Declaratory and Claim from December 2014 filed by a disabled IDF veteran In the opinion of the Company's Management, which is IDF veteran against Paz monetary to declare the cancellation of the series of agreements signed based on the opinion of its legal counsel, the Company's totaling with the Company alleging, among others, that it represents chances in respect of the claim are greater than the chances of the disabled operator of the station but on the other hand, approximately a non-exempt restrictive arrangement consisting of there is a real chance, smaller than 50%, that the outcome NIS 10 million discriminatory terms in a standard contract. The claim also will be different. seeks monetary relief for loss of earnings and damages caused when the station was inactive. The Company filed a counterclaim where if the disabled IDF veteran's claim is accepted, the Company will be entitled to receive usage fees for its proprietary rights to the land on which the filling station is located and alternatively entitled to recovery of its investments in the filling station. Compensation is also claimed for damages caused by the plaintiff.
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim Pal-Kal related claims 6 Claim filed against the $ 584,309 Claim filed against the Company in January 2004. The In the opinion of the Company's Management, based on the Company et al by the plaintiffs are the holders of rights in a commercial property opinion of its legal counsel, the chances of the claims filed holders of rights in a located on the first floor of a building on King David Street, against the Company to prevail are greater than 50%. With commercial property on Jerusalem, that had been acquired from the Company, which respect to the third party notice, the Company has good King David Street in is claimed to have been constructed unlawfully, using the arguments against the third parties that were directly Jerusalem and the method known as the "Pal-Kal" method. The statement of involved in the construction of the building and reasonable Company's third party claim specifies damages that include, inter alia, supports and arguments with respect to the other parties, including the notice repairs carried out and decline in value. The Company filed municipality, the local committee etc. In January 2010, the third party notices against multiple third parties, including Jerusalem Municipality sent a letter to the holders of rights in the contracting company and its shareholders, the the building, informing them that the building is not construction engineers, the building contractor and others. considered to be unsafe (which requires repairs), and providing guidelines for its periodic inspection by a qualified engineer. The inspections carried out by a qualified engineer once a year are adequate and, accordingly, the Company's Management believes that the Company is not likely to bear the costs of fortification of the building. 7 Claim of the Approximately A claim filed in October 2008 bythe representatives of the In the opinion of the Company's Management, based on the representatives of the NIS 30 million. apartment owners of the building on King David Street, opinion of its legal counsel, the chances of the claims filed apartment owners of the Jerusalem constructed using the "Pal-Kal" method. The against the Company to prevail are greater than 50%. building on King David compensation was claimed, inter alia, in respect of Nevertheless, the chances of the third party notices with Street, Jerusalem against fortification works carried out, the decline in the value of the respect to some of the third parties that were directly the Company et al apartments and mental anguish. The Company filed third involved in the construction of the building are good, and (including the party notices against multiple third parties, including the with respect to the others, including the municipality, the construction engineer, contracting company and its shareholders, the construction local committee etc., are reasonable and therefore, the the building contractor, engineers, the building contractor and others. chances of the third party notices being accepted are greater the building inspectors, than 50%. In January 2010, the Jerusalem Municipality sent the architect of the a letter to the holders of rights in the building, informing building and the them that the building is not considered to be unsafe (which Jerusalem Municipality) requires repairs), and providing guidelines for its periodic and the Company's third inspection by a qualified engineer. The inspections carried party notice out by a qualified engineer once a year are adequate and, accordingly, the Company's Management believes that the Company is not likely to bear the costs of fortification of the building.
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim 8 Claim of owners of A claim for the A claim for the issue of a mandamus, and alternatively, a In the opinion of the Company's Management, based on the stores and offices issue of a monetary claim filed in October 2008 by the owners of opinion of its legal counsel, the chances of the claims filed against the Company mandamus, and stores and offices in the building on King David Street, against the Company to prevail are greater than 50%. Nevertheless, the chances of the third party notices with and another defendant alternatively, a Jerusalem, constructed using the "Pal-Kal" method. The respect to some of the third parties that were directly which was the developer monetary claim amount claimed is based on the plaintiffs' estimate of the involved in the construction of the building are good, and of the construction of the in the amount of cost of the fortification works required. The plaintiffs claim with respect to the others, including the municipality, the building on King David NIS 12 million. that only after carrying out the repairs, the full amount of local committee etc., are reasonable and therefore, the Street, Jerusalem and the damages can be estimated, and have, therefore, filed a chances of the third party notices being accepted are greater Company's third party petition for the splitting-up of remedies. The Company filed than 50%. In January 2010, the Jerusalem Municipality sent notice third party notices against multiple third parties, including a letter to the holders of rights in the building, informing them that the building is not considered to be unsafe (which the contracting company and its shareholders, the requires repairs), and providing guidelines for its periodic construction engineers, the building contractor and others. inspection by a qualified engineer. The inspections carried out by a qualified engineer once a year are adequate and, accordingly, the Company's Management believes that the Company is not likely to bear the costs of fortification of the building. Proceedings with local authorities 9 Proceedings initiated by Approximately Disputes with several local authorities regarding demands A provision has been made in amounts that based on the Paz against local NIS 36 million. for municipal taxes, fees and various charges, mostly opinion of the Company's legal counsel will be required to authorities. retroactive. settle the disputes. 10 Proceedings initiated by Approximately Notices for municipal taxes on gas accumulators and gas In the opinion of the Company's Management, based on the Pazgas against local NIS 42 million. rooms in several local authorities for current years and opinion of its legal counsel, the chances that charges will be authorities. retroactive charges. awarded retroactively are remote since the majority of accumulators are not located in public areas and therefore the risk that the current charges will be granted is lower than 50%. Pazgas recorded a provision based on the opinion of its professional advisors.
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim Legal claims 11 Appeal of the Kiryat Ata Betterment levy Appeal filed in December 2015 on the dismissal of an In May 2014, the Court dismissed both the appeals filed by Local Planning and of administrative appeal on the decision of the appeals the Kiryat Ata Local Planning and Building Committee and Building Committee approximately committee of November 2012 that ruled that Pazgas is not ruled that the gas companies are not liable for any betterment against Pazgas and two NIS 59 million. liable to pay any betterment levy. levy as a result of the approval or modification of a national other gas companies and zoning plan. The Court also granted the gas companies' against the National appeal and ruled that the gas companies (including Pazgas) Planning and Building are entitled to compensation for the impairment of the real Committee, the Ministry estate following the approval of the national zoning plan. of Energy and Water and The Court ordered the appeals committee to instruct the the Ministry of advising appraiser to determine the compensation for the Environmental impairment. Protection and Paz's In December 2015, the Kiryat Ata Local Planning and counter appeal Building Committee filed an appeal to the verdict. In January 12 Appeal of the Kiryat Ata Additional Appeal filed in December 2015 on the dismissal of an 2016, Pazgas filed a counter appeal pursuant to Article 197 Local Planning and betterment levy administrative appeal on the decision of the appeals to the Planning and Building Law. Building Committee of committee of December 2012 to cancel the additional In the opinion of the Company's Management, based on the against Pazgas and two approximately demand for imposing betterment tax in respect of the opinion of its legal counsel, even if appeal is accepted, the other gas companies and NIS 58 million. National Council's decision of February 2012 according to chances that Pazgas will ultimately be required to pay a against the National which the Kiryat Ata site can continue to operate after the betterment levy are lower than 50%. Planning and Building tanks are dumped in the ground until the later of the date on Committee, the Ministry which the site in the north begins operation or January 2029. of Energy and Water and the Ministry of Environmental Protection and Paz's counter appeal
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Serial No. The parties Amount of the claim Nature of the claim Chances of the claim 13 Arbitration regarding a Monetary claim In August 2010, a claim was filed against the Company In January 2015, the parties signed a settlement in which the monetary claim in the estimated at as part of an arbitration proceeding regarding an Company sold to the plaintiff its entire rights in the office subject of a building approximately NIS 88 expansion of an office building that was jointly owned building and its unutilized building rights, excluding its that was jointly owned million and an by the Company and the plaintiff with which the rights in the filling station and convenience store and in by Paz and the plaintiff additional amount for Company had signed a business combination in the another some 45 sq. m. on the ground floors of the office and Paz's counterclaim monthly management past. Following a settlement signed between the building. The parties waived all their claims, except fees in respect of the parties, only monetary claims remain outstanding. monetary claims. areas that were and/or The parties initiated a new arbitration proceeding regarding will be held in practice the monetary claims. by the Company. In the opinion of the Company's Management, based on its legal counsel, the chances that the new arbitrator will obligate the Company to pay the claimed amounts are lower than 50%. With respect to the issue of the amount of the monthly management fees (which was not discussed before by the Court), the Company's Management, based on its legal counsel, estimates that the chances that the arbitrator will dismiss the parties' mutual claims in respect of the past exceed 50%. With respect to the claim for the payment of management fees from the date of filing the claim and thereafter, the Company's Management, based on its legal counsel, estimates that the chances that Paz will be required to pay any management fees in the future in the same amount paid so far are lower than 50% and but rather it is more likely that Paz will be required to pay management fees based on another method of settling of accounts (lower fees than those paid so far) for the services actually rendered to it by the plaintiff.
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Serial No. The parties Amount of the claim Nature of the claim Chances of the claim 14 Monetary claims Monetary claim filed Monetary claim filed by the Company in September In the opinion of the Company's Management, based on the between a station by Paz against the 2012 against an operator regarding non-payment of opinion of its legal counsel, the Company has good operator and the operator in an amounts for fuels purchased and demand for arguments in its claim and accordingly the chances that a Company immaterial amount evacuation for said non-payment. significant part of the Company's claim will be accepted are and demand for higher than 50%. evacuation of the operator from the filling station. A counter claim filed Monetary counterclaim and declaratory action filed by In the opinion of the Company's Management, based on the by the operator in the the operator in December 2012 to declare the set of opinion of its legal counsel, the chances of the counterclaim amount of NIS 17 agreements void. to be accepted are lower than 50%. million and also a declaratory action to declare the set of agreements void. 15 Paz Ashdod against the Declaratory and Claim for declaratory and monetary relief in which the In the opinion of the Company's Management, based on the Ashdod Port Company monetary relief of Court is asked to rule that the Israel Ports Company opinion of its legal counsel, given the preliminary stage of Ltd. and the Israel Ports approximately Ltd. and Ashdod Port illegally collect "infrastructure the proceeding, the chances of the claim cannot yet be Company Ltd. NIS 55 million fees" for services that are not supplied by them, order assessed. that they cease such collection and restore the entire amounts charged to Paz Ashdod. 16 Paz Ashdod vs. the Petition to issue an Petition against the Electricity Authority's resolution In the opinion of the Company's Management, based on its Public Utilities order nisi and interim for determining system tariffs for the electricity legal counsel, the chances of the petition to be accepted with Authority - Electricity order (the system's management services, including against the respect to the retroactive application of the resolution are significance of the retroactive application of the resolution. good and higher than 50% but with respect to the additional retroactive charge of arguments in the petition, it is difficult to assess their chances approximately due to the preliminary stage of the proceeding but they are, at NIS 46 million and the very least, balanced. the significance of a future charge of approximately NIS 20 million a year)
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim 17 High Court of Justice Petition to issue Petition against obligating the fuel companies to install and In the opinion of the Company's Management, based on its claim by the association an order nisi and use universal automatic refueling devices effective from legal counsel, the chances of the petition cannot be assessed of fuel companies, Paz interim order April 1, 2016 in view of failures detected in the device's at this preliminary stage. et al vs. the Minister of safety component. National Infrastructures, Energy and Water Resources Class actions 18 Claim filed against Paz Dozens of Motion for approval of a claim as class action filed in In the opinion of the Company's Management, based on the et al for amounts millions of NIS October 2009 against the fuel companies alleging that opinion of its legal counsel, the chances that the Company charged for unsupplied (Paz's share is amounts had been illegally charged by them for unsupplied will be charged with a material amount are lower than 50%. gasoline estimated at gasoline. It is argued that the fuel meter charges the approximately consumer by marking that fuel injection had commenced NIS 36 million). when in fact it has not. 19 Claim against Paz and Approximately Motion for approval of claim as class action, filed in August Based on legal opinion, the Company's Management other fuel companies - NIS 1 billion 2011, on the grounds that the respondents had illegally estimates that despite the preliminary stage of the case and marketing margin against all the burdened unpermitted expenses onto the marketing margin based on the information known to date, the chances of the fuel companies by misleading the regulator thereby selling gasoline for motion to be accepted are lower than 50%. (the amount of higher prices that allowed. the claim against the Company has not been defined) 20 Claim against Pazomat Approximately Motion for approval of claim as class action, filed in The court approved the motion and a hearing of the class et al - diesel oil price NIS 454 October 2011, on the grounds that the respondents misled action on the grounds of depriving condition in a standard million. Pazomat customers who purchase diesel oil into assuming contract and agreement prepared not in good faith. The that they were getting cheaper prices as opposed to Company filed a motion for appeal. The Supreme Court occasional consumers of diesel oil in the filling stations of dismissed the motion for procedural reasons without Paz and the other fuel companies whereas in practice, as the prejudicing the Company's right to argue against the final petitioners are arguing, the Pazomat customers were asked verdict. Based on legal opinion, the Company's Management to pay more than occasional customers. estimates that it is very likely that the Company will be required to pay a certain amount. The Company recorded a provision in its books which according to its legal counsel is appropriate.
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim 21 Claim against Paz - Approximately Motion for approval of claim as class action filed in June Based on its legal counsel and given the preliminary stage of labelling nutritional NIS 3 million. 2013 alleging that Paz failed to comply with the duty to tag the proceeding, the Company's Management estimates that ingredients all nutritional ingredients in breads/rolls and other baked the chances of the motion to be granted are slim. goods that are baked and packaged at the stores. 22 Claim against Pazgas - Approximately Motion for approval of claim as class action filed in Based on its legal counsel, the Company's Management details provided in NIS 50 million. February 2014 alleging that the invoices issued by Pazgas do estimates that the chances of the motion against Pazgas to be invoices not provide details of the method of calculation of the accepted are lower than 50%. amounts being charged (including updated tariffs and usage fees). 23 Claim against Paz, Approximately Motion for approval of claim as class action filed in April Based on its legal counsel and on currently available Yellow and other fuel NIS 30 million 2014 alleging that the respondents, including Paz and information, including the Consumer Protection Authority's companies (Paz's share is Yellow, are violating the provisions of the Consumer response to an inquiry raised in this issue, the Company's estimated at Protection Law with respect to the duty to tag prepackaged Management estimates that the chances of the motion to be approximately products regarding the ice cream products sold in the stores. accepted are lower than 50%. NIS 10 million). 24 Claim against Pazgas Approximately Motion for approval of claim as class action filed in May Based on its legal counsel, the Company's Management and its subsidiary - NIS 10 million. 2014 alleging illegal charges and/or overcharges of estimates that the chances of the motion against Pazgas to be illegal charges commissions, interest and other amounts in the context of accepted are lower than 50%. the "miscellaneous" and "discounts" items. In addition, the motion argues that Pazgas assigned customers with whom it had signed agreements to its subsidiary in order to avoid legal liability towards these customers and without informing these customers of the assignment. 25 Claim against Paz and Approximately Motion for approval of claim from October 2014 as class Based on its legal counsel, the Company's Management Paz Ashdod NIS 21 million. action alleging that the defendants failed to pay the legally estimates that at this early stage of the proceeding, and with required recreation fees to some of the employees thereby the necessary caution, the risk that the motion for a class violating the State's expansion order regarding recreation action will be accepted as filed is lower than 50%. pay. It is also argued that the defendants violated the provisions of Amendment 24 to the Salary Protection Law in respect of some of the employees.
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim 26 Claim against Paz, Paz Approximately Motion for approval of a class action from June 2015 for In the opinion of the Company's Management, based on its Lubricants and other NIS 14.4 alleged air pollution in Haifa bay and resulting damages legal counsel, at this stage of studying the relevant facts and companies outside the million (the caused to the population of the area. legal aspects and given that the entire circumstances of the Group mount of the dispute have yet to be revealed, the chances of the motion for claim against approval or of the claim itself to prevail cannot be assessed. Paz and Paz Lubricants was not stated). 27 Claim against Paz Amount of Motion for approval of a class action from August 2015 for In the opinion of the Company's Management, based on its claim against alleged violation of the environmental treatment of electric legal counsel, although the case is in a very early stage, the Group not and electronic equipment and batteries arguing that the based on available information, the chances that the motion specified. Company supposedly does not allow customers to return for approval will create a material liability for the Company batteries and does not post visible signs regarding the return are lower than 50%. of batteries. 28 Claim against Paz and NIS 5 million. Motion for approval of a class action against the Company In the opinion of the Company's Management, based on its other company and another company (supplier of baked goods) from legal counsel, in view of the preliminary stage of the case, it February 2016 alleging that the Company sells prepackaged is impossible to assess the chances of the motion; however, baked goods in its stores that do not meet legal provisions based on the Company's engagement with the supplier, the underlying product and packaging quality and quantity. full responsibility for the legal packaging of the products lies with the supplier. 29 Claim against Yellow NIS 4.5 million. Motion for approval of a class action filed against Yellow In the opinion of the Company's Management, based on its from February 2016 alleging that Yellow sells in its stores legal counsel, in view of the preliminary stage of the case, its beverages (that are subject to container deposit legislation) chances to prevail cannot be assessed at this stage. that do not include the amount of the deposit on the price tag.
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Serial Amount of the No. The parties claim Nature of the claim Chances of the claim Criminal proceedings 30 Indictment for building Indictments. Immaterial building violations. The maximum risk is penalties in immaterial amounts and/or violations on the Pi- shutdown order until the license is settled. Glilot site (also against officers) 31 Three indictments Indictments. Absence of business license and immaterial building The maximum risk to the subsidiary is penalties in against a subsidiary of violations. immaterial amounts. the Company (21.5% held) and officers therein in Pi-Glilot site 32 Dozens of warning Dumping accumulators in the areas of several local The maximum risk to Pazgas is penalties in immaterial letters sent to Pazgas for authorities without a permit. amounts. building violations 33 Indictment filed by the Indictments. Indictment regarding the operation of the Kiryat Ata facility Based on Pazgas' legal counsel, the Company's Management Kiryat Ata Municipality without a business license. estimates that the chances that the proceeding will lead to against Pazgas and conviction are lower than 50%. officers therein 34 Indictment filed by the Indictment. Indictment for operating the subsidiary's business in Kiryat Based on Pazgas' legal counsel, the Company's Management Municipality of Kiryat Ata without a business license. estimates that the chances that the proceeding will lead to Ata against a subsidiary conviction are lower than 50%. of Pazgas (which is directly and indirectly held at a rate of 43.5%) and against officers (including former officer) Administrative monetary sanctions 35 The Ministry of Approximately Notice of intention to levy administrative monetary sanction In the opinion of the Company's Management, based on its Environmental NIS 18.6 due to alleged violation of the conditions of a sea dumping legal counsel, at this stage, before the Company's arguments Protection vs. Paz million. permit in 2013. are heard, it is impossible to assess the amount of the Ashdod sanction that will be levied, if any, this also given that not all the professional materials to support a decision have been obtained.
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The claims and/or motions for approval of class actions described in items 5, 11, 12, 13, 16, 17 23, 27, 28, 29, 34, 35 and 37 in the table of claims in paragraph 6.8 to the periodic report for 2014 were either stricken or dismissed or concluded in dismissal or settlement arrangements in the context of which the Company paid immaterial amounts.
The claim described in item 4 in the table of claims in paragraph 6.8 to the periodic report for 2014 was concluded in a settlement agreement in the context of which the station's operation was transferred to the Company.
Six subsidiaries of the Company were removed from the motion for approval of a class action described in item 36 in the table of claims in paragraph 6.8 to the periodic report for 2014. The Company and one subsidiary remain as respondents in the motion.
The indictments mentioned in items 41 and 44 in the table of claims in paragraph 6.8 to the periodic report for 2014 were either stricken or concluded in plea bargains in which the Company paid immaterial amounts.
6.9 Major Agreements
6.9.1 For a description of major agreements in the various divisions, see paragraphs 3.19, 4.19 and 5.19 above.
6.9.2 For a description of series of debentures that the Company issued to the public and the provisions of the trust deeds that were signed pursuant thereto, see Appendix B of the Report of the Board of Directors and Note 14 to the Company's financial statements as of December 31, 2015.
For a description of letters of quittance and indemnity that the Company provided its officers, see paragraph 21 to Chapter D to the Annual Report - Additional Details about the Company.
6.10 Goals and Business Strategy
6.10.1 General
Paz is the leading company in Israel for the production, supply, marketing and sale of oil products, the management of fueling and retail sites, and the direct marketing of oil products. Paz Ashdod is engaged in refining crude oil into oil products with Paz being the main customer. The synergy between refining crude oil into oil products and marketing and selling oil products represents a competitive edge.
Paz invests considerable resources in developing the filling stations and the Yellow convenience store chain in the refueling sites. The Company also takes steps for increasing the number of and expanding the retail centers while utilizing the real estate potential of these centers.
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In keeping with the Company's policy to exhaust its asset potential, the Company acts to dispose of assets that are not at the core of its business and/or high potential real estate. In this context, the Company explores alternatives for benefiting from its potential in areas where the value of the real estate is higher compared to its current use by either selling the real estate or changing the real estate's zoning.
Following the investment plan performed in the Ashdod Refinery in recent years, the Ashdod Refinery's operational flexibility and energy efficiency grew. Paz Ashdod produces high- quality and advanced refined oil products, while maintaining maximum efficiency, improving the mix of raw materials and refined oil products and increasing profits, while ensuring that no damage is caused to the environment.
6.10.2 The R&W Division
Paz's business strategy in the R&W Division and in the Entrepreneurship and Assets Subdivision and Real Estate Subdivision is to continue to be the leading group in Israel for the supply of oil products at public filling stations and by direct marketing, to lead the convenience store sector in Israel and to develop and expand the other services and products at the retail sites.
The Company regards the construction of retail sites as an engine for growth. The Company's accumulated experience shows that the retail site contributes, inter alia, to sales at the filling stations in the retail site.
At the retail sites and at a large number of the filling stations, Paz operates the chain of Yellow convenience stores, which is the leading brand among the chains of convenience stores in Israel.
The fuel marketing industry has undergone significant changes in recent years. The changes were mainly expressed in the decrease in the price of oil per barrel which affected the prices of oil distillates (in the last 18 months), a significant increase in the number of filling stations and the reduction of the marketing margins for gasoline 95 octane, which is a controlled product. In view of these changes, the Company is continuing the process of optimizing the profits of the retail chain. As a part of this process, the Company examines the contribution of each existing and new filling station, takes steps to maximize the real estate potential and deals with the supply chain and day-to-day operation of the filling stations and retail areas.
Paz's business strategy in the Wholesale Subdivision is to continue to be the largest group in Israel and the Palestinian Authority for supplying oil products outside the public filling stations, by focusing on profit improvement and calculated management of customer credit risks, in accordance with the Company's policy. The Company intends to continue to make the most of the synergy that exists between Paz Ashdod and the different divisions of the Group, while placing an emphasis on the building of an unbroken chain from the production at Paz Ashdod to supply of the product to the customer.
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6.10.3 The Industries Division
The Industries Division focuses on expanding the activity of the various units, in the production, import, sale and marketing of products, recycling, the development of new products and business development and diversification of target markets in Israel and abroad, all this while maintaining economic competition and creating synergy among the companies in the Industries Division and between these companies and the other units in the Group.
6.10.4 The Refining Division
The Refining Division's strategy is to exhaust the full potential of Paz Ashdod's means of production, improve the performance of the various production units, optimize production of refined oil products with high economic value in accordance with binding international standards and using an optimal crude mix, utilize the synergy that exists between Paz Ashdod and the companies of the Group in the various divisions, focus on the value chain between the Refining Division and the R&W Division, diversify Paz Ashdod's sources of revenues by generating electricity in the cogeneration power stations on its premises and selling it to its customers while achieving partial mitigation of the existing fluctuations in the oil and related products market and export products that account for at least 25% of its revenues on an annual basis in compliance with the conditions in the Law for the Encouragement of Capital Investments, 5719-1959.
As a part of the Company's strategy, the Refining Division is expanding its activity into additional core and energy fields with the use of Paz Ashdod's geographical location and existing infrastructure and is minimizing its production costs in general and specifically its energy costs. Within this context, the Refining Division has already expanded its activity to the field of electricity and is studying the potential expansion of this activity by constructing a third cogeneration power station. The Refining Division continues to streamline its core activity and has concluded a project for planning the construction of an off-gas recovery facility in order to optimize the operation and profitability of the production system. For further details regarding the production and supply of electricity and the planned off-gas recovery facility, see paragraph 5.16 above.
The Refining Division continually explores new projects for improving its profits based on forecasts of future changes in the refining market.
6.10.5 Expected Developments in the Coming Year
The Group's strategy is aimed at retaining the Group's leading status while retaining its operating continuity, streamlining and optimizing its profits.
The implementation of the Group's strategy is expressed in several main areas of activity:
In the Refining Division - utilizing the full potential of Paz Ashdod's means of production (to improve the product mix, achieve energy efficiency and diversity operations), maintaining production continuity and increasing profits.
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In the R&W Division - continued deployment, expansion and diversity of activities and services at fueling sites and retail sites and expansion and development of the added value offered to customers, including in the Yellow convenience stores. In the Yellow convenience stores, the Company will continue to focus on the high quality coffee category, the bakery category, on enhancing the market share of supplemental shopping and expanding the variety of services and products, including opening branded falafel selling stands at some of the Yellow convenience stores. In 2016, the Company intends to launch a website for selling consumer products online and/or for collecting various products that are purchased from other websites by customers at the Yellow convenience stores.
The Company is continuing to work to strengthen its status with strategic customers and to develop the management and sales potential of advanced solutions for Pazomat customers while preparing for the use of universal automatic refueling devices.
In the Industries Division - Pazgas will focus on expanding its activity in the field of products that use LPG, on converting plants to natural gas operation and on entering the natural gas sales market. Paz Lubricants and Pazkar will focus on expanding and developing new products. Pazkar will focus on increasing exports.
The Company will continue to act to sell assets that are not in its business core and/or high potential real estate.
The Group is working to improve the level of services and cross-sales of the Group's products to the Group's customers, both private and commercial, and develop and expand markets for exports from Paz Ashdod and Pazkar.
The Company will continue to focus on improvement of processes and maximization of its synergies and economies of scale (joint HQ, centralized purchasing, distribution and supply chain).
All of the Group's operations are carried out while developing control and risk management processes, protecting safety and the environment, and contributing to the community.
The Paz Group continues to implement its long-term strategic plan, while maintaining a centralized management and preserving its status as market leader in the Israeli energy and retail sector.
6.11 Risk Factors
The risk management policy of the Group is intended to be used by the management of the Company to achieve business goals, by assessing the potential results of the exposure and acting to limit the exposure. Risk assessment is performed by the Company by taking into account the seriousness of the risk and the likelihood of its occurrence. The Company's risk management is carried out under the supervision of the Company's Audit and Finance Committee and in accordance with the policy determined by the Board of Directors of the Company, in accordance with a procedure followed by the Company within the framework of an ERM (Enterprise Risk Management) program.
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There are several risk factors that derive from the business environment in which the Company operates, from the unique characteristics of the fuel industry with its many regulations and from the unique characteristics of the Company, which influence its activity.
6.11.1 Macroeconomic Risk Factors
6.11.1.1 The Geopolitical and Security Position Globally and in Israel
The global geopolitical and security situation has a direct effect on the economic situation, the import of crude oil into Israel, the global prices of oil and the prices of oil distillates and the refining margins.
2015 was characterized by an abundant supply of crude oil. The United States' increasing production capabilities of oil and related products from oil shale deposits have resulted in excess supply which, along with OPEC's decision not to modify the quantity of production of crude oil barrels, represented the principal reasons for the dramatic drop in crude oil prices starting from the second half of 2014, the change in the market structure (from backwardation to contango) and the improvement of the refining margins in 2015. However, different geopolitical crises such as the sustained economic crisis in Europe, the grave economic crisis in Russia, the uncertainty involving the production of oil from Libya and Iraq and the ongoing battles in Syria all continue to cause fluctuations in oil prices and refining margins and make it difficult to provide market forecasts.
The continuous political and security threat to the State of Israel is likely to expose the Company to trading restrictions, commercial sanctions (by parties operating abroad) as a result of difficulties in the purchase and supply of crude oil, difficulties in producing and supplying refined oil products (including in the event of a shutdown as a result of a state of emergency), a risk of an attack by hostile elements on the Company's facilities (in the Ashdod Refinery and the Haifa facilities) and/or at the import ports and/or the airports and/or the crude oil storage tanks that are also used by the Group for importing and/or storing crude oil and refined products, and a decrease in the number of flights coming to Israel and domestic flights.
For further details of the effect of the security and political situation on the Company, see paragraph 2.2.2 above.
6.11.1.2 Financial Risks
Interest rates: most of the credit that the Company receives bears a variable rate of NIS or dollar interest. Therefore, major changes in interest rates may affect the Company's financial results. For further details, see Note 30 to the financial statements as of December 31, 2015.
Changes in currency exchange rates: most of the Group's activity is in the fuel market, and therefore a large part of its current assets and liabilities are affected by the dollar exchange rate, whereas the financial statements are calculated and presented in NIS. For these reasons, the Group is exposed to risks that derive from changes in the exchange rate of the dollar against the NIS. For further details, see Note 30 to the financial statements as of December 31, 2015.
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Inflation and the Consumer Price Index: for details on the Company's exposure to CPI risk, see Note 30 to the financial statements as of December 31, 2015.
Moreover, embezzlement or financial fraud is liable to adversely affect the Company's operations. The Company acts to minimize its exposure to embezzlement or financial fraud, among others, by maintaining a separation of duties and authorities in all functions relating to finances.
6.11.1.3 Natural Damages caused by Earthquakes
Because Israel is located on the Syrian-African fault line, it is prone to earthquakes. Since it is not possible to foresee the occurrence or strength of an earthquake (apart from any forecasts that may exist), the Company, with all of its facilities, is exposed to damage. Since the Company's facilities are deployed throughout Israel, in the Company's opinion the risk to the Company's operations and facilities is not critical, excluding the Ashdod Refinery.
According to a survey carried out for the insurance companies and according to the estimates of the Geophysical Institute of Israel, the facilities of the Ashdod Refinery, which are located in Ashdod, are situated in an area that is not prone to earthquakes and the likelihood of damage to them as a result of an earthquake is small.
However, the Company is preparing for a possibility of an earthquake in accordance with the instructions of the Home Front, and inter alia it operates an alternative information systems site whose purpose is to ensure its continued activity and allow it to recover after a disaster. The Company has established an Emergency Situation Committee in order to prepare for potential emergencies.
6.11.1.4 Cyber Threats
In recent years there has been a major increase in cyber threats that are mostly perpetrated by terrorists and activists. The objectives of cyber threats are generally profiteering and/or achieving various economic, political or military benefits. Cyberattacks on IT systems are liable to cause organizations financial damage as well as damage to reputation, business disruptions etc. The Company's IT systems are exposed to cyber threats. From time to time, the Company examines its means of protection against such threats and implements various technologies in its systems to mitigate the risk of cyber related damages. It should be noted that in any event, cyberattacks and/or the potential damages caused by cyberattacks cannot be fully prevented. See more details in paragraph 6.11.3.5 above.
6.11.2 Risk Factors in the Oil Industry
6.11.2.1 Changes in the Prices of Crude Oil, Oil Products and the Refining Margin
A recession in the global markets and increases or decreases in the prices of oil products may materially affect the supply and demand and prices of oil products. High demands for oil products resulting from low prices are liable to hinder the global refining capacity and raise refining margins and vice versa - low demands will lead to surplus refining capacity and have an adverse effect on the refining margins. As a result, the Company's profits and scope of activity might be affected.
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The most important factor that affects the profits of the Company is the global refining margins. There are major fluctuations in the global refining margins and the Company has a limited ability to reduce its effect on the Company. The Company acts to reduce to some extent the effect of fluctuations in the refining margins on its results by means of a partial hedging of the refining margin or its components from time to time.
The global refining environment which in 2015 was characterized by an abundance of crude oil, low prices, high refining margins and the market structure consisting of forwards all had a positive effect on Paz Ashdod.
In view of Israel's financial strength and that of the Group, and the relative inflexibility of the local demand for the Group's main products, the effect of fluctuations in the Group's global markets is relatively limited in its other spheres of operations. For additional details, see paragraphs 2.2.3 and 6.11.1.1 above.
The Company holds an inventory whose value changes according to changes in the global prices of crude oil.
Paz Ashdod's activity in the field of buying raw materials, refining them and selling the products on the local market and the international market, as well as Paz Ashdod's need to keep at all times an inventory of crude oil (including a basic inventory) and oil products on a major scale, requires Paz Ashdod to take market risks deriving from changes in the prices of raw materials, changes in the prices of the products, timing differentials between the date of buying the raw materials and the date of selling the products, differences between the base assets and the hedging instruments and the future structure of the market. Within the context of protecting itself against these exposures, Paz Ashdod buys suitable derivatives. However, it is not possible to protect itself fully against the risk deriving from fluctuations in prices and impairment of inventories. For further details, see paragraph 5.3 above and Note 30 to the financial statements as of December 31, 2015.
As of the date of publishing this report, the Company has a policy of holding unprotected inventory in an amount that does not exceed 250 thousand tons or $ 300 million, whichever is the smaller. The Company determines the amount of unprotected inventory flexibly in accordance with the state of the market and its expectations of a change in price.
In the event of a significant increase in crude oil prices, the amount of credit that the Company will need to finance its working capital will increase.
6.11.2.2 Competition
Most of the markets in which the Group is active are very competitive, which is reflected, inter alia, in the prices of the products marketed by the Group and in the large number of competitors. An increase in competition may adversely affect the Company's market share and the Group's profits.
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Discontinuance of activity with large customers - the Palestinian Authority is a large customer of the Company and in 2015 represented a material customer of the Group. The Company estimates that it is not dependent on this customer since in the event of cancellation of the agreement with the Palestinian Authority the Company will be able to increase the sales of Paz Ashdod's surplus oil products to the fuel companies (due to the refinery's proximity to the area of the majority of consumption in Israel) and/or decrease the amounts purchased from ORL and/or export and/or reduce the import of LPG. Nevertheless, it is reasonable to assume that in the event of cancellation of the agreement with the Palestinian Authority, the Company's profits in the Division will be significantly impaired. See more details in paragraph 3.5.2.2 above.
The Group is contending with the following restrictions:
Constructing additional filling stations: the Company acts to construct filling stations for purely economic and strategic considerations. Paz has the largest number of filling stations in city centers compared to its competitors, which affords it a competitive edge in filling sites. See details in paragraph 3.8.1 above.
The directives of the Antitrust Authority with regard to exclusive supply agreements at filling stations where the fuel companies do not have property rights: according to the instruction of the Antitrust Authority, at filling stations where the fuel company has no property rights, it is possible to enter into exclusive supply agreements for a maximum period of one to three years. This instruction increases the competition and is likely to result in changes in the deployment of the Company's filling stations. For further details, see paragraph 3.18.12.1 above.
The conditions for approval of the merger between Paz and Paz Ashdod: within the framework of the approval of the merger between Paz and Paz Ashdod, several restrictions were imposed on the Group, including a restriction on the Company's possibilities of growth, including with regard to filling stations within the Municipal boundaries of the cities Tel-Aviv and Jerusalem. For further details, see paragraph 3.18.12.2 above.
Direct marketing contracts: entry barriers into the field of direct marketing are very low and the competition in direct marketing is characterized by high sensitivity to price and payment terms. Some of the marketing contracts are made with tenders for a period of several years and on competitive terms, and there is a risk that when the contracts end, the Company will not win the new tenders or some of them, and/or that their profitability will be affected in the event of a change in the terms.
Electronic fueling: the competition in this field focuses mainly on price, credit terms and additional services. The competition in the field of electronic refueling is high. The Universal Refueling Device Regulations are liable to increase competition, encourage customer mobility between fuel companies, impair the Company's sales and profits and cause the Company a significant investment in order to install the electronic refueling infrastructures at the filling stations and replace the refueling devices in vehicles. For details regarding the Universal Refueling Device Regulations, see paragraph 3.18.11 above.
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Competitors in refining on the local market: Paz Ashdod competes for the supply of oil products in Israel with ORL, which has a larger production capacity than Paz Ashdod (estimated at double). However, most of the Ashdod Refinery's sales are to Paz. In addition, Paz Ashdod is located closer to the consumption center, which is capable of reducing transport costs. The Company does not anticipate the construction of an additional refinery in Israel in light of the scope of the Israeli market and in view of the time, the required capital and the complex licensing processes involved in setting up a new refinery. At the same time, the import of refined products by the fuel companies and international trading companies competes with the activity of the refineries, but the viability of imports is influenced by the sale price of the refineries. For further details, see paragraph 5.8 above.
Increased use of natural gas and alternative sources of energy: a changeover to using alternative sources of energy, such as natural gas and electric motors, is likely to reduce the amounts of oil products that the Company will sell in Israel. Natural gas has become a significant source of energy in the Israeli economy, and it is expected within a few years, subject to the completion of the construction of a transport and distribution system, to replace most of the use of fuel oil and gas oil, mainly in the field of producing electricity and other fields based on profitability. Moreover, the consumption of natural gas by industrial customers has been reducing and is expected to continue to reduce the consumption of LPG, fuel oil and gas oil and consequently reduce the Group's profits. As for the trends of switching to natural gas refueling, see paragraphs 2.2.12-2.2.15 above.
As a result of the increase in Paz Ashdod's production capacity and the expected increase in natural gas consumption, the Company adopted a strategic decision to increase exports of fuel oil and gas oil. For further details, see paragraph 5.1.9 above.
Moreover, natural gas is used in combustion and, as stated above, is an alternative to fuel oil, gas oil and LPG which the Group markets. The marketing of natural gas increases the range of alternative products to Paz Ashdod's products and for this reason marketing it may reduce the scope of the Company's sales but at the same time (subject to considerations of the price of oil distillates as opposed to the price of natural gas) reduce the production costs of Pazkar and Paz Lubricants with the conversion of Pazkar's and Paz Lubricants' plants to natural gas use. Furthermore, in view of the amendment to the Natural Gas Industry Law (Amendment No. 6), 5774-2014, Pazgas is preparing to market and sell natural gas. For more details regarding natural gas and changes in consumer habits in Israel, see paragraphs 2.2.12-2.2.15 above.
The Company estimates that the changeover to the use of alternative sources will not significantly affect its results in the coming years.
Branding and goodwill: the Group companies have a long-lasting reputation and brand names that distinguish the Group companies from their competitors. Harm to the reputation or the brand names of the Paz Group from bad publicity or in any other way may adversely affect the Company's results, even if this publicity is incorrect.
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6.11.2.3 Regulatory Issues
(1) Increase in regulatory control: the Group is affected by regulatory changes that are made from time to time. Some of the Company's products and operations are regulated, for example, there is price control on gasoline 95 octane, price control on aviation gasoline, price control on infrastructure services, control at the reporting level on the prices of LPG to consumers and the prices of transport diesel at the filling stations, restrictions on the purchase prices from the refineries [including control on LPG ex- factory prices at the reporting level (effective from February 2015, excluding LPG that does not contain mercaptan), control on other products that only one of the refineries is able to produce (such as asphalt that is manufactured at ORL), prohibition of selling LPG at a price that exceeds the import price (effective from February 2015, excluding LPG that does not contain mercaptan), price control on stationary LPG containers and control on the maximum price of deposits on LPG equipment. Moreover, the refineries have a duty to enter into equal contracts with the various LPG suppliers, including with regard to the amount and quality of the gas sold, the infrastructure services provided by the refineries to the LPG suppliers and the credit terms for those suppliers. Pazgas is also bound by the proscription to discriminate between similar new consumers.
In addition, the Company is subject to restrictions on contracts relating to filling stations, restrictions on sales through automatic fueling installations, restrictions on involvement in various fields of activity, etc.
For further details of the marketing margin of 95 octane gasoline, see paragraph 3.18.8.2 above. A decrease in the marketing margin is likely to adversely affect the Company's profits.
For further details of control at the reporting level on transport diesel, see paragraph 3.18.8.1 above.
For further details of the examination of the possibility of control on LPG ex-factory prices and the possible control of the marketing margin for LPG, see paragraphs 2.2.8.4 and 4.18.4 above.
For further details of restrictions imposed on the Company with regard to the filling stations pursuant to the terms of the merger between Paz and Paz Ashdod, see paragraph 3.18.12.2 above.
For further details of the draft Fuel Industry Law, see paragraph 2.2.8.2 above. Within the framework of the proposed Fuel Industry Law or a similar proposed law, the Company may find itself facing additional restrictions on its development, including restrictions on the Company's market share of filling stations and restrictions on infrastructure operations and Paz Ashdod's operations.
For further details of the report of the Committee for Socioeconomic Change, see paragraph 2.2.8.4 above. If the report's recommendations are accepted, the Company may find itself facing additional restrictions of control on prices and the Company's market share of filling stations.
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For details of a draft report issued by the Ministry of Finance regarding a new price control methodology, see paragraph 2.2.8.1 above.
For further details of the recommendations in the report of the Committee for Increasing Competition in the Economy (the Market Concentration Committee), see paragraph 2.2.8.3 above.
For further details of the Universal Refueling Device Regulations, see paragraph 3.18.11 above.
For further details of restrictions relating to the sale of LPG, see paragraph 4.15.2 above.
(2) Licenses and permits: the various activities of the companies in the Group require licenses and permits from various authorities, such as a business license, a fuel production license, a gas supply license, a poison permit, a hazardous substance transport permit, etc.
It should be noted that some of the various operations of the Group companies do not have all the required licenses and/or permits. The Company is taking action to obtain all the required licenses and permits, for example, operating the Company's filling stations requires approvals and licenses from many authorities. For some of the filling stations the Company does not have all of the licenses and approvals required, or sometimes they expire and need to be renewed.
Operating the Ashdod Refinery, including the construction of new facilities at the Ashdod Refinery, requires the obtaining of licenses and permits. Failure to obtain and/or renew the permits and licenses will undermine the continuous activity of the Ashdod Refinery, something that is likely to have a material adverse effect on the Group's profits.
(3) Failure to comply with provisions of the law: failure to comply with the provisions of the law and especially with the directives of the Securities Authority, the Antitrust Authority, instructions in the field of environmental protection and safety and instructions regarding licenses and permits may adversely affect the operations and goodwill of the Company. New and changing regulations in the spheres of operations and/or an incorrect interpretation of provisions of the law and/or increasing strictness in the provisions of the law and/or a lack of mechanisms for ensuring compliance with the requirements of the law, including enforcement plans and/or human error, may expose the Company to civil and criminal proceedings, adversely affect the Company's profits, cause damage to the Company's goodwill and make the Company liable for fines, sanctions and major financial investments.
For further details of restrictions on the Company's operations pursuant to the Restrictive Trade Practices Law, see paragraph 3.18.12 above. For further details in the subject of regulations in the field of environmental protection, see paragraphs 3.17, 4.17 and 5.17 above. For additional details of an internal enforcement plan in the field of securities law, see paragraph 6.1.4 above.
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6.11.2.4 Financial Reporting
For details regarding measures taken to prevent a situation in which the financial statements and the other financial information included in the Company's financial statements do not properly reflect the financial position of the Company, see the process of approval of the Company's financial statements, including an examination of the effectiveness of the internal control carried out in the Company in paragraph 10 of the Report of the Board of Directors and Chapter F – Annual Report of the Effectiveness of the Internal Control on the Financial Reporting and Disclosure pursuant to Regulation 9B(a).
6.11.2.5 Operating Continuity
(1) Dependence on suppliers of infrastructure, transport and storage services: the fuel industry is limited in the number of infrastructure facilities (two refineries, a limited number of storage and distribution facilities and supply pipelines). The Company's activity depends upon receiving services from infrastructure companies: from EAPC, the IEC, PEI and OPP which own essential infrastructures for the unloading, storing and pipeline supply of crude oil, distillate fluids and LPG. Shutdown of activity of an infrastructure facility may undermine the proper functioning of the refineries, the fuel companies, Aviation Assets, the gas companies and the companies that provide fueling services for airplanes and significantly harm the Company's profits. A stoppage in activity may be caused by strikes, a security incident, an accident, natural disasters, the weather, product quality, etc. In the Company's estimation, it is possible to minimize the risk from the amount of inventory that it holds in various places, and from the fact that the main distribution of the Company takes place at facilities that it owns (the Ashdod Refinery and the facility in Haifa). The Company's exposure is similar to the exposure of other companies in the fuel and gas industries and the Company has no greater exposure than that of the rest of the industries. For further details, see paragraphs 1.1.2.2 and 1.1.2.4 above.
The distribution and transport of products to the Yellow convenience stores is partly done by various suppliers and party by Pazmovil which operates its own logistic center. In this manner, the Company minimizes the risk involving the supply of products to the Yellow convenience stores to operating continuity.
(2) Dependence on natural gas supplier: Paz Ashdod is dependent on the Tamar Reservoir which is the only natural gas supplier in Israel. The discontinuance of supply of natural gas and/or a reduction in the amount provided to Paz Ashdod is likely to increase Paz Ashdod's operating expenses and/or shutdown the cogeneration power stations. See details in paragraph 5.19.4 below.
(3) Dependence on the refineries: the companies operating in the field of refined oil products have an almost total dependence on the refineries, which are the main suppliers of the various refined oil products that those companies buy. Since the Ashdod Refinery is owned by the Company, the Company has less of a dependence in this respect than its competitors, except for asphalt products (purchased from ORL) and LPG (also partly purchased from ORL and mainly imported). For further details, see paragraphs 4.15.2 and 4.15.4 above.
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(4) Strikes and work stoppages: general strikes in the Israeli economy and especially work stoppages at ports and/or sanctions at the distribution terminals and/or stoppages at infrastructure companies that supply fuel and/or strikes of transport services may prevent the import of raw material products, cause a stoppage in the production, marketing and distribution system, cause a delay in the delivery of orders and thereby harm the Group's ability to comply with its undertakings, something that may harm Paz Ashdod's reputation and cause it significant damages and costs.
Should the facilities of the Ashdod Refinery suffer a stoppage, including as a result of a malfunction in the facilities or because of a workers' strike, the Company foresees that the production activity of the refined oil products will be significantly affected for the period of the stoppage, and as a result the Group will suffer damage.
(5) Failures in the supply chain: the risk of a failure in the supply chain relates to the following processes: from the planning stage through production at Paz Ashdod to sale at the filling station and/or the supply of other products and services to customers of the Group's companies. Operating failures at Paz Ashdod, incorrect design assumptions and/or defects in the stage of determining the demand for the products, and/or an inability to manufacture products at Ashdod Refinery, because of limitations on the amount of production and/or storage restriction and/or an inability to buy raw materials and products in the required amount, and/or erroneous pricing and defective calculation of raw material purchases for the Ashdod Refinery and and/or defects in the control environment and/or in the optimization of the supply chain may adversely affect the Company's profits.
6.11.2.6 Environmental Protection
(1) Failure to comply with provisions in the field of environmental protection: the requirements of the Ministry of Environmental Protection and the provisions of the law regarding filling stations, facilities and plants compel the Company to allocate considerable financial resources. In recent years the demands of the Ministry of Environmental Protection have becomes stricter and these demands may increase, which may compel the Company to devote additional financial resources to this issue. The Company intends to continue to implement the provisions of the law and the demands of the Ministry of Environmental Protection. The Company cannot estimate with certainty all of the repercussions of environmental protection law and the demands of the Ministry of Environmental Protection.
(2) Environmental hazards: the handling of oil products in the spheres of activity may cause environmental risks, and especially air pollution, soil pollution and groundwater pollution, which may be caused as a result of the activities of Paz Ashdod, the filling stations and the Company's facilities and plants. Oil products are by their very nature dangerous products and/or pollutants and they may damage health. In the event of an environmental hazard, the Company is liable to sustain financial and reputation related damages.
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(3) Environmental protection at old filling stations: the Company has old public filling stations (stations that were built before 1997), which constitute approximately 70% of the Company's filling stations. These stations were built in accordance with standards that were acceptable in the past but which do not guarantee that there was and/or will be no leak from any tank or pipe. The Company conducts land surveys and takes steps to rehabilitate any soil pollution and purify groundwater, all in coordination with the Ministry of Environmental Protection. This activity requires making sizeable investments.
The Company is exposed to civil and criminal legal proceedings as a result of apparent environmental pollution that was caused in the past and that may be caused in the future as a result of its activity, and in this context the enforcement authorities carry out checks and investigations from time to time. There is a risk that indictments will be filed against the Company and its officers if soil or water pollution is found at filling stations, in the Ashdod Refinery and at other facilities of the Group. The rehabilitation of the surrounding area where groundwater pollution has been caused may involve the Group in significant expenses that cannot be estimated. The Company implements an internal environmental enforcement program, among others to reduce the risk of environmental hazards and its respective exposure.
For further details of the environmental risks in the division, see paragraphs 3.17, 4.17 and 5.17 above.
For details regarding the Company's policy and enforcement plan regarding environmental protection and safety, see paragraph 6.7.3 above.
6.11.2.7 Safety
The oil products in the Company's possession are dangerous and poisonous substances (with a potential of exploding, catching fire or causing poisoning), both to those that handle them and to the environment. Therefore, the Company is exposed to incidents that may be caused by these products, including damage to health, damage to the environment, damage resulting from flammable substances catching fire, etc. The handling of oil products is subject to various regulatory provisions that require strict work safety and hygiene measures.
The Company is exposed to indictments and claims that may adversely affect its business results and undermine its goodwill.
The Company is also exposed to personal injury and property damage in its various activities.
The Group prepares insurance policies that insure its assets and liabilities in respect of any bodily harm and/or damage to tangible property, subject to the standard restrictions in insurance policies of this type.
In order to insure the Group's assets and liabilities, the Group avails itself of the services of external insurance consultants.
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There is no certainty that the coverage and/or liability limits in the policies cover the entire exposure involving the Group's activity, nor is there certainty that it will be possible to renew the policies in the future on reasonable commercial terms or at all.
Paz Ashdod prepares an insurance policy against property loss or damage (with a deductible of $ 2.5 million) and consequential loss (for a compensation period of 24 months from the end of a 60-day self-participation term), under a compensation ceiling of $ 1.275 million per event and on a cumulative basis. The insurer's liability for property loss or damage and consequential loss as a result of tremor damages caused by an earthquake is limited to $ 350 million per event and on a cumulative basis. This limitation does not apply to damages caused by fire and/or explosion arising from an earthquake which are subject to the general limitation mentioned above.
Paz Ashdod also purchases an insurance policy against consequential loss for a compensation period of up to 24 months which may be caused to Paz Ashdod's facilities as a result of terrorist acts and/or warfare, subject to a compensation ceiling of $ 200 million (in excess of a deductible of $ 40 million).
6.11.3 Unique Characteristics of the Group
6.11.3.1 Strategy
Among others, the Group's strategy requires making decisions on capital investments in strategic projects, establishing price and credit policies, establishing filling station maintenance and operation policies (opening new filling stations and methods of operating filling stations), making decisions on business ventures in new fields, partly based on forecasts regarding global economy, energy prices and developments in the motor industry etc.
Any failures in the planning or execution of the Group's strategies are liable to cause the Group financial and/or image related damages.
The Group's strategy is directed towards improving profits and investing in the creation of infrastructure for future growth, while creating competitive advantages in the various fields of operations.
The Company's policy is to invest in profitable activities while adhering to a reasonable period of return on the investments.
The Company practices an economic price policy while reducing customer credit. It is also acting to protect itself against financial exposures in its fields of operation, among others by conducting hedges against exposures to foreign currencies, the refining margin and changes in the value of inventory of crude oil and related products.
The Company is taking streamlining measures, including and to the extent needed, restructuring in the Group companies.
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The Company is acting to develop its business - the principal growth engines in the Group's strategic plan focus on utilizing the full potential of the means of production in Paz Ashdod using an optimal crude oil mix (for improving the mix, achieving energy efficiency and diversifying activities), identifying sources of growth in the Refining Segment and later developing the retail centers, filling stations owned by the Company and the Yellow convenience store chain, fulfilling the Group's commercial real estate potential and cross- marketing the Group's various products to its customers while expanding the synergies between the Group companies.
For further details of the Company's customer credit policy, see paragraph 6.2.1.3 above.
6.11.3.2 Lawsuits
There are material lawsuits pending against the Company, Pazgas, Paz Ashdod and Paz Lubricants for large amounts, including class actions, as explained in paragraph 6.8 above. Therefore, the Group is exposed to the repercussions arising from these claims.
Disabled veteran stations and/or real stations: the Company has a larger number of disabled IDF veteran filling stations and/or real stations than its competitors. Therefore, should the Supreme Court determine that the arrangement between the Company and the disabled veterans that operate the filling stations, and/or between the Company and the operators of the real stations, in whole or in part, is a non-exempt restrictive arrangement and/or includes discriminatory terms in a standard contract, the damage that will result from this to the Company, inter alia from the possibility of damage to the Company's property rights, is likely to be greater than the damage caused to the other fuel companies.
Non-renewal of rights in the lands of existing filling stations: some of the Company's filling stations are not owned by the Company and the Company does not lease them directly from the Israel Land Authority. If the sublease or tenancy agreements for the lands on which the filling stations are located are not extended, and/or it will be determined that the Company's property rights are limited and/or void, this may have an adverse effect on the results of the Company's operations.
The Company manages the risk of legal actions, inter alia, by complying strictly with the requirements of the law and regulations and availing itself of the assistance of experts and external consultants.
6.11.3.3 Financial risk - Customer Credit
Credit given to the Palestinian Authority: within the context of the agreement between Paz and the Palestinian Authority, as set out in paragraph 3.5.2.2 above, the amounts of credit that the Company gives to the Palestinian Authority are material to the Company. As collateral for the credit, the Palestinian Authority undertook to allow Paz to collect debts due to it from the tax money held for the Palestinian Authority by the Government of Israel. The Company cannot estimate the possibility and the amount of time that would be required in order to collect the money from the Government of Israel, if and insofar as the Company demands the money from the Government of Israel. The Company has not been given any other collateral. See more information on the Excise on Fuel Law, 5718-1958 which does not acknowledge excise duty deduction for bad debts, see paragraph 2.2.7 above.
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Customer credit: in the course of its activities, the Company gives some of its large customers credit for significant amounts of money without collateral and/or without full collateral and therefore it is exposed to the non-payment of the credit.
An economic recession may adversely affect the ability of the Company's customers to make payments, and lead to a decrease in debt payment ethics, a decrease in private consumption and business activity and the impairment of the Company's income and profits. The Company monitors the financial position of its customers, and is constantly strengthening and improving the collateral received from its customers and adjusting the amount of sales and the credit terms to customers in accordance with the risk level that it attributes to those customers. For some of the subsidiary's customers, credit insurance has been purchased.
For further details regarding the Company's policy with regard to giving customer credit, see paragraph 6.2.1.3 above.
6.11.3.4 Product Quality
The Company manufactures and markets various refined oil products and markets and sells products to its customers at the Yellow convenience stores. Many laws and regulations regulate the liability for the manufacturer's or supplier's product quality and the rights of consumers who are injured by a defective product.
Food products sold in Yellow convenience stores: the responsibility for the food products lies with the manufacturer/supplier based on the Consumer Protection Law. The Company exercises an effective control system for transporting the products, arranging the shelves and maintaining the quality and validity of the food products sold in the Yellow convenience stores.
Should any damage be caused to consumers as a result of products that the Company manufactured and/or marketed in the Yellow convenience stores (including as a result of a lack of control and supervision over the quality of the products sold in the Yellow convenience store chain, and as a result of the expiry date and quality of the products), the Company may be sued, including by way of class actions, and this may have a detrimental effect on the Company's goodwill and its financial results, if it is found to be liable.
Oil products: Paz Ashdod manufactures refined oil products in accordance with standard and quality requirements and carries out many quality controls.
Paz Lubricants and Pazkar products: Paz Lubricants makes lubricants, chemicals and solvents. Pazkar makes sealing and insulation products and other transportation infrastructure products. Both companies comply with standards and regulations and practice numerous quality controls.
The Group employs insurance advisors and buys product liability insurance policies that cover its liability for bodily harm and/or damage to tangible property, as customary in Israel, subject to the accepted restrictions in insurance policies of this kind.
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Jet fuel and aviation gasoline: Aviation Assets is responsible for the quality of the fuel supplied by it from transporting the jet fuel from the tanks in the tank farm until it enters the airplane, according to an agreement signed between Aviation Assets and the Airports Authority. Therefore, Aviation Assets, inter alia, might also be liable for any injury and/or damage caused as a result of defective fuel. Aviation Assets has a joint insurance policy with Aviation Services, the Company and other bodies, including the Airports Authority, which covers, inter alia, the aforesaid liability for any bodily injury and/or damage to property, insofar as caused due to defective fuels as above, up to a liability limit of $ 500 million per event and on a cumulative basis. However, it should be noted that this insurance policy does not cover all the exposures and there is no certainty that the liability limit in the insurance policy will cover the entire costs of damages caused due to defective fuels as above.
6.11.3.5 Crashes in Central Information Systems
The Company's information systems provide the main computer needs of the Group. Damage to these systems will not cause a logistical standstill of the Company and the Company will be able to continue to produce and supply fuel to its customers in all spheres of activity, including at retail sites, on the basis of local computer systems and manual responses. However, the administrative capabilities of the Company may be harmed from the viewpoints of financial management, reporting and control.
Failures in the safety mechanisms of the information systems, including fire and/or floods in the Company's mainframes, cyberattacks such as the use of existing information and/or the input of defective information by an unauthorized party and the leak of information from the organization to hostile and/or unauthorized parties may cause the loss of information, the disclosure of business information and adversely affect the achievement of the Company's strategic goals.
The Company maintains an alternative mainframe site, whose purpose is to ensure continued activity and a recovery capacity after a disaster. The production system data are backed on an ongoing basis at the Company's head IT systems site and duplicated in the mainframe at the daily backup site. Moreover, another backup of the central computer systems is kept in fireproof safes and at other sites.
6.11.3.6 Work Relations
Insofar as the employees of the various Group companies are incorporated in a representative labor union (excluding employees who are already members of a representative workers' association), this might have an effect on the Group's operations (in the event of labor disputes, strikes etc.) and its financial results.
6.11.4 The Company's Assessment regarding the Extent to which the Risk Factors Affect the Group
The table below shows the Group's major risk factors, as described above, according to categories (macroeconomic risks, risks in the oil industry and risks that are unique to the Company), which have been rated, in accordance with the estimation of the Company's management, according to their effect, if they occur, on the Group's business as a whole (major, medium or minor effect).
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The Company's assessment regarding the extent of the effect of any risk factor on the Company does not represent any assessment of the likelihood that the risk factor will materialize. Furthermore, the order of the risk factors presented above and below is not based on the size of the risk involved in each risk factor or the likelihood that it will occur.
Degree of effect of the Group's major risk factors Minor Medium Major Paragraph Risk factors effect effect effect 6.11.1 Macroeconomic Risk Factors: 6.11.1.1 The Geopolitical and Security Position X Internationally and in Israel 6.11.1.2 Financial Risks X 6.11.1.3 Natural Damages from Earthquakes X 6.11.1.4 Cyber threats X 6.11.2 Risk Factors in the Oil Industry: 6.11.2.1 Changes in Prices of Crude Oil and Oil X Products and Price Margins 6.11.2.2 Competition X 6.11.2.3 Regulatory Issues X 6.11.2.4 Financial Reporting X 6.11.2.5 Operational Continuity X 6.11.2.6 Environmental Protection X 6.11.2.7 Safety X 6.11.3 Risk Factors Unique to the Group: 6.11.3.1 Strategy X 6.11.3.2 Lawsuits X 6.11.3.3 Financial Risk - Customer Credit X 6.11.3.4 Product Quality X 6.11.3.5 Crashes in Central Information Systems X 6.11.3.6 Work Relations X
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A-228 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 B. Report of the Board of Directors on the State of Affairs of the Corporation WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 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 year ended December 31, 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 year ended December 31, 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 2015 ("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.
2015 was characterized by an abundant supply of crude oil reflected by low prices. The dramatic drop in prices began in the second half of 2014. The Company estimates that one of the main reasons for the excess supply is OPEC's decision not to modify the quantity of production of crude oil barrels despite the production of oil and related products from oil shale deposits in the United States. The excess supply and the drop in oil price led, among others, to a change in the market structure (from backwardation to contango) and the improvement of the refining margins in the immediate range. Notwithstanding the reduction in the number of producing drillings in the U.S. and the growth in global consumption, the excess supply continued owing to record outputs in Saudi Arabia and Russia and to the increased production in Iraq and Libya, all even before the expected contribution of added oil barrels from Iran following the signing of the Iran nuclear deal. The excess supply and the drop in oil price led, among others, to a change in the market structure (from backwardation to contango) and to the improvement of the refining margins in the immediate term. See more details in paragraph 3.3.2 below.
The average price per barrel in 2015 was approximately $ 52. The highest price per barrel in 2015 was approximately $ 67 and the lowest price per barrel in 2015 was approximately $ 36.
At the end of the fourth quarter of 2015, the price per barrel was approximated $ 36. In Q4 2015, the price per barrel experienced a downward trend from approximately $ 48 at the beginning of the quarter, with a maximum price of approximately $ 52 during the quarter, to approximately $ 36 at the end of the quarter. The median price per barrel in Q4 2015 amounted to approximately $ 44.
In January and February 2016, the median price per barrel amounted to approximately $ 31.
International energy consulting firms expect the trend of low oil prices to continue at least until the end of 2018, with a forecasted median price per oil barrel ranging between $ 45 and $ 54 in 2016.
It should be noted that every fourth quarter of the fiscal year is affected by seasonality which is expressed in lower refining margins.
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The information regarding evaluations, forecasts 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 materially 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.
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/or the Ashdod Refinery ("the 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, a decline in the number of incoming flights into Israel and a decline in domestic flights.
1.3 The Company faces the challenges arising from 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, spreading out the risks of the Company and providing it a position of relative advantage.
1.3.2 The high level of complexity of the Ashdod Refinery that is operated by Paz Ashdod together with the improvements that were made to the refinery in the last few years have increased Paz Ashdod's production capacity and allowed manufacturing an optimal product mix that leans 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 and European 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 and in Note 30 to the financial statements for 2015.
B-2 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
1.3.4 The Company's financial policy is also reflected in its debt structure. The Company has debts to holders of debentures which mature in 2019 and 2024.
The Group's average nominal adjusted interest rate on its financial liabilities in 2015 is about 2.0%.
1.3.5 The Company has been 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 two (unrelated) agreements, one for the sale of real estate in the Pi-Glilot site and the other for the sale of its interests in Pi-Glilot Petroleum Terminals and Pipelines Ltd. ("Pi-Glilot" or "the original agreement", as applicable), both of which are likely to yield it total pre-tax gains of approximately NIS 110 million.
In the second quarter of 2015, the Company recognized a pre-tax capital gain of approximately NIS 27 million from the sale of the land in the Pi-Glilot site.
On October 25, 2015, an arrangement was signed between the Company and third parties (including the party in the original agreement) which was approved on October 26, 2015 by the Court. According to the arrangement, in the context of the exercise of a right of first refusal, according to the articles of association of Pi-Glilot, the Company and a third party (which is a shareholder in Pi- Glilot) will sign a new agreement for the sale of the Company's stake in Pi-Glilot for the same price and under the same terms (with the necessary adjustments) as those signed in the original agreement and the original agreement will be cancelled. The new agreement will be signed once the Minister of Finance approves the new composition of shareholders in said third party (which, as stated above, is a shareholder in Pi-Glilot). See more information in Note 12b to the financial statements as of December 31, 2015 and paragraph 3.11.2 to the Periodic Report.
The information included in this paragraph regarding the Company's expected gain from the sale of its stake in Pi-Glilot represents forward-looking information, as defined in the Securities Law, and is based on the Company's evaluations. There is no certainty that those evaluations will indeed materialize, among others, due to the third party's possible noncompliance with the agreement for the sale of the Company's stake in Pi-Glilot and/or the non-fulfillment of the suspending conditions underlying the agreement for the sale of the Company's stake in Pi-Glilot, including the Minister of Finance's approval.
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 On November 23, 2015, the Company declared the distribution of a dividend to its shareholders in the amount of NIS 170 million, representing approximately NIS 16.76 per share. The dividend was paid in January 2016.
2.3 After the statement of financial position date, on February 2, 2016, the Company issued debentures for net proceeds (less issuance expenses) of approximately NIS 682 million. See more details in Note 14.6.2 to the financial statements as of December 31, 2015
B-3 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
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 2015 Q4/2015 Q3/2015 Q2/2015 Q1/2015 Total 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 Total 2013 Net sales 12,860 2,827 3,234 3,581 3,218 18,513 4,394 4,706 4,577 4,836 19,635 Cost of sales 10,712 2,307 2,721 3,060 2,624 16,695 3,952 4,106 4,242 4,395 18,214 Gross profit 2,148 520 513 521 594 1,818 442 600 335 441 1,421 Selling and marketing expenses 964 244 240 244 236 977 253 240 241 243 982 General and administrative expenses 201 58 42 56 45 179 42 44 41 52 202 Other (income) expenses, net (8) 1 5 (14) - (18) (11) (1) 6 (12) (17) Operating income 991 217 226 235 313 680 158 317 47 158 254 Financial expenses (income), net 79 (1) 76 (67) 71 430 151 223 10 46 51 Share of earnings of investees ------1 Income before income tax 912 218 150 302 242 250 7 94 37 112 204 Income tax expense (income) 193 44 39 59 51 77 13 26 8 30 91 Net income 719 174 111 243 191 173 (6) 68 29 82 113 Attributable to equity holders of the Company 716 173 110 243 190 172 (7) 67 29 83 110 Attributable to non-controlling interests 3 1 1 - 1 1 1 1 - (1) 3
3.1.2 Condensed reported interim operating income (loss) according to operating segments (NIS in millions):
Total 2015 Q4/2015 Q3/2015 Q2/2015 Q1/2015 Total 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 Total 2013 Paz R&W 389 87 117 102 83 397 109 102 101 85 391 Paz-Industries 218 63 44 41 70 178 47 34 36 61 164 Paz-Refining 491 101 92 112 186 212 32 203 (63) 40 (201) Unallocated (107) (34) (27) (20) (26) (107) (30) (22) (27) (28) (100) Total reported operating income 991 217 226 235 313 680 158 317 47 158 254 Total reported EBITDA 1,387 316 325 334 412 1,083 261 418 146 258 642 Total reported net income attributable to equity holders of the Company 716 173 110 243 190 172 (7) 67 29 83 110
B-4 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
3.1.3 Condensed reported interim gross profit (loss) according to operating segments (NIS in millions):
Total 2015 Q4/2015 Q3/2015 Q2/2015 Q1/2015 Total 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 Total 2013 Paz R&W 1,100 271 297 276 256 1,082 263 283 282 254 1,118 Paz-Industries 490 134 107 111 138 453 118 100 103 132 444 Paz-Refining 560 115 110 135 200 292 64 219 (48) 57 (134) Intercompany transactions (2) - (1) (1) - (9) (3) (2) (2) (2) (7) Total reported gross profit 2,148 520 513 521 594 1,818 442 600 335 441 1,421
3.1.4 Condensed adjusted statement of income (NIS in millions):
Total Total Total 2015 Q4/2015 Q3/2015 Q2/2015 Q1/2015 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 2013 Net sales 12,860 2,827 3,234 3,581 3,218 18,513 4,394 4,706 4,577 4,836 19,635 Cost of sales 10,724 2,350 2,705 3,020 2,649 16,744 3,894 4,255 4,154 4,441 17,953 Adjusted gross profit 2,136 477 529 561 569 1,769 500 451 423 395 1,682 Selling and marketing expenses 964 244 240 244 236 977 253 240 241 243 982 General and administrative expenses 201 58 42 56 45 179 42 44 41 52 202 Other expenses (income) (8) 15(14) - (18) (11) (1) 6 (12) (17) Adjusted operating income 979 174 242 275 288 631 216 168 135 112 515 Adjusted financial expenses, net 176 16 35 54 71 141 34 34 36 37 155 Share of earnings (losses) of investees ------1 Adjusted income (loss) before income tax 803 158 207 221 217 490 182 134 99 75 361 Adjusted income tax expense (income) 177 34 48 46 49 113 39 32 19 23 87 Adjusted net income (loss) 626 124 159 175 168 377 143 102 80 52 274 Attributable to equity holders of the Company 623 123 158 175 167 376 142 101 80 53 271 Attributable to non-controlling interests 3 1 1 - 1 1 1 1 - (1) 3
B-5 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
3.1.5 Condensed adjusted interim operating income (loss) according to operating segments (NIS in millions):
Total 2015 Q4/2015 Q3/2015 Q2/2015 Q1/2015 Total 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 Total 2013 Paz R&W 389 87 117 102 83 397 109 102 101 85 391 Paz-Industries 218 63 44 41 70 178 47 34 36 61 164 Paz-Refining 479 58 108 152 161 163 90 54 25 (6) 60 Unallocated (107) (34) (27) (20) (26) (107) (30) (22) (27) (28) (100) Total adjusted operating income 979 174 242 275 288 631 216 168 135 112 515 Total adjusted EBITDA 1,375 273 341 374 387 1,034 319 269 234 212 903 Total adjusted net income attributable to equity holders of the Company 623 123 158 175 167 376 142 101 80 53 271
3.1.6 Condensed adjusted interim gross profit (loss) according to operating segments (NIS in millions):
Total 2015 Q4/2015 Q3/2015 Q2/2015 Q1/2015 Total 2014 Q4/2014 Q3/2014 Q2/2014 Q1/2014 Total 2013 Paz R&W 1,100 271 297 276 256 1,082 263 283 282 254 1,118 Paz-Industries 490 134 107 111 138 453 118 100 103 132 444 Paz-Refining 548 72 126 175 175 243 122 70 40 11 127 Intercompany transactions (2) - (1) (1) - (9) (3) (2) (2) (2) (7) Total adjusted gross profit 2,136 477 529 561 569 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 2015 amounted to approximately NIS 12,860 million, compared with approximately NIS 18,513 million in 2014, a decrease of approximately NIS 5,653 million or about 31%.
Net sales in Q4 2015 amounted to approximately NIS 2,827 million, compared with approximately NIS 4,394 million in Q4 2014, a decrease of approximately NIS 1,567 million or about 36%.
The decrease in sales arises 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 amounted to approximately NIS 6,913 million in 2015, compared with approximately NIS 9,426 million in 2014, a decrease of approximately NIS 2,513 million or about 27%.
Net sales of Paz-R&W in Q4 2015 amounted to approximately NIS 1,574 million, compared with approximately NIS 2,071 million in Q4 2014, a decrease of approximately NIS 497 million or about 24%.
The decrease in net sales of Paz-R&W in the Reporting Periods compared to the corresponding periods of last year mainly arises from the decrease in the prices of fuels. The decrease was partly offset by the increase in sales quantities in and outside the stations.
B-6 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
The sales turnover of the Yellow convenience stores (including sales through concessionaires) in 2015 amounted to approximately NIS 741 million, compared with approximately NIS 718 million in 2014, an increase of about 3%.
3.2.3 Net sales of Paz-Industries in 2015 amounted to approximately NIS 1,538 million, compared with approximately NIS 1,728 million in 2014, a decrease of approximately NIS 190 million or about 11%.
Net sales of Paz-Industries in Q4 2015 amounted to approximately NIS 413 million, compared with approximately NIS 433 million in Q4 2014, a decrease of approximately NIS 20 million or about 5%.
The decrease in net sales of Paz-Industries in the Reporting Periods compared to the corresponding periods of last year is due to the decrease in prices of oil products which was partly offset by the increase in sales quantities.
3.2.4 Net sales of Paz-Refining in 2015 amounted to approximately NIS 9,757 million, compared with approximately NIS 15,144 million in 2014, a decrease of approximately NIS 5,387 million or about 36%.
Net sales of Paz-Refining in Q4 2015 amounted to approximately NIS 2,094 million, compared with approximately NIS 3,603 million in Q4 2014, a decrease of approximately NIS 1,509 million or about 42%.
The decrease in net sales of Paz-Refining in 2015 compared with 2014 arises mainly from the decrease in prices of oil products which was partly offset by the increase in sales quantities.
The decrease in net sales of Paz-Refining in Q4 2015 compared with Q4 2014 arises mainly from the decrease in prices of oil products and the decrease in sales quantities.
3.3 Gross profit
3.3.1 Reported gross profit in 2015 amounted to approximately NIS 2,148 million, compared with approximately NIS 1,818 million in 2014, an increase of approximately NIS 330 million or about 18%.
The reported gross profit in the fourth quarter of 2015 amounted to approximately NIS 520 million, compared with approximately NIS 442 in the fourth quarter of last year, an increase of approximately NIS 78 million or about 18%.
The increase in reported gross profit in the Reporting Periods compared with the corresponding periods of last year is mainly due to the improved results of all the divisions, mainly of Paz-Refining. See more information in paragraphs 3.3.5 and 3.5.5 below.
3.3.2 Adjusted gross profit in 2015 amounted to approximately NIS 2,136 million, compared with approximately NIS 1,769 million in 2014, an increase of approximately NIS 367 million or about 21%.
The increase in adjusted gross profit in 2015 as opposed to 2014 is mainly due to the improved results of all the divisions, mainly of Paz-Refining.
B-7 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Adjusted gross profit in Q4 2015 amounted to approximately NIS 477 million, compared with approximately NIS 500 million in Q4 2014, a decrease of approximately NIS 23 million or about 5%.
The increase in adjusted gross profit in Q4 2015 compared with Q4 2014 is a result of the decrease in the profits of the Refining Division, mostly due to the decrease in the intermediate distillate margins.
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").
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, 2015.
As of the date of the financial statements, the Company has unhedged inventories at a scope of approximately 100 thousand tons (excluding self-consumption and loss).
In the fourth quarter of 2015 and in the whole of 2015, the Company recorded losses on unhedged inventories totaling approximately NIS 34 million and NIS 71 million, respectively, compared with approximately NIS 100 million and NIS 108 million in the fourth quarter of 2014 and in the whole of 2014, respectively.
As of the date of approval of the financial statements, the Company has unhedged inventories at a scope of about 87 thousand tons (excluding self-consumption and loss). The change in the prices of crude oil and related products affects the Company's financial statements.
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.
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 view of these changes in its business environment and in an attempt to improve its results, the Company is taking the appropriate business and economic steps with respect to the market status.
Therefore, in view of the decline in crude oil prices, the Company resolved to increase its inventories and unhedged inventories (in the context of its policy of holding unhedged inventories discussed above).
B-8 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Accordingly, effective from the third quarter of 2014, the Company does not adjust the effects of the inventory hedging activity when the Company has unhedged inventories. As discussed above, 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.
As discussed above, the effect of the hedges in Q4 2015 and in Q4 2014 was not neutralized from the financial results since the Company had unhedged inventories.
In 2015, the effect of the market structure resulted in income of approximately NIS 200 million, a positive effect which, as discussed above, was not neutralized from the financial results since the Company had unhedged inventories.
In the first half of 2014, an expense in respect of hedge costs totaling approximately NIS 44 million was neutralized owing to the Company's fully hedged inventories (excluding self-consumption and loss).
In the second half of 2014, the effect of the market structure resulted in income of approximately NIS 50 million, a positive effect which was not neutralized from the financial results since the Company had unhedged inventories.
3.3.3 Ashdod Refinery's adjusted refining margin ("the margin")
The following table presents the margin and Paz Ashdod's financial costs for the whole of 2015 and for the fourth 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 incurred in generating electricity, 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 for 2015 for 2014 Q4 2015 Q4 2014 Adjusted margin – dollar per ton 69 52 62 55 Adjusted margin – dollar per barrel 9.2 7.0 7.9 7.4
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 KBC margin and the price per barrel of Brent crude oil. All data are presented in dollars. These margins, similarly 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 for Average for 2015 2014 Q4 2015 Q4 2014 Europe KBC/IEA margin per barrel * 6.8 2.5 4.9 4.2 Ural margin per barrel ** 4.8 2.0 3.5 3.8 Average price of crude oil barrel *** 52 99 44 77
* Source of data – KBC Energy Economics Report. ** Source of data – Reuters. *** Source of data – Platts.
B-9 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
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] in the fourth quarter of 2015:
The product ($/barrel) 2015 2014 Change Q4/2015 Q4/2014 Change Gasoline (Gasoline barges/ICE Brent crk) 14.7 10.8 36% 10.6 9.7 9% Diesel oil (ULSD Cif Med/ICE Brent crk) 14.8 16.5 (10%) 11.3 17.6 (36%) Jet fuel (Jet Cif NWE/ICE Brt crk) 13.2 15.8 (16%) 10.9 18.2 (40.1%) Fuel oil (F.01% Fob Med/ICE Brent crk) (11.2) (10.6) (6%) (13.0) (12.0) (8%)
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):
2015 % 2014 % Q4 2015 % Q4 2014 % Gasoline and naphtha 1,863 37% 1,786 37% 468 37% 458 37% Diesel oil 1,538 31% 1,542 32% 374 30% 437 35% Jet fuel and kerosene 550 11% 542 11% 144 12% 107 8% Fuel oil 871 17% 771 16% 219 17% 202 16% Other 196 4% 217 4% 46 4% 51 4% Total 5,018 100% 4,858 100% 1,251 100% 1,255 100%
3.3.5 Due to the volatility in the prices of crude oil in 2015, the Company recorded income in respect of hedges on the crude oil component, in respect of unrealized inventory as of the end of the fourth quarter of 2015, and in respect of the partial hedge of the refining margin.
These hedges are considered to be speculative for accounting purposes; due to their being economic hedges that are not recognized as accounting hedges.
The effect of the unrealized inventory hedges in the fourth quarter of 2015 resulted in income of approximately NIS 94 million, which increased the gross profit.
In 2015, the effect of the unrealized inventory hedges resulted in expenses in the amount of approximately NIS 7 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.
3.3.6 At the end of the fourth quarter of 2015, the Company recorded a provision for impairment of inventory to its net realizable value in the amount of approximately NIS 47 million. On the other hand, in the fourth quarter of 2015 the Company recorded income from the realization of inventory as it was at the end of the third quarter of 2015, in the amount of approximately NIS 21 million, against which expenses were recorded in the third quarter of 2015. The net effect of the provision for impairment on gross profit in the fourth quarter of 2015 resulted in an expense of approximately NIS 26 million.
B-10 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
The net effect of the provision for impairment of inventories on the gross profit in 2015 amounted to income of approximately NIS 76 million since in the first quarter of 2015, the Company had 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 had been recorded in the fourth quarter of 2014.
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 2015 and in the fourth quarter of 2015, due to the increase in the exchange rate of the dollar, the Company recorded financial expenses from exchange rate differences in an amount of approximately NIS 14 million and NIS 9 million, respectively, in respect of oil supplier balances and dollar liabilities for financing the realized inventory. On the other hand, the gross profit in 2015 and in the fourth quarter of 2015 increased by the same amount due to lower cost of sales in NIS, which reflects the realization of inventory of crude oil purchased at lower exchange rates. For more information, see also paragraph 3.7.2 below and Note 30.4.2 to the financial statements as of December 31, 2015.
3.3.8 The adjusted gross profit margin (out of the Company's income) in 2015 was about 17%, compared with about 10% in 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 2015 amounted to approximately NIS 1,157 million, compared with approximately NIS 1,138 million in 2014, an increase of approximately NIS 19 million or about 2%.
The increase in operating expenses in 2015 as opposed to 2014 is mainly a result of the increase in expenses originating from the increase in sales quantities and the increase in provisions for legal claims.
Net operating expenses in Q4 2015 amounted to approximately NIS 303 million, compared with approximately NIS 284 million in Q4 2014, an increase of approximately NIS 19 million or about 7%.
The increase in operating expenses in Q4 2015 arises from capital gains from the disposal of real estate properties recorded in Q4 2014.
3.5 Operating income
3.5.1 Consolidated
3.5.1.1 Reported operating income in 2015 amounted to approximately NIS 991 million, compared with approximately NIS 680 million in 2014, an increase of approximately NIS 311 million or about 46%.
The increase in reported operating income in 2015 compared with 2014 arises from the increase in the gross profit in all the segments.
Reported operating income in Q4 2015 amounted to approximately NIS 217 million, compared with approximately NIS 158 million in Q4 2014, an increase of approximately NIS 59 million or about 37%.
The increase in reported operating income in Q4 2015 as opposed to Q4 2014 arises mainly from the increase in the gross profit of Paz-Refining and Paz-Industries.
B-11 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
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 2015 amounted to approximately NIS 979 million, compared with approximately NIS 631 million in 2014, an increase of approximately NIS 348 million or about 55%.
The increase in adjusted operating income in 2015 compared with 2014 arises mainly from the increase in the gross profit in all the segments.
Adjusted operating income in Q4 2015 amounted to approximately NIS 174 million, compared with approximately NIS 216 million in Q4 2014, a decrease of approximately NIS 42 million or about 19%.
The decrease in the adjusted operating income in Q4 2015 as opposed to Q4 2014 derives from the decrease in the profits of Paz-Refining and Paz-R&W which was partly compensated by the increase in the profits of Paz-Industries.
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 in 2015 amounted to approximately NIS 389 million, compared with approximately NIS 397 million in 2014.
The operating income of Paz-R&W in Q4 2015 amounted to approximately NIS 87 million, compared with approximately NIS 109 million in Q4 2014, a decrease of approximately NIS 22 million or about 20%.
The decrease in the operating income of Paz-R&W in Q4 2015 compared with Q4 2014 mainly arises from capital gains from the disposal of assets recorded in Q4 2014, partly offset by the increase in quantities sold in stations.
3.5.3 Paz-Industries
The operating income of Paz-Industries in 2015 amounted to approximately NIS 218 million, compared with approximately NIS 178 million in 2014, an increase of approximately NIS 40 million or about 22%.
The operating income of Paz-Industries in Q4 2015 amounted to approximately NIS 63 million compared with approximately NIS 47 million in Q4 2014, an increase of approximately NIS 16 million or about 34%.
The increase in operating income in Paz-Industries in the Reporting Periods compared to the corresponding periods of last year is mainly due to the increase in the profits of Pazgas and Pazkar.
3.5.4 Paz-Refining
3.5.4.1 The reported operating income of Paz-Refining in 2015 amounted to approximately NIS 491 million, compared with approximately NIS 212 million in 2014, an increase of approximately NIS 279 million. The increase arises mainly from the increase in the refining margin and the revaluation of 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 Q4 2015 amounted to approximately NIS 101 million, compared with approximately NIS 32 million in Q4 2014, an increase of approximately NIS 69 million arising mainly from the increase in the refining margin, see information in the table in paragraphs 3.3.5 3.5.5 below.
B-12 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
3.5.4.2 The adjusted operating income of Paz-Refining in 2015 amounted to approximately NIS 479 million, compared with approximately NIS 163 million in 2014, an increase of approximately NIS 316 million which arises mainly from the increase in the adjusted refining margin, the increase in produced quantities and the revaluation of the dollar exchange rate in relation to the NIS.
The adjusted operating income of Paz-Refining in Q4 2015 amounted to approximately NIS 58 million, compared with approximately NIS 90 million in Q4 2014, a decrease of approximately NIS 32 million arising mainly from the decrease in intermediate distillate margins.
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 demonstrates the trends in ordinary operations without such effects.
Paz- Paz- Unallocated Paz-R&W Industries Refining expenses Total NIS in millions 2015 Reported operating income (loss) in 2015 389 218 491 (107) 991 Expenses (income) from timing differences in respect of inventory hedges (1) - - 7 - 7 Classification of financial income (expenses) in respect of inventory credit (2) --(14) - (14) Expenses (income) from provision for impairment of inventory to net realizable value (3) --(76) - (76) Losses (gains) of economically unhedged inventories (5) - - 71 - 71 Adjusted operating income (loss) in 2015 389 218 479 (107) 979 2014 Reported operating income (loss) in 2014 397 178 212 (107) 680 Expenses (income) from timing differences in respect of inventory hedges (1) --(160) - (160) Classification of financial income (expenses) in respect of inventory credit (2) --(150) - (150) Expenses (income) from provision for impairment of inventory to net realizable value (3) - - 109 - 109 Effect of full inventory hedges (4) - - 44 - 44 Losses (gains) of economically unhedged inventories (5) - - 108 - 108 Adjusted operating income (loss) in 2014 397 178 163 (107) 631 2013 Reported operating income (loss) in 2013 391 164 (201) (100) 254 Expenses (income) from timing differences in respect of inventory hedges (1) - - 81 - 81 Classification of financial income (expenses) in respect of inventory credit (2) - - 133 - 133 Expenses (income) from provision for impairment of inventory to net realizable value (3) --(34) - (34) Effect of full inventory hedges (4) - - 81 - 81 Adjusted operating income (loss) in 2013 391 164 60 (100) 515
B-13 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Paz- Paz- Unallocated Paz-R&W Industries Refining expenses Total NIS in millions Q4 2015 Reported operating income (loss) in Q4 2015 87 63 101 (34) 217 Expenses (income) from timing differences in respect of inventory hedges (1) --(94) - (94) Classification of financial income (expenses) in respect of inventory credit (2) --(9) - (9) Expenses (income) from provision for impairment of inventory to net realizable value (3) - - 26 - 26 Losses (gains) of economically unhedged inventories (5) - - 34 - 34 Adjusted operating income (loss) in Q4 2015 87 63 58 (34) 174 Q4 2014 Reported operating income (loss) in Q4 2014 109 47 32 (30) 158 Expenses (income) from timing differences in respect of inventory hedges (1) --(43) - (43) Classification of financial income (expenses) in respect of inventory credit (2) --(116) - (116) Expenses (income) from provision for impairment of inventory to net realizable value (3) - - 117 - 117 Losses (gains) of economically unhedged inventories (5) - - 100 - 100 Adjusted operating income (loss) for Q4 2014 109 47 90 (30) 216
(1) Expenses (income) deriving from hedging transactions on the prices of crude oil, classified as speculative in accordance with IFRS.
(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/reversal of 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.
B-14 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
3.6 Operating income before depreciation and amortization (EBITDA)
3.6.1 The reported EBITDA in 2015 amounted to approximately NIS 1,387 million, compared with approximately NIS 1,083 million in 2014, an increase of approximately NIS 304 million or about 28%.
The reported EBITDA in Q4 2015 amounted to approximately NIS 316 million, compared with approximately NIS 261 million in Q4 2014, an increase of approximately NIS 55 million or about 21%.
3.6.2 After neutralizing the special effects, the adjusted EBITDA in 2015 amounted to approximately NIS 1,375 million, compared with approximately NIS 1,034 million in 2014, an increase of approximately NIS 341 million or about 33%.
The adjusted EBITDA in Q4 2015 amounted to approximately NIS 273 million, compared with approximately NIS 319 million in Q4 2014, a decrease of approximately NIS 46 million or about 14%.
3.7 Financial expenses, net
3.7.1 Net financial expenses in 2015 amounted to approximately NIS 79 million, compared with approximately NIS 430 million in 2014, a decrease of approximately NIS 351 million.
Net financial income in Q4 2015 amounted to approximately NIS 1 million, compared with net financial expenses of approximately NIS 151 million in Q4 2014, a decrease of approximately NIS 152 million.
The decrease in net financial expenses in the Reporting Periods compared with the corresponding periods of last year mainly arises from expenses in respect to foreign currency hedges and from the effect of exchange rate differences of the dollar in relation to the NIS on inventories recorded in corresponding periods of last year.
See additional information in paragraph 3.3.7 above and in Note 30.4.2 to the financial statements as of December 31, 2015.
3.7.2 After neutralizing the financial items mentioned above and set out in the table below, the adjusted financial expenses in 2015 amounted to approximately NIS 176 million, compared with approximately NIS 141 million in 2014, an increase of approximately NIS 35 million.
The main increase in adjusted financial expenses in 2015 compared with 2014 is due to expenses in respect of dollar economic hedges recorded in 2014. See details in Note 30.4.2 to the financial statements as of December 31, 2015.
Adjusted financial expenses in Q4 2015 amounted to approximately NIS 16 million, compared with approximately NIS 34 million in Q4 2014, a decrease of approximately NIS 18 million.
B-15 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 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 allows a better analysis of the financial expenses in the Reporting Periods compared with the corresponding periods of last year and express ordinary financial costs:
Difference between 2014 and 2015 2014 Difference 2013 2013 NIS in millions Reported net financial expenses 79 430 (351) 51 379 Income (expenses) from adjustment to fair value of debentures and IRS transactions according to IFRS 9 (1) -4(4) (6) 10 Income (expenses) from exchange rate differences on unrealized inventory (2) 9 (41) 50 (23) (18) Income (expenses) from future foreign currency hedges (4) 102 (102) 204 - (102) Classification of financial income (expenses) in respect of inventory credit (3) (14) (150) 136 133 (283) Adjusted financial expenses 176 141 35 155 (14)
Q4 2015 Q4 2014 Difference NIS in millions Reported net financial expenses (income) (1) 151 (152) 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) 12 45 (33) Income (expenses) from future foreign currency hedges (4) 14 (48) 62 Classification of financial income (expenses) in respect of inventory credit (3) (9) (116) 107 Adjusted financial expenses 16 34 (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.
(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, 2015.
B-16 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
3.8 The Company's share of the results of companies accounted for at equity
The Group's share of results of companies accounted for at equity is immaterial.
3.9 Income tax
3.9.1 Income tax in 2015 amounted to a tax expense of approximately NIS 193 million, compared with approximately NIS 77 million in 2014, an increase of approximately NIS 116 million.
Income tax in Q4 2015 amounted to a tax expense of approximately NIS 44 million, compared with approximately NIS 13 million in Q4 2014, an increase of approximately NIS 31 million.
The increase in the reported tax expense in the Reporting Periods compared with the corresponding periods of last year mainly stems from the increase in the reported pre-tax income.
The reported effective tax rate in 2015 was about 21%, compared with about 31% in 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 2015 amounted to approximately NIS 177 million compared with approximately NIS 113 million in 2014, an increase of approximately NIS 64 million.
The increase in the adjusted tax expense in 2015 compared with 2014 stems from the increase in the adjusted pre-tax income.
Adjusted tax expenses in Q4 2015 amounted to approximately NIS 34 million compared with approximately NIS 39 million in Q4 2014, a decrease of approximately NIS 5 million.
3.10 Net income
3.10.1 Reported net income (excluding non-controlling interests) in 2015 amounted to approximately NIS 716 million, compared with reported net income of approximately NIS 172 million in 2014, an increase of approximately NIS 544 million or about 316%.
The reported net income (excluding non-controlling interests) in Q4 2015 amounted to approximately NIS 173 million, compared with reported net loss of approximately NIS 7 million in Q4 2014, an increase of approximately NIS 180 million.
The increase in reported net income in the Reporting Periods compared with the corresponding periods of last year derives from the increase in the reported operating income and the decrease in reported financial expenses.
3.10.2 After neutralizing certain effects as shown in the table below, the adjusted net income in 2015 amounted to approximately NIS 623 million compared with adjusted net income of approximately NIS 376 million in 2014, an increase of approximately NIS 247 million or about 66%.
The increase in adjusted net income in 2015 compared with 2014 derives from the increase in the profits of Paz-Refining.
The adjusted net income in Q4 2015 amounted to approximately NIS 123 million compared with adjusted net income of approximately NIS 142 million in Q4 2014, a decrease of approximately NIS 19 million or about 13%.
B-17 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
The decrease in adjusted net income in Q4 2015 compared with Q4 2014 mainly derives from the increase in the profits of the Refining and R&W Divisions.
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, allows a better analysis of the Group's business results in the Reporting Periods compared with the corresponding periods of last year and demonstrates the trends underlying the Group's operating activities:
Difference NIS millions (net of tax effect) 2015 2014 Difference 2013 2014-2013 Net income in the statement of income 716 172 544 110 62 Expenses (income) from timing differences in respect of inventory hedges (1) 6 (134) 140 68 (202) Expenses (income) in respect of provision for impairment of inventory to net realizable value (4) (65) 93 (158) (29) 122 Loss (gain) from adjustment to fair value of debentures and IRS transactions according to IFRS 9 (2) - (3) 3 4 (7) Expenses (income) from exchange rate differences on unrealized inventory (3) (8) 34 (42) 20 14 Expenses (income) from future foreign currency hedges (7) (86) 86 (172) - 86 Effect of hedges (5) -37(37) 68 (31) Losses (gains) on economically unhedged inventory (6) 60 91 (31) - 91 Expenses (income) in respect of deferred tax due to change in tax rate --- 30 (30) Adjusted net income less the above effects 623 376 247 271 105
NIS millions (net of tax effect) Q4 2015 Q4 2014 Difference Net income (loss) in the statement of income 173 (7) 180 Expenses (income) from timing differences in respect of inventory hedges (1) (79) (36) (43) Expenses (income) in respect of provision for impairment of inventory to net realizable value (4) 22 99 (77) Loss (gain) from adjustment to fair value of debentures and IRS transactions according to IFRS 9 (2) - (1) 1 Expenses (income) from exchange rate differences on unrealized inventory (3) (10) (38) 28 Expenses (income) from future foreign currency hedges (7) (12) 41 (53) Losses (gains) on economically unhedged inventory (6) 29 84 (55) Adjusted net income less the above effects 123 142 (19)
Note: the tax effect on the adjustments in 2015 was calculated mainly according to the tax rate applicable to Paz Ashdod, which is 16%.
B-18 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 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.
(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. For more details see also paragraph 3.7.2, Note (1) above.
(3) The neutralization of exchange rate differences on liabilities relating to unrealized inventory as of the statement of financial position date.
(4) Provision/reversal of 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, 2015.
4. Financial position
The Company's consolidated statement of financial position as of December 31, 2015 amounted to approximately NIS 10,442 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 December 31, 2015 amounted to approximately NIS 3,044 million, compared with approximately NIS 3,444 million as of December 31, 2014, a decrease of approximately NIS 400 million.
The decrease in current assets derives mainly from a decrease of approximately NIS 170 million in trade receivables mainly following the decrease in fuel prices and a decrease of approximately NIS 113 million in assets held for sale following the sale of assets and a decrease in cash and cash equivalents of approximately NIS 80 million.
The balance of trade receivables as of December 31, 2015 amounted to approximately NIS 1,619 million, which includes balances of over NIS 400 million with respect to indirect taxes (VAT and excise tax).
4.1.2 Total current assets as of December 31, 2015 constitute about 29% of the total statement of financial position, compared with about 33% in the statement of financial position as of December 31, 2014.
B-19 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
4.2 Non-current assets
4.2.1 Total non-current assets as of December 31, 2015 amounted to approximately NIS 7,398 million, compared with approximately NIS 7,042 million as of December 31, 2014, an increase of approximately NIS 356 million. The increase derives mainly from the placement of a long-term bank deposit of approximately NIS 550 million as part of the Company's preparations for the repayment of debentures (series C) in 2019 (see details in Note 7d to the financial statements) and an increase in long-term receivables of approximately NIS 93 million arising from future receipts from the sale of assets in 2015 against a decrease in fixed assets and intangible assets of approximately NIS 175 million due to excess current depreciation over investments in the period, a decrease of approximately NIS 84 million from the reclassification of income receivable from the State to current assets and a decrease in deferred tax assets totaling approximately NIS 27 million due to the utilization of losses for tax purposes.
4.2.2 Total non-current assets as of December 31, 2015 constitute about 71% of the total statement of financial position, compared with about 67% of the total statement of financial position as of December 31, 2014.
4.3 Current liabilities
4.3.1 Current liabilities as of December 31, 2015 amounted to approximately NIS 2,877 million, compared with approximately NIS 3,226 million as of December 31, 2014, a decrease of approximately NIS 349 million. The decrease derives mainly from the decrease in trade payables in the amount of approximately NIS 786 million as a result of the drop in oil prices, which was partly offset by the increase in the balance of short-term loans in a total of approximately NIS 286 million and a dividend payable in the amount of approximately NIS 170 million.
4.3.2 Current liabilities as of December 31, 2015 constitute about 27% 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 inventory less trade payables) as of December 31, 2015 amounted to approximately NIS 1,105 million, compared with approximately NIS 523 million as of December 31, 2014. The increase in working capital of approximately NIS 582 million derives mainly from a significant decrease in trade payables as a result of the drop in oil prices.
The accounting working capital (current assets less current liabilities) as of December 31, 2015 amounted to approximately NIS 167 million, compared with approximately NIS 218 million as of December 31, 2014.
4.5 Non-current liabilities
4.5.1 Non-current liabilities as of December 31, 2015 amounted to approximately NIS 4,258 million, compared with approximately NIS 4,241 million as of December 31, 2014.
4.5.2 Non-current liabilities as of December 31, 2015 constitute about 41% of the total statement of financial position, compared with about 40% of the total statement of financial position as of December 31, 2014.
B-20 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
4.6 Equity
4.6.1 Equity attributable to the equity holders of the Company as of December 31, 2015 amounted to approximately NIS 3,297 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 287 million derives from an addition of approximately NIS 716 million to income in 2015. The increase was partly offset by dividends declared and paid in 2015 in the amount of NIS 420 million and the repurchase of shares in the amount of approximately NIS 9 million. See details of the plan for the repurchase of shares in paragraph 18.1 below and in paragraph 1.3.2 to Chapter A - the Description of the Company's Business.
4.6.3 Total equity as of December 31, 2015 constitutes about 32% of the total statement of financial position, compared with about 29% of the total statement of financial position as of December 31, 2014.
5. Financing sources
5.1 The average scope of loans and debentures, net in 2015 amounted to approximately NIS 4.7 billion, compared with approximately NIS 5.1 billion in 2014, a decrease of approximately NIS 0.4 billion.
See details of debentures in Appendix B below.
As of December 31, 2015, the scope of short-term bank credit (including current maturities) amounted to approximately NIS 0.5 billion. The average scope of short-term bank credit amounted to approximately NIS 0.9 billion.
The total cash flow debt (bank loans and debentures) as of December 31, 2015 approximates NIS 4,380 million (excluding accrued interest). The total carrying amount of this debt amounts to approximately NIS 4,387 million. The difference mainly arises from premiums, accrued interest and non-cash flow expenses in respect of issuance of debentures.
The Group's net financial debt balance for accounting purposes less cash balances and long-term deposits (of approximately NIS 60 million and NIS 550 million, respectively) approximates NIS 3,777 million as of the report date.
5.2 As of December 31, 2015 and as of the report date, the Company has non-binding credit facilities from financial institutions.
5.3 The average scope of customer credit in 2015 totaled approximately NIS 1.8 billion. The average scope of supplier credit in 2015 totaled approximately NIS 1.9 billion. A portion of the supplier credit bears market interest for the short term.
5.4 After the statement of financial position date, on February 2, 2016, the Company issued debentures for net proceeds (less issuance expenses) of approximately NIS 682 million. See details in Note 14.6.2 to the financial statements as of December 31, 2015.
B-21 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
6. Liquidity
6.1 The current ratio as of December 31, 2015 was 1.1, similarly to December 31, 2014.
6.2 On April 1, 2015, Standard & Poor's (S&P) Maalot ("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 2015 amounted to approximately NIS 847 million, compared with cash flows provided by operating activities of approximately NIS 740 million in 2014.
The main change in cash flows from operating activities in 2015 compared with 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 2015 amounted to approximately NIS 698 million, compared with cash flows provided by investing activities of approximately NIS 327 million in 2014.
The main change in cash flows from investing activities in 2015 compared with 2014 is a result of the investment in long-term bank deposits and the exercise of IRS derivatives on debentures in 2014.
6.5 Cash flows used in financing activities in 2015 amounted to approximately NIS 208 million, compared with cash flows used in financing activities of approximately NIS 2,855 million in 2014.
The main change in cash flows from financing activities in 2015 compared with 2014 is a result of the repayment of a debt in 2014.
6.6 The balance of cash and cash equivalents as of December 31, 2015 amounted to approximately NIS 60 million, a decrease of approximately NIS 80 million compared with December 31, 2014.
B-22 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
7. Information on sensitivities of instruments to changes in market factors
The following tables summarize the sensitivity (NIS in millions):
Gain (loss) from the changes 10% 5% 10% 5% increase in increase in decrease in decrease in exchange exchange exchange exchange rate rate rate rate
Changes in US dollar/NIS exchange rate 3 2 (2) (3)
Gain (loss) from the changes 10% 5% 10% 5% increase in increase in decrease in decrease in interest interest interest interest rate rate rate rate
Changes in NIS interest (3) (2) 2 3
Gain (loss) from the changes 10% 5% 10% 5% increase in increase in decrease in decrease in oil price oil price oil price oil price
Changes in market price (inventory, crude oil and related products) 32 16 (16) (32)
Gain (loss) from the changes 3% 1% 3% 1% increase in increase in decrease in decrease in CPI CPI CPI CPI
Changes in Israeli CPI 3 1 (1) (3)
* Represents amounts lower than NIS 0.5 million.
For detailed information regarding the sensitivity to sensitive instruments on the basis of changes in market factors – see appendix A herein.
8. Remuneration of senior officers
8.1 For details of the approval of a restricted stock unit (RSU)-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 Note 21 to the financial statements for 2015.
8.2 For details of the approval of a bonus and salary increments to senior officers, see paragraph 6.1.6.2 to Chapter A - the Description of the Company's Business and Note 34 to the financial statements for 2015.
8.3 For details of the amendment of the employment terms of the Company's CEO, see Note 34 to the financial statements for 2015.
8.4 The Board of Directors has examined the issue and determined that the remuneration paid to officers and interested parties in the Company in 2015, as detailed in paragraph 8 to Chapter D to the periodic Report is commensurate with the remuneration policy and is fair and reasonable under the circumstances.
B-23 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
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 2015. 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 2015, 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 Note 30 to the financial statements for 2015.
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 and based on the policy determined by the Company's Board as described in Note 30 to the financial statements for 2015.
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 audit/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 2015 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 December 31, 2015 involved two meetings of the Committee, held on March 14, 2016 and March 16, 2016 (in which the Committee evaluated the application of its recommendations from March 14, 2016).
B-24 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
In the meetings, the Committee discussed the analyses of the performance of the Company in 2015, the draft of the financial statements (all parts of the financial statements), the completeness and adequacy of the disclosures in the financial statements, the main accounting policy adopted, the accounting treatment applied, significant estimates and test of indicators of potential impairment of cash generating units, including the assumptions and estimates inherent in them, 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 2015. 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 March 16, 2016, the Board of Directors discussed the recommendations of the Committee and approved the financial statements of the Company as of December 31, 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.
11. Disclosure regarding the internal auditor
11.1 The Company's internal auditor is Mrs. Pninit Colin-Mass who has served in this position on a full- time basis since July 1, 2013 ("the internal auditor").
The internal auditor serves as the internal auditor of all of the companies of the Group and does not fill any other position. The internal auditor meets all of the conditions required by the provisions of Section 146(B) of the Companies Law and Section 8 of the Internal Audit Law, 1992 ("Internal Audit Law").
The appointment of the internal auditor was approved by the Company's Audit and Finance Committee on June 26, 2013. The considerations supporting her appointment were her education and professional skills and experience in internal auditing in various corporations. Moreover, the internal auditor is well acquainted with the Company and the internal audit functions in the Company in view of her previous position as temporary internal auditor and the roles she professionally fulfilled in the Company's internal audit system.
11.2 The internal auditor is a certified public accountant, has a BA in Economics and Accounting and an MBA in Business Administration from the Hebrew University of Jerusalem. She has extensive experience in internal audits in Israel and abroad.
11.3 The internal auditor reports directly to the Chairman of the Board of Directors and works in coordination with and under the supervision of the Audit and Finance Committee of the Board of Directors (in this paragraph - "the Committee").
11.4 The work plan of the internal audit addresses all Group companies. The plan is on an annual basis and constitutes part of the triennial work plan approved by the Committee. The plan is derived from an assessment of the existing level of risks in accordance with the risk assessment carried out by the internal auditor, including with respect to embezzlement and fraud risks, and is also based on a presentation of the risks assessed by management, from developments in the Company, and from the frequency of the audits that are required for each issue. The plan is submitted by the auditor to the Committee after having first been presented to the CEO and the Chairman of the Board of Directors. The auditor has the leeway to deviate from the work plan by informing the CEO and Chairman of the Board of Directors and may conduct special tests as necessary.
B-25 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
11.5 The scope of the audit in the Reporting Period was about 6,000 hours. This scope was approved by the Committee and is subject to change according to the needs of the Company. The number of audit hours, broken down by segments, is presented in the following table:
Companies/units Audit hours Headquarters, Finance, R&W Division 2,300 Refining and Logistics Division 1,850 Industries Division 1,850
The internal audit work was carried out in accordance with generally accepted professional internal audit standards, in accordance with Section 4(B) of the Internal Audit Law.
11.6 The internal auditor is granted constant and unlimited access to all information systems and data of the Company, in accordance with Section 9 of the Internal Audit Law.
11.7 The audit reports regarding the Company and the subsidiaries are submitted in writing to the CEO, the Chairman of the Board of Directors, and the Committee and are discussed by the Committee. In 2015, the Committee convened seven times to discuss the audit reports.
11.8 The minutes of the Committee's discussions are circulated to all members of the Board of Directors. In 2015, the internal auditor issued 15 audit reports as part of the internal audit work plan.
Regarding audits carried out by the internal auditor with respect to application of the criteria for immaterial transactions and extraordinary transactions with controlling shareholders in the Company see paragraph 10.2.2 to Chapter D - Additional Information about the Corporation.
11.9 In the opinion of the Board of Directors of the Company, the scope, nature, and continuity of the activity of the internal auditor and her work plan are reasonable under the circumstances and are adequate to achieve the objectives of the internal audit of the corporation. The Committee and the internal auditor annually assess the appropriateness of the scope of the internal audit work in the Group.
11.10 The cost of the employment of the internal auditor in 2015 amounted to NIS 620 thousand. This amount includes salary, bonus, social benefits, accrued severance pay, vehicle maintenance expenses and 156 RSUs in keeping with the approval of the Company's share-based payment plan as discussed in paragraph 8.1 above.
In the opinion of the Board of Directors of the Company, the remuneration of the internal auditor is reasonable, as is the practice in similar companies. Therefore, such remuneration and the allocation of 156 RSUs to the internal auditor do not have an effect on the internal auditor's professional judgment.
B-26 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
12. Auditors' fees
Presented below are the work hours and fees of the auditors (NIS in thousands):
2015 2014 No. of No. of Other No. of No. of Other audit Audit non-audit service audit Audit non-audit service hours fee hours fees hours fee hours fees
Auditor Somekh Chaikin 8,185 1,921 795 199 8,100 1,921 385 77
Total Paz Oil Company 8,185 1,921795 199 8,100 1,921 385 77
Subsidiaries Somekh Chaikin 8,684 1,773 820 252 9,518 1,883 809 237 Livai & Livai 14 4 - - 14 4 - - Kesselman & Kesselman 650 50 - - 980 50 - - Kost Forer Gabbay and Kasierer 40 10 - - 132 33 100 25 Stark & Stark 374 80 16 4 368 97 - - Pnini & Pnini - - - - 88 22 - -
Total subsidiaries 9,762 1,917 836 256 11,100 2,089 909 262
Total for the year 17,947 3,838 1,631 455 19,200 4,010 1,294 339
The auditors' fees were finalized between managements of the companies in the Group and the auditors based on the scope of audit work required and past experience, and approved by the Audit and Finance Committee and the Company's Board of Directors.
The other services were mainly rendered in connection with taxes, risk mapping and economic consulting.
13. 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.
14. 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.
15. The Board of Directors of the Company
15.1 Directors possessing accounting and financial skills
As of the date of the report, all members of the Board other than Mrs. Hadar Bino-Shmueli are directors possessing accounting and financial skills in accordance with the provisions of Section 92(A)(12) of the Companies Law and the Skills 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.
15.2 Independent directors
See details of the Company's independent directors and the underlying articles of association in the corporate governance questionnaire in the Chapter D of the Periodic Report.
B-27 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
15.3 Changes in the Board of Directors of the Company and in senior officers
See details in paragraph 15 to Chapter D of the Periodic Report.
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).
On November 26, 2015, a special general meeting of the Company's shareholders approved the appointment of Mr. Shaul Zemach as external director in the Company starting for a three-year term beginning on November 26, 2015. See more information in immediate reports of October 21, 2015 (TASE reference: 2015-01-139341) and November 26, 2015 (TASE references: 2015-01-165651 and 2015-01-165663).
In February 2016, Mr. Gideon Chitayat terminated his service as external director in the Company at the end of nine years of tenure. See more information in an immediate report of February 4, 2016 (TASE reference: 2016-01-023551)
16. The involvement of Paz in the community, social and environmental responsibility and donations
16.1 Alongside business leadership and economic initiatives, the Paz Group is committed to social and environmental responsibility.
16.2 This activity reflects an advanced management perception, which believes that an entity that operates in the community must contribute to the advancement, preservation and improvement of the conditions of the community. Paz views commercial activity that incorporates environmental responsibility as a social value and a strategic goal, and manages such activity as an integral part of its business.
16.3 Paz's activity for the community as part of its involvement in communal life and is expressed on a number of levels:
16.3.1 Activity for the community, special projects for children and support of underprivileged populations. This activity is financed out of the budget of donations, which is distributed by the Group's Donations Committee on the basis of predetermined criteria.
16.3.2 Social activity - in 2015, the Company's employees took part in various projects such as special camps for children with cancer, preparing and distributing sandwiches to children in need and donation of goods to different associations.
16.3.3 In 2015, the Company completed the accessibility adjustment of 110 filling stations for the disabled. The accessibility adjustment process was carried out with the assistance of consultants from the "Israel Accessibility" Society.
16.3.4 The overall donations and sponsorships made by the Group in 2015 amounted to approximately NIS 544 thousand. In 2015, the scope of donations to a particular organization did not exceed NIS 50 thousand, excluding one association which is not related to the Company, any of the directors, the CEO, the controlling shareholder in the Company or his relatives.
B-28 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
16.4 Pursuant to the concept of environmental responsibility, the Group dedicates expenses and investments in the area of environmental quality, as follows:
During 2015, Paz expended and invested an amount of approximately NIS 106 million in favor of the environment, among others for land surveys, land rehabilitation, groundwater rehabilitation, installation of state-of-the-art stage II vapor balance systems and more. The treatment was made as part of a coordinated work plan that was compiled with the Ministry of Environmental Protection.
The Group's books as of December 31, 2015 contain an aggregate provision of approximately NIS 15 million in favor of expenses in respect of rehabilitation of groundwater at stations where contamination was discovered and not paid yet and other environmental protection costs.
Part Four – Disclosure Provisions regarding the Corporation's Financial Reporting
17. Critical accounting estimates
17.1 For details of critical accounting estimates, see Note 2.5 to the annual financial statements as of December 31, 2015.
17.2 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 below.
Part Five – Repurchases
18. Repurchase of debentures by the Company
18.1 Repurchase of debentures by the Company
The Company has a policy for the repurchase of Company debentures.
On November 23, 2015, the Company's Board extended the repurchase plan of debentures (series C) and debentures (series D) effective from January 1, 2016 through December 31, 2016. According to the repurchase plan, the Company may purchase, from time to time and at different scopes, debentures of the Company in a maximum aggregate of NIS 300 million.
To date, the Company and/or a subsidiary of the Company have not purchased any debentures (series C) and/or debentures (series D).
18.2 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 1.3.3 to Chapter A - the Description of the Company's Business and Note 21.4 to the financial statements as of December 31, 2014.
B-29 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Part Six – Designated Disclosure to Debenture Holders
19. Liability certificates
19.1 For information regarding the Company's liability certificates, see Appendix B herein.
Part Seven – Additional Issues
20. Drawing of attention in the auditors' report on the financial statements
In the auditors' report as of March 16, 2016, the auditors of the Company draw attention to the content of Note 33.1.2 to the financial statements as of December 31, 2015 regarding a claim and a motion to recognize the claim as a class action. The Company's management, based on the opinion of its legal counsel, estimates that at this stage the effect of the aforementioned claim on the financial statements, if any, cannot be assessed and therefore no provision was recorded in its respect in the financial statements.
21. Determination of criteria for immaterial transactions and extraordinary transactions with controlling shareholders
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 to Chapter D - Additional Information about the Corporation as of December 31, 2015.
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 2015 and for the efforts dedicated by them toward the advancement of the Company.
Zadik Bino – Chairman of the Board Yona Fogel – CEO
Date: March 16, 2016
B-30 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Appendix A
The following tables present the sensitivity to sensitive instruments on the basis of changes in market factors (NIS in millions).
Sensitivity to changes in the dollar/NIS exchange rate**
Sensitive instruments Gain (loss) from change Gain (loss) from change Increase of Decrease of 10% in 5% in 5% in 10% in exchange rate exchange rate Fair value exchange rate exchange rate
Exchange rate of the dollar (in NIS) 4.292 4.097 3.902 3.707 3.512
Cash 2118(1) (2) Other accounts receivable 29 15 292 (15) (29) Inventories 71 36 714 (36) (71) Long-term loans and receivables ** 1* * Trade payables (113) (57) (1,133) 57 113 Other accounts payable (2) (1) (19) 1 2 Forward oil transactions 16 8 * (8) (16) Asset in respect of rental contracts ** 2* * Liability in respect of rental contracts * * (8) * * 3 2 (133) (2) (3)
* Less than NIS 0.5 million. ** Includes sensitivity to immaterial changes in other currencies.
Sensitivity to changes in NIS interest
Sensitive instruments Gain (loss) from change Gain (loss) from change Increase of Decrease of 10% in interest 5% in interest 5% in interest 10% in interest rate rate Fair value rate rate (Interests used for discounting)
Long-term receivables (3.5%) (3) (2) 224 2 3 Gas deposits (3.5%) **(179) * * Paz Ashdod debentures * * (5) * * (3) (2) 40 2 3
* Less than NIS 0.5 million. ** Sensitivity to changes in the dollar interest is not presented due to immateriality.
B-31 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Appendix A (cont.)
Sensitivity to changes in market prices (inventory, crude oil and distillates)
Sensitive instruments Gain (loss) from change Gain (loss) from change Increase of Decrease of 10% in oil price 5% in oil price Fair value 5% in oil price 10% in oil price
Inventory of oil and distillates* 65 32 652 (32) (65) Futures ** (33) (16) 8 16 33 32 16 660 (16) (32)
* Excluding inventory, the price of which has been determined. ** Including hedges on future oil purchases.
Sensitivity to changes in the CPI
Sensitive instruments Gain (loss) from change Gain (loss) from change Increase of Decrease of 3% in CPI 1% in CPI Fair value 1% in CPI 3% in CPI
Other accounts receivable 31103(1) (3) Long-term receivables (CPI-linked) 72224(2) (7) Other payables and current taxes (6) (2) (190) 2 6 Long-term liabilities (banks and others) (1) * (47) * 1 Paz Ashdod debentures * * (5) * * 3 1 85 (1) (3)
* Less than NIS 0.5 million.
Sensitivity of the carrying amount of the liability to changes in debentures bearing variable interest
Debentures (series C) pay variable interest linked to the Bank of Israel interest rate plus a margin of 2.2%. Debentures (series D) pay variable interest linked to the Bank of Israel interest rate plus a margin of 1.65%.
For details regarding the sensitivity analysis of the carrying amount of the liability in respect of debentures, see Note 30 to the financial statements.
B-32 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 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 31.12.15 terms as of 31.12.15 of 31.12.15 as of 31.12.15 Date of rating Current (NIS in Interest Nominal report (yes / payment payment Linkage (NIS in 31.12.15 (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 AA- 3,117 Variable BoI 1.3% Yes Four times May 25, None 3,117 3,117 3,117 0.2 3,219 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 AA- 752 Variable BoI 1.7% Yes Four times May 31, None 752 752 753 1.1 758 D(3) 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 NIS 15 million and premium of approximately NIS 21 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. (3) For details of the expansion of debentures (series D) after the statement of financial position date, see Note 14.6.2 to the financial statements as of December 31, 2015.
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-.
B-33 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Paz Oil Company Ltd. Report of the Board of Directors on the State of Affairs of the Corporation
Appendix C
Information regarding a material valuation pursuant to Regulation 8B of the Securities Regulations (Periodic and Immediate Reports), 1970
Following is a summary of the information regarding the valuation that served as the basis for determining the values of items in the financial statements:
An indicative valuation of the holdings of the Company in Paz Ashdod Oil Refinery Ltd., for purposes of determining whether there was an impairment in the goodwill recorded in the financial statements of the Company as a result of the acquisition of 100% of the shares of Paz Ashdod Oil Refinery Ltd., in accordance with the provisions of IAS 36, "Impairment of Assets". According to the valuation, there was no impairment of the aforementioned goodwill.
Details of the valuation:
Identification of subject of valuation Investment in Ashdod oil refinery Date of valuation December 31, 2015 Carrying amount attributed to the NIS 3.8 billion Refining Division, including excess cost (based on the operational assets and liabilities) Value of subject of valuation as NIS 5.5 billion determined in the valuation Identity of appraiser Mr. Uri Cohen, partner in Cognum Financial Consulting Ltd. (formerly: Itzhak Swary Ltd.), CPA (Isr.), BA in Economics and Accounting from the Tel-Aviv University, MBA from the Tel- Aviv University, some 25 years of experience in economic consulting and valuations, including of companies in the energy sector ("the appraiser"). The monetary liability of the appraiser in conducting this work was limited, except in case of a malicious act, to an amount in NIS that is equivalent to thrice the professional fee paid for the valuation. The Company undertook to indemnify the appraiser for reasonable expenses, as well as in respect of an award by the court to a third party in excess of the liability limit that may be caused to the appraiser as a result of this economic work. Partners in Cognum Financial Consulting Ltd., including Uri Cohen, hold shares in Paz in an amount that is immaterial to them. There is no dependency between the appraiser and the Company. Valuation model used by the appraiser IAS 36, measurement of the value of the operations of the Refinery using the discounted cash flow method (DCF). Principal assumptions of the valuation Refining margins based on multiannual forecasts prepared by KBC, an international consulting firm in the field of energy, for seven years. The decrease in the valuation compared to last year mainly arises from the decrease in the projected profit from the power stations in the representative year. WACC after tax used in the valuation was 11.5%, similarly to 2014, reflecting a dollar debt price of about 4.5%-5.5% and a return on equity of about 17%, assuming normative leverage of 40%-45% of the value of assets. Dollar amounts in real terms based on an exchange rate of $ 1=NIS 3.902. Sensitivity analysis Sensitivity to cost of equity was also examined. Even with the addition of 1% to WACC, the amount of the valuation exceeds the carrying amount.
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34 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 C. Consolidated Financial Statements WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0
PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2015
INDEX
Page
Auditors' Report to the Shareholders Regarding the Audit of Components of Internal Control over Financial Reporting 2 - 3
Auditors' Report to Shareholders 4
Consolidated Statements of Financial Position 5 - 6
Consolidated Statements of Income 7
Consolidated Statements of Comprehensive Income 8
Consolidated Statements of Changes in Equity 9 - 11
Consolidated Statements of Cash Flows 12 - 14
Notes to Consolidated Financial Statements 15 - 125
WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0
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
Auditors' Report to the Shareholders of Paz Oil Company Limited Regarding the Audit of Internal Control Components over Financial Reporting in accordance with paragraph 9b(c) of the Israeli Securities Regulations (Periodic and Immediate Reports), 1970
We have audited internal control components over financial reporting of Paz Oil Company Limited and subsidiaries (together "the Company") as of December 31, 2015. These control components were determined as explained in the following paragraph. The Company's Board of Directors and Management are responsible for maintaining effective internal control over financial reporting and for their assessment of the effectiveness of the Company's internal control components over financial reporting accompanying the periodic report as of the above date. Our responsibility is to express an opinion on the Company's internal control components over financial reporting based on our audit.
Internal control components over financial reporting audited by us were determined in accordance with Auditing Standard 104 of the Institute of Certified Public Accountants in Israel, "Audit of Internal Control Components over Financial Reporting" and its amendments ("Auditing Standard 104"). These components are: (1) entity-level controls, including controls over the preparation and closure of the financial reporting process and information technology general controls; (2) controls over the sales process; (3) controls over the inventory process; (4) controls over the fixed assets process (all these are named together "audited control components").
We conducted our audit in accordance with Auditing Standard 104. This standard requires us to plan and perform the audit to identify the audited control components and to obtain reasonable assurance about whether these control components were effective in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, identifying the audited control components, assessing the risk that a material weakness exists in the audited control components, and testing and evaluating the design and operating effectiveness of those control components based on the assessed risk. Our audit, regarding those control components, also included performing such other procedures as we considered necessary in the circumstances. Our audit referred only to the audited control components, as opposed to internal control over all significant processes related to financial reporting; therefore our opinion refers to the audited control components only. Our audit also did not refer to mutual effects between audited control components and unaudited control components; therefore our opinion does not take into account these possible effects. We believe that our audit provides a reasonable basis for our opinion in the context described above.
Because of its inherent limitations, internal control over financial reporting as a whole, and internal control components in particular, may not prevent or detect misstatements. Also, projections of any current evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective audited control components as of December 31, 2015.
Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of KPMG International, a Swiss cooperative. C-2
WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0
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
We have also audited, in accordance with generally accepted auditing standards in Israel, the Company's consolidated financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 and our report dated March 16, 2016 expressed an unqualified opinion on these financial statements and drew attention to Note 33.1.2 to the financial statements regarding a claim and a motion to approve the claim as a class action, based on our audits and the reports of the other auditors.
Somekh Chaikin Certified Public Accountants
March 16, 2016
Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of KPMG International, a Swiss cooperative. C-3
WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0
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
AUDITORS' REPORT TO THE SHAREHOLDERS OF PAZ OIL COMPANY LIMITED
We have audited the accompanying consolidated statements of financial position of Paz Oil Company Ltd. ("the Company") as of December 31, 2015 and 2014, and the consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Board of Directors and Management of the Company. Our responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of certain investees accounted for at equity the investment in which totals approximately NIS 28,870 thousand and approximately NIS 28,768 thousand as of December 31, 2015 and 2014, respectively, and the Group's share in the earnings of which totals approximately NIS 242 thousand, approximately NIS 183 thousand and approximately NIS 1,054 thousand in the years ended as of December 31, 2015, 2014 and 2013, respectively. The financial statements of those companies were audited by other auditors whose reports thereon were furnished to us, and our opinion, insofar as it relates to the amounts included in respect of those companies, is based on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards in Israel, including standards prescribed by the Auditors' Regulations (Mode of Auditor' Performance), 1973. Such standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Board of Directors and Management of the Company, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2015 and 2014, and their results of operations, changes in equity and cash flows for each of the three years in the period which ended December 31, 2015 and in accordance with International Financial Reporting Standards (IFRS) and the provisions of the Securities Regulations (Annual Financial Statements), 2010.
We have also audited, in accordance with Auditing Standard 104 of the Institute of Certified Public Accountants in Israel, "Audit of Internal Control Components over Financial Reporting", the components of the Company's internal control over financial reporting as of December 31, 2015, and our report dated March 16, 2016 expressed an unqualified opinion on the effectiveness of such components.
Without qualifying our opinion above, we draw attention to the contents of Note 33.1.2 to the financial statements regarding a claim and a motion to approve the claim as a class action. In the opinion of the Company's Management, based on the opinion of its legal counsel, at this stage it is not possible to assess the impact of the claim, if any, on the financial statements and, therefore, no provision was made in respect thereof.
Somekh Chaikin Certified Public Accountants March 16, 2016
Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of KPMG International, a Swiss cooperative. C-4
WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 2015 2014 Note NIS in millions
Assets Cash and cash equivalents 6 60 140 Trade receivables 7 1,619 1,789 Other accounts receivable 7 121 206 Income receivable from the State 7b 86 - Inventories 8 1,041 1,075 Other investments 10 86 83 Current tax assets 28 8 15 Asset held for sale 12b 23 136
Total current assets 3,044 3,444
Income receivable from the State 7b - 84 Trust deposit for employee benefits 7c 69 70 Long-term bank deposits 7d 550 - Long-term receivables and loans granted 7 355 262 Investment property 12a 31 32 Investments in investees accounted for at equity 9 29 30 Loans to investees accounted for at equity 9 7 5 Fixed assets, net 11 5,513 5,657 Intangible assets, net 13 808 839 Prepaid lease fees 32.2 23 23 Deferred tax assets 28 13 40
Total non-current assets 7,398 7,042
Total assets 10,442 10,486
The accompanying notes are an integral part of the consolidated financial statements.
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Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
December 31, 2015 2014 Note NIS in millions
Liabilities Short-term loans and credit, including current maturities of debentures 14 513 227 Trade payables 15 1,555 2,341 Other accounts payable 16 553 622 Current tax liabilities 28 38 5 Provisions 17 48 31 Dividend payable 170 -
Total current liabilities 2,877 3,226
Debentures 14 3,874 3,877 Other long-term liabilities 14 50 53 Employee benefits 18 55 51 Deferred tax liabilities 28 279 260
Total non-current liabilities 4,258 4,241
Total liabilities 7,135 7,467
Equity 19
Non-controlling interests 10 9
Share capital 194 194 Treasury shares (189) (180) Capital reserves 1,830 1,830 Other capital reserves - - Retained earnings 1,808 1,512
3,643 3,356
Capital reserve from translation differences (346) (346)
Total equity attributable to equity holders of the Company 3,297 3,010
Total equity 3,307 3,019
Total liabilities and equity 10,442 10,486
The accompanying notes are an integral part of the consolidated financial statements.
Zadik Bino Yona Fogel Sharona Novak Chairman of the Board Chief Executive Officer Chief Financial Officer
Date of approval of the financial statements: March 16, 2016.
C-6 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2015 2014 2013 Note NIS in millions
Revenues 22 12,860 18,513 19,635 Cost of sales 23 10,712 16,695 18,214
Gross profit 2,148 1,818 1,421
Selling and marketing expenses 24 964 977 982 General and administrative expenses 25 201 179 202 Other income, net 26 (8) (18) (17)
Total operating expenses 1,157 1,138 1,167
Operating income 991 680 254
Financial income 39 38 186 Financial expenses 118 468 237
Financial expenses, net 27 79 430 51
Share of earnings of investees accounted for at equity 9 - - 1
Income before income tax 912 250 204
Income tax expenses 28 193 77 91
Net income for the period 719 173 113
Attributable to: Equity holders of the Company 716 172 110 Non-controlling interests 3 1 3
Net income for the period 719 173 113
Net earnings per share attributable to equity holders of the Company Basic net earnings per share (in NIS) 20 70.52 16.93 10.82 Diluted net earnings per share (in NIS) 20 70.48 16.92 10.82
The accompanying notes are an integral part of the consolidated financial statements.
C-7 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31, 2015 2014 2013 NIS in millions
Net income for the period 719 173 113
Items of other comprehensive income (loss) 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 - 9 (29) Re-measurement of defined benefit plan (1) 1 1 Taxes in respect of items of other comprehensive income (loss) not carried to profit and loss - (2) 7
Total other comprehensive income (loss) for the period not carried to profit and loss, net of taxes (1) 8 (21)
Total comprehensive income for the period 718 181 92
Total comprehensive income attributable to: Equity holders of the Company 715 180 89 Non-controlling interests 3 1 3
Total comprehensive income for the period 718 181 92
The accompanying notes are an integral part of the consolidated financial statements.
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Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Foreign currency Non- Share Capital translation Treasury Retained controlling Total capital reserves reserve shares earnings Total interests equity NIS in millions
Year ended December 31, 2015:
Balance as of January 1, 2015 194 1,830 (346) (180) 1,512 3.010 9 3,019
Total comprehensive income for the period: Net income for the period - - - 716 716 3 719 Other comprehensive loss for the period, net of tax -- - -(1) (1) - (1)
Total comprehensive income for the period - - - - 715 715 3 718
Transactions with owners, recorded directly in equity and distributions to owners: Dividend to non-controlling interests ------(2) (2) Share-based payments -- - -11- 1 Purchase of treasury shares -- - (9) - (9) - (9) Dividend declared and paid -- - -(250) (250) - (250) Dividend declared (170) (170) - (170)
Balance as of December 31, 2015 194 1,830 (346) (189) 1,808 3,297 10 3,307
The accompanying notes are an integral part of the consolidated financial statements.
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Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Capital reserve from net change in fair value of debentures at fair value through profit Foreign or loss currency attributed to Non- Share Capital translation changes in credit Treasury Retained controlling Total capital reserves reserve risk shares earnings Total interests equity NIS in millions
Year ended December 31, 2014:
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 tax -- - 7 -18- 8
Total comprehensive income for the period - - - 7 - 173 180 1 181
Transactions with owners, recorded directly in equity and distributions to owners: Dividend to non-controlling interests ------(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 consolidated financial statements.
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Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Attributable to equity holders of the Company Capital reserve from net change in fair value of debentures at fair value through profit Foreign or loss currency attributed to Non- Share Capital translation changes in credit Treasury Retained controlling Total capital reserves reserve risk shares earnings Total interests equity NIS in millions
Year ended December 31, 2013:
Balance as of January 1, 2013 194 1,830 (346) 15 (180) 1,727 3,240 8 3,248
Total comprehensive income for the period: Net income for the period - - - - - 110 110 3 113 Other comprehensive income (loss) for the period, net of tax -- - (22) -1(21) - (21)
Total comprehensive income for the period -- - (22) - 111 89 3 92
Transactions with owners, recorded directly in equity and distributions to owners: -- - - -2 2 - 2 Share-based payments
Balance as of December 31, 2013 194 1,830 (346) (7) (180) 1,840 3,331 11 3,342
The accompanying notes are an integral part of the consolidated financial statements.
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Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2015 2014 2013 NIS in millions
Cash flows from operating activities:
Net income for the period 719 173 113
Adjustments for: Depreciation and amortization 396 403 388 Capital gain on sale of fixed assets (34) (28) - Capital gain from sale of investee - - (7) Group's share of earnings of investees accounted for at equity - - (1) Share-based payment transactions 1 1 2 Financial expenses, net 79 430 51 Income tax expense 193 77 91
Net income for the period after adjustments 1,354 1,056 637
Decrease in short and long-term trade and other accounts receivable 267 130 208 Decrease in inventories 34 492 452 (Decrease) Increase in trade and other accounts payable (746) (773) 1,416 Increase (Decrease) in provisions and employee benefits 18 (17) (7) Decrease (Increase) in derivative financial instruments in respect of commodities 27 (22) (12)
(400) (190) 2,057
Income tax paid (107) (126) (40)
Net cash provided by operating activities 847 740 2,654
The accompanying notes are an integral part of the consolidated financial statements.
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Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2015 2014 2013 NIS in millions
Cash flows from investing activities:
Purchase of fixed assets (216) (221) (571) Proceeds from sale of fixed assets, investment property and intangible assets 67 39 17 Proceeds from sale of investee - - 7 Tax paid in respect of sale of investee - - (3) Dividend received from investees and other investments 9 7 7 Loans granted to filling station operators, agents, employees, fuel companies and others (12) (4) (6) Repayment of loans granted to filling station operators, agents, employees, fuel companies and others 18 14 16 Investment in intangible assets and prepaid lease expenses (5) (1) (4) Interest received 4 9 17 Placement of long-term deposits in banks (550) - - Exercise of derivatives in respect of interest differences - 484 108 Betterment levy on sale of fixed assets (13) - - Repayment of loan to the Fuel Administration - - 192
Net cash provided by (used in) investing activities (698) 327 (220)
The accompanying notes are an integral part of the consolidated financial statements.
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Chapter C - Financial Statements CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2015 2014 2013 NIS in millions
Cash flows from financing activities:
Issuance of debentures, net of issuance expenses - 743 309 Receipt of long-term loans from financial institutions - - 500 Repayment of long-term loans and from banks and others (201) (306) (204) Dividend to non-controlling interests in subsidiary (2) (3) (1) Increase (Decrease) in short-term bank credit 492 (11) (481) Repayment of debentures (2) (2,061) (445) Dividends paid (250) (500) - Purchase of treasury shares (9) - - Interest paid (108) (239) (200) Linkage differences on repayment of CPI-linked debentures - (441) (73) Repayment of exercised derivatives (128) (37) -
Net cash used in financing activities (208) (2,855) (595)
(Decrease) Increase in cash and cash equivalents (59) (1,788) 1,839 Cash and cash equivalents at beginning of period 140 1,888 54 Effect of exchange rate fluctuations on cash and cash equivalents held in foreign currency (21) 40 (5)
Cash and cash equivalents at end of period 60 140 1,888
The accompanying notes are an integral part of the consolidated financial statements.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 1:- GENERAL
1.1 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 consolidated financial statements of the Company as of December 31, 2015 comprise the financial statements of the Company and its subsidiaries (collectively - "the Group"), and the Group's interests in associates and jointly controlled entities. 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 in and out of 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, and in complementary services and industries. The securities of the Company are listed for trade on the Tel-Aviv Stock Exchange ("TASE").
1.2 Definitions
In these financial statements:
The Company - Paz Oil Company Ltd.
The Group - The Company and its subsidiaries.
Subsidiaries - Companies, including partnerships, whose financial statements are fully consolidated, directly or indirectly, in the financial statements of the Company.
Investees - Subsidiaries and companies, including partnerships or joint ventures, the Company's investment in which is included, directly or indirectly, using the equity method of accounting.
Related party - Within its meaning in IAS 24 (2009), "Related Party Disclosures".
Interested parties - Within their meaning in paragraph (1) of the definition of an "interested party" in Section 1 of the Securities Law, 1968.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 2:- BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS
2.1 Statement of compliance with IFRS
The consolidated financial statements have been prepared by the Group in accordance with International Financial Reporting Standards ("IFRS").
These financial statements have also been prepared in accordance with the Securities Regulations (Annual Financial Statements), 2010.
The consolidated financial statements were authorized for issue by the Company's Board of Directors on March 16, 2016.
2.2 Functional currency and presentation currency
These consolidated financial statements are presented in NIS, which is the Company's functional currency, and have been rounded up to the nearest million, unless stated otherwise. The NIS is the currency that reflects the principal economic environment in which the Company operates.
2.3 Basis of measurement
The consolidated financial statements have been prepared on the historical cost basis except for the following assets and liabilities: derivative financial instruments, financial assets at fair value through profit or loss, inventories, deferred tax assets and liabilities, debentures designated at fair value through profit or loss, provisions, assets and liabilities in respect of employee benefits and investments in associates and joint ventures accounted for at equity.
For additional information regarding the measurement of these assets and liabilities, see Note 3, Significant Accounting Policies.
The carrying amount of non-monetary assets and equity items that were measured on the historical cost basis was adjusted to changes in the CPI until December 31, 2003, since until that date the Israeli economy was considered hyperinflationary.
2.4 Operating cycle
The operating cycle of the Group is one year. As a result, current assets and current liabilities include items that are intended and expected to be disposed of within the normal operating cycle of the Group.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 2:- BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)
2.5 Use of estimates and judgments
2.5.1 The preparation of financial statements in conformity with IFRS requires the management of the Company and of the investees to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. It is hereby clarified that actual results may differ from these estimates.
The preparation of accounting estimates used in the preparation of the Company's financial statements requires the management of the Company and of the investees to make assumptions regarding circumstances and events that involve considerable uncertainty. Management of the Company prepares the estimates on the basis of past experience, various facts, external circumstances, and reasonable assumptions according to the pertinent circumstances of each estimate. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
2.5.2 Critical estimates - presented below is information pertaining to critical estimates that were made while implementing the accounting policy, which have a material impact on the financial statements:
2.5.2.1 Inventory measurement - at each reporting date, the Group examines whether there have been changes in the net realizable value of inventory. If the realizable value of inventory is less than its cost, a provision is recorded up to the amount of the net realizable value. The realizable value of crude oil is estimated based on the realizable value of the distillates that are expected to be derived therefrom, less anticipated manufacturing costs. The net realizable value of oil distillates is determined according to the inventory selling price.
The cost of inventory in process and inventory of finished goods includes the attributable portion of the manufacturing overheads, which is based on normal capacity. Market value is an estimate of the selling price in the ordinary course of business, less estimated conversion costs and the estimated costs required for executing the sale. A change in the estimate of the net realizable value of inventory may impact the results of operations.
2.5.2.2 Contingent liabilities - when assessing the possible outcomes of legal claims that were filed against the Company and its investees, the companies relied on the opinions of their legal counsel. The opinions of their legal counsel are based on the best of their professional judgment, and take into consideration the current stage of the proceedings and the legal experience accumulated with respect to the various matters. As the results of the claims will ultimately be determined by the courts, they may be different from such estimates.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 2:- BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)
2.5.2.3 Impairment of non-financial assets, including goodwill - the Group examines on each reporting date whether there have been any events or changes in circumstances which would indicate impairment of one or more non-financial assets. When there are indications of impairment, or at least annually for a cash-generating unit to which goodwill was allocated, it examines whether the carrying amount of the investment can be recovered from the discounted cash flows anticipated to be derived from the asset (or from the cash-generating unit to which the asset is attributed), or from the fair value less costs to sell ("net selling price") of such asset, and if necessary, it records an impairment provision up to the amount of the recoverable value. In some cases, the discount rate of the cash flows is calculated with the assistance of external valuators, and reflects current market assessments of the time value of money and the risks specific to the asset or to the cash-generating unit to which the asset relates. The estimates regarding cash flows are based on past experience with respect to this asset or similar assets, and on the best possible assessments of the Company regarding the economic conditions that will exist during the remaining useful life of the asset. The Company uses the estimates of an appraiser when determining the net selling price of some of its assets. With respect to real estate, the estimates also take into consideration the situation of the market where the asset is located. Changes in these estimates may result in material changes to the carrying amounts of the assets and to the results of operations.
2.5.2.4 Doubtful accounts - the financial statements include an allowance for doubtful accounts which, in management's opinion, adequately reflects the loss that may result from trade receivables whose collection is doubtful. The allowance for doubtful accounts includes specific and general provisions. Management's determination of the adequacy of the provision is based on various estimates, such as the Company's past experience with respect to the collectability of such trade receivables, the age of the debt, and the existing information with respect to the financial position of the customers, the volume of their business and an evaluation of the security received from them. Doubtful accounts, which according to Company's Management's opinion are unlikely to be collected, are written-off in the Company's books. The actual collection of debts may differ from management's estimates. The Company's estimates of the allowance for doubtful accounts may change as a result of highs and lows in the state of the Israeli economy that can affect the ability of customers to pay their debts to the Company.
2.5.2.5 Testing the estimated useful life of items of fixed assets - the Group examines the useful life of items of fixed assets at least once a year based, among others, on evaluations of internal and/or external engineers with the relevant professional expertise and experience, based, among others, on the Group's accumulated past experience. Changes in the estimated useful life of items of fixed assets are liable to lead to an increase or decrease in depreciation expenses carried to profit and loss and to a change in operating results.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 2:- BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)
2.6 Capital management - objectives, procedures and processes
Management's policy is to maintain a strong capital base in order to preserve the ability of the Company to continue operating so that it may provide a return on capital to its shareholders, benefits to other holders of interests in the Company, such as credit providers and employees of the Company, and sustain future development of the business. The Board of Directors monitors the level of dividends to ordinary shareholders.
2.7 Reclassification of comparative figures
The Company reclassified certain comparative figures in immaterial amounts presented in the opening balances of the cost of fixed assets and accumulated depreciation. The above reclassification had no impact on the balance of depreciated cost.
2.8 Changes in accounting policies
Effective from January 1, 2015, the Group applies the new Standards detailed below:
IFRS 9 (2013), "Financial Instruments" ("the Standard")
The Standard revises IFRS 9, "Financial Instruments", IFRS 7, "Financial Instruments: Disclosures" and IAS 39, "Financial Instruments: Recognition and Measurement" regarding general hedge accounting.
The Standard modifies the method of evaluation of the effectiveness of hedge relationships to rely on forward-looking tests only and cancels the need for a retrospective evaluation of effectiveness. In addition, the quantitative thresholds (80%-125%) for determining the effectiveness of the hedge defined in IAS 39 were eliminated and superseded by quantitative or qualitative tests for the economic relationship between the hedged instrument and the hedging instrument without quantitative thresholds.
The Standard allows extracting the time value of purchased options, the forward component (interest component) of forward contracts and the foreign currency basis spread from the hedge relationships. These components will be viewed, in whole or in part, as "hedge costs" that will be deferred or amortized to profit and loss over time.
The Standard does not allow the voluntary termination of hedge relationships that continue to qualify for the entity's risk management objectives and those will only be terminated when they no longer meet the qualification criteria.
The Standard adds disclosure requirements such as the entity's risk management strategies and the effect of hedge accounting on the financial statements.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 2:- BASIS OF PREPARATION OF THE FINANCIAL STATEMENTS (Cont.)
The Standard will be applied prospectively excluding a limited number of exceptions. All the Standard's criteria must be met on the date of its initial adoption to apply hedge accounting from that date onwards.
The Group has decided to apply the Standard early but as of the date of issuance of these financial statements, the Group has not yet effectively adopted the Standard's hedge accounting provisions.
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements by the Group entities, excluding as detailed in Note 2.8 above.
3.1 Basis of consolidation
3.1.1 Business combinations
The Group implements the acquisition method to all business combinations.
3.1.1.1 The acquisition date is the date on which the acquirer obtains control over the acquiree. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
3.1.1.2 The Group recognizes goodwill on the acquisition date according to the fair value of the consideration transferred, including any amounts recognized in respect of rights that do not confer control in the acquire, as well as the fair value at the acquisition date of any pre-existing equity right of the acquirer in the acquiree, less the net amount of the identifiable assets acquired and the liabilities assumed.
3.1.1.3 Costs associated with the acquisition that were incurred by the acquirer in the business combination such as: finder's fees, advisory, legal, valuation and other professional or consulting fees, other than those associated with an issue of debt or equity instruments connected to the business combination, are expensed in the period the services are received.
3.1.2 Subsidiaries
Subsidiaries are entities controlled by the Company. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed where necessary to align them with the policies adopted by the Group.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
3.1.3 Non-controlling interests
Non-controlling interests comprise the equity of a subsidiary that cannot be attributed, directly or indirectly, to the parent company. Non-controlling interests that are instruments that give rise to a present ownership interest and entitle the holder to a share of net assets in the event of liquidation (for example: ordinary shares), are measured at the date of the business combination at either fair value, or at their proportionate interest in the identifiable assets and liabilities of the acquiree, on a transaction-by-transaction basis.
3.1.3.1 Profit or loss and any component of other comprehensive income are attributable to equity holders of the Company and the non-controlling interests. Total comprehensive income is attributable to the equity holders of the Company and the non-controlling interests, even when the result is a negative balance of the non-controlling interests.
3.1.3.2 Transactions with non-controlling interests in which control is retained are accounted for as equity transactions. Any difference between the consideration paid or received and the change in non-controlling interests is carried to the interests of the equity holders of the Company directly to capital reserve.
3.1.4 Investment in associates and joint ventures
Associates are companies in which the Group has significant influence over the financial and operating policies without having control. The investment in an associate is accounted for using the equity method. It is assumed that interests of 20%-50% in the investee confer significant influence. Joint ventures are joint arrangements in which the Group has rights to the net assets of the arrangement.
Investments in associates and joint ventures are accounted for using the equity method and are recognized initially at cost. The consolidated financial statements include the Group's share of the income and expenses and profit or loss of investees that are accounted for at equity, after adjustments to adapt the accounting policies with those of the Group, from the date that significant influence or joint control commences until the date that significant influence or joint control ceases.
3.1.5 Transactions eliminated in consolidation
Intra-group balances and any unrealized income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealized gains and losses arising from transactions with associates and joint ventures are eliminated against the investment to the extent of the Group's interests in these investments.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
3.2 Foreign currency transactions
Transactions in foreign currencies are translated into the functional currency of the Group at the exchange rate at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the end of the year. Foreign currency differences arising on translation are recognized in profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
3.3 Financial instruments
3.3.1 Non-derivative financial assets
3.3.1.1 Initial recognition of financial assets
The Group initially recognizes loans and receivables and deposits on the date that they are created. All other financial assets acquired in a regular way purchase, including assets designated at fair value through profit or loss, are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument, meaning on the date the Group undertook to purchase or sell the asset. Financial assets are initially measured at fair value. Subsequent to initial recognition, the Group measures financial assets at fair value or at amortized cost as detailed below.
3.3.1.1.1 Financial assets measured at amortized cost
Subsequent to initial measurement, a financial asset is measured at amortized cost using the effective interest method and less impairment losses, if the objective of the entity's business model is to hold assets in order to collect contractual cash flows and the contractual terms give rise, on specific dates, to cash flows that are solely payments of principal and interest, and the Group elected not to designate it to fair value through profit or loss in order to reduce or cancel an accounting mismatch. Financial assets measured at amortized cost include cash and cash equivalents, trade receivables, other accounts receivable and long-term loans and receivables.
Cash and cash equivalents comprise cash balances available for immediate use and call deposits. Cash equivalents comprise short-term highly liquid investments (with original maturities of three months or less) that are readily convertible into known amounts of cash and are exposed to insignificant risks of change in value.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
3.3.1.1.2 Financial assets measured at fair value
Any financial assets that are not measured at amortized cost are measured at fair value subsequent to initial recognition, with any changes in fair value being recognized in profit or loss.
3.3.1.2 Derecognition of financial assets
Financial assets are derecognized when the contractual rights of the Group to the cash flows from the asset expire, or the Group transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred.
Any interest in transferred financial assets that is created or retained by the Group is recognized as a separate asset or liability.
Regular way sales of financial assets are recognized on the trade date, meaning on the date the Company undertook to sell the asset.
3.3.2 Non-derivative financial liabilities
Non-derivative financial liabilities comprise: loans and borrowings from banks and others, trade and other accounts payable and deposits from gas consumers.
3.3.2.1 Initial recognition of financial liabilities
The Group initially recognizes debt securities issued on the date that they are originated. All other financial liabilities are recognized initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.
Financial liabilities are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortized cost using the effective interest method.
3.3.2.2 Derecognition of financial liabilities
Financial liabilities are derecognized when the obligation of the Group, as specified in the agreement, expires or when it is discharged or cancelled.
3.3.2.3 Offsetting financial instruments
Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when, and only when, the Group currently has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously.
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NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
3.3.3 Derivative financial instruments
The Group holds derivative financial instruments to hedge its exposure to foreign currency risks, interest rate risks, risks of fluctuations in oil prices and risks of fluctuations in the refining margins. Derivatives are recognized initially at fair value; attributable transaction costs are recognized in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below:
3.3.3.1 Economic hedges
Hedge accounting is not applied to derivative instruments that economically hedge financial assets and liabilities denominated in foreign currencies and commodity prices. Changes in the fair value of derivatives on commodity prices and refining margins are recognized in the cost of sales, while the changes in the fair value of derivatives on currency exchange rates and interest are recognized as financing income or expenses.
3.3.3.2 Derivatives that do not serve hedging purposes
The changes in fair value of these derivatives are recognized immediately in profit or loss, as financing income or expense. Inter alia, the Group implements the said accounting treatment to changes in the fair value of options that do not have a fixed exercise price.
3.3.3.3 Separable embedded derivatives
Embedded derivatives are separated from the host contract and accounted for separately if (a) the economic characteristics and risks of the host contract and the embedded derivative are not closely related; (b) a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and (c) the combined instrument is not measured at fair value through profit or loss. The Company does not separate embedded derivatives from a host contract that is a financial asset. Instead, the financial instrument is reviewed as a whole and classified as set forth in paragraph 3.3.3 above. Changes in the fair value of separable embedded derivatives are recognized immediately in profit or loss, as financial income or expense.
3.3.4 CPI-linked assets and liabilities that are not measured at fair value
The carrying amount of CPI-linked financial assets and liabilities, which are not measured at fair value, is revaluated every period in accordance with the actual increase or decrease in the CPI.
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NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
3.3.5 Share capital
3.3.5.1 Ordinary shares
Incremental costs directly attributable to the issue of Ordinary shares and share options are recognized as a deduction from equity, less the tax effect.
3.3.5.2 Treasury shares
When share capital recognized as equity is repurchased by the Group, the amount of the consideration paid, which includes directly attributable costs, net of any tax effects, is recognized as a deduction from equity. Repurchased shares are classified as treasury shares. When treasury shares are sold or reissued subsequently, the amount received is recognized as an increase in equity, and the resulting surplus or deficit on the transaction is carried to equity.
3.4 Fixed assets
3.4.1 Recognition and measurement
Fixed asset items are measured at cost less accumulated depreciation and accumulated impairment losses. The cost of certain fixed asset items (land, buildings and gas tanks) was determined based on their fair value (deemed cost) at January 1, 2007, the date of the Group's transition to IFRS reporting. Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self- constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment.
Spare parts, ancillary equipment and backup equipment are classified as fixed assets once they meet the definition of property, plant and equipment under IAS 16. If not, they are classified as inventories.
A fixed asset item that was purchased in consideration for another non-monetary item in a transaction having a commercial substance is measured at fair value.
When major parts of a fixed asset item (including costs of major periodic inspections) have different useful lives, they are accounted for as separate items (major components) of fixed assets.
Gains and losses on disposal of a fixed asset item are determined by comparing the proceeds from disposal with the carrying amount of the asset, and are recognized net within other income or expenses, as applicable, in profit or loss.
Advances on account of the purchase of fixed assets are presented under fixed assets.
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3.4.2 Subsequent costs
The cost of replacing part of a fixed asset item and other subsequent costs are recognized as part of the carrying amount of the item if it is probable that the future economic benefits embodied within them will flow to the Group and its cost can be measured reliably. The carrying amount of a replaced part of a fixed asset is derecognized. The costs of day-to-day servicing are recognized in profit or loss as incurred.
3.4.3 Depreciation
Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the cost of the asset, or other amount substituted for cost, less its residual value.
An asset is depreciated when it is ready for use, that is, when it is in the location and condition required for it to operate in the manner intended by management.
Depreciation is recognized in profit or loss on a straight-line basis over the estimated useful lives of each part of a fixed asset item. Assets under finance leases, including lands, are depreciated over the shorter of the lease term and their useful lives. Freehold land is not depreciated.
The estimated useful lives for the current and comparative periods are as follows:
Years of depreciation Refining and cracking facilities 25-50 Power station 25 Buildings, ancillary buildings and approach roads 10-50 (mainly 50) Tanks, machinery, equipment and moveable assets 3-50 (mainly (10-14) Motor vehicles 5-14 Computers and communications equipment 3-7 Office furniture and equipment 3-20 Lands under finance lease Over the lease period (including option) Leasehold improvements The shorter of the term of the lease (including the Group's lease extension option) and the useful life of the asset
The excess cost created in the context of the investment in subsidiaries and allocated to specific assets is amortized over the remaining depreciation period of the respective asset on the date of allocation of the excess cost. The estimates pertaining to depreciation methods, useful lives and residual values are reviewed at least at each financial year-end.
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3.5 Intangible assets
3.5.1 Goodwill
Goodwill that arises upon the acquisition of subsidiaries is presented as part of intangible assets. For information regarding the measurement of goodwill upon initial recognition, see paragraph 3.1.1.2 above. In subsequent periods, goodwill is measured at cost less accumulated impairment losses.
3.5.2 Other intangible assets
Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses. Intangible assets comprise, inter alia, an agreement for the purchase of natural gas in the subsidiary, Paz Ashdod, at certain prices. The amount presented in the statement of financial position as an intangible asset, representing part of the excess cost created upon the acquisition of Paz Ashdod, is the discount of the difference between the price of the natural gas agreement and the anticipated cost of gas as per the natural gas prices determined by the Ministry of Energy based on anticipated gas quantities, as computed on the date of acquisition of Paz Ashdod, by the appraisers that had allocated the excess purchase price.
3.5.3 Subsequent expenditure
Subsequent expenditure is recognized as an intangible asset only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred.
3.5.4 Amortization
Amortization is recognized in profit or loss on a straight-line basis (excluding with respect to a natural gas agreement, as detailed below) over the estimated useful lives of the intangible assets from the date they are available for use. Goodwill is not systematically amortized but is tested for impairment at least annually.
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The estimated useful lives for the current and comparative periods are as follows:
Years of amortization Deferred charges 5-20 (mainly 20) Shipping and distribution rights 5-18 Royalties in respect of knowhow 10-30 Water and electricity rights 20-25 Natural gas agreement Based on the ratio of the quantity of natural gas used in the period to the valuation computed upon the acquisition of Paz Ashdod or the agreement period, whichever is shorter Software 3-5
The estimates pertaining to amortization methods, useful lives and residual values are reviewed at least at each financial year-end.
3.6 Investment property
Investment property is property (land or building - or part of a building - or both) held (by the Company as the owner or under a finance lease) either to earn rental income or for capital appreciation or for both, but not for the use in the production or supply of goods or services or for administrative purposes; or sale in the ordinary course of business.
Investment property is initially measured at cost with the addition of transaction costs. The cost of investment property items was determined as deemed cost at their fair value as of January 1, 2007, the date of transition to IFRS reporting.
Investment property relates mainly to lands, which are not depreciated. In subsequent periods, the investment property is measured at cost less accumulated depreciation and impairment losses, if any. Gains and losses on disposal of investment property item are determined by comparing the proceeds from disposal with the carrying amount of the asset, and are recognized within other income (expenses) in profit or loss.
3.7 Leased assets
Lands leased from the Israel Land Administration where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases.
Other leases are classified as operating leases and the leased assets are not recognized on the Group's statement of financial position. Prepaid lease fees to the Israel Land Administration in respect of land leases classified as operating leases are presented on the statement of financial position as prepaid expenses and recognized in profit or loss over the lease period. The lease period takes into consideration an option to extend the lease period if at the beginning of the lease it was probable that the option will be exercised.
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For the purpose of lease classification of lands and buildings, the land and buildings deliverables are tested separately, while taking into major consideration in the classification of the leased land deliverable the fact that the land has indefinite useful life.
3.8 Inventories
Inventories are measured at the lower of cost or net realizable value. The net realizable value of the inventory of crude oil and the inventory of distillates is determined on the basis of selling prices less the anticipated selling costs of the distillates and manufacturing costs of the crude oil. The cost of inventories includes all the expenditure incurred in acquiring the inventories and the costs incurred in bringing them to their existing location and condition. In the case of inventory in process and inventory of finished goods, cost includes an appropriate share of production overheads based on normal operating capacity. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Net realizable prices are determined specifically for each type of inventory.
Cost is determined as follows:
Inventory of raw materials - By the "first-in first-out" method.
Finished goods - Mainly by the "first-in first-out" method.
Inventory of lubricants - On the "moving weighted average" basis.
Inventory of gas - Mainly on the basis of the cost of gas. This is determined by the "first-in first-out" method, and the average cost of filling and transporting.
Inventory of food and - Mainly on the "moving weighted average" basis. convenience products
Inventory of appliances, - Mainly on the "moving weighted average" basis. spare parts and other products
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3.9 Capitalization of borrowing costs
Specific and non-specific borrowing costs were capitalized to qualifying assets throughout the period required for completion and construction until they are ready for their intended use. Non-specific borrowing costs are capitalized in the same manner to the same investment in qualifying assets, or a portion thereof, which was not financed with specific credit by means of a rate which is the weighted-average cost of the credit sources which were not specifically capitalized. Other borrowing costs are expensed as incurred.
3.10 Impairment
3.10.1 Financial assets
3.10.1.1 A financial asset not carried at fair value through profit or loss or at fair value through other comprehensive income is tested for impairment when objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers, changes in the economic environment that point to the insolvency of debt issuers or the disappearance of an active market for a security. Observed information suggests that there has been impairment that can be measured of the expected cash flows from a group of financial assets.
3.10.1.2 Evidence of impairment of debt instruments:
The Group considers evidence of impairment for loans, trade receivables, other receivables and other investments measured at amortized cost at both a specific asset and collective level. All individually significant loans and receivables are assessed for specific impairment. All individually significant loans, trade receivables, other receivables and other investments measured at amortized cost found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Trade receivables, loans and other receivables and other investments measured at amortized cost that are not individually significant are collectively assessed for impairment by grouping together loans and receivables with similar risk characteristics.
In assessing collective impairment, the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management's judgment as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical trends.
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3.10.1.3 Accounting for impairment losses of financial assets measured at amortized cost:
An impairment loss in respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset's original effective interest rate. Losses are recognized in profit or loss and reflected in a provision for loss against trade receivables, other receivables, loans and other investments measured at amortized cost. Interest income on the impaired asset is recognized using the interest rate that was used to discount the future cash flows for the purpose of measuring the impairment loss.
3.10.1.4 Reversal of impairment loss:
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized (such as repayment by the debtor). For financial assets measured at amortized cost, the reversal is recognized in profit or loss.
3.10.2 Non-financial assets
3.10.2.1 Timing of the impairment test:
The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. In subsequent periods, the Group estimates the recoverable amount of each cash-generating unit that consists of goodwill, once a year and on the same date, or more frequently, if there are indications of impairment.
3.10.2.2 Determination of cash-generating units and allocation of goodwill to cash- generating units:
For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets ("the cash-generating unit"). Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, cash-generating units to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. When goodwill is not monitored for internal reporting purposes, it is allocated to operating segments and not to a cash-generating unit (or group of cash- generating units) lower in level than an operating segment. Goodwill purchased in a business combination is allocated to the cash-generating units, including existing cash- generating units in the Group prior to the business combination, which are expected to yield benefits from the synergy of the combination.
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3.10.2.3 Measurement of the recoverable amount:
The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its net selling price (fair value less costs to sell). In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
3.10.2.4 Recognition of impairment loss:
An impairment loss is recognized if the carrying amount of an asset or its cash- generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss. Impairment losses recognized in respect of cash- generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amounts of the other assets in the cash-generating unit on a pro rata basis.
3.10.3 Investments in associates and joint ventures
An investment in an associate of joint venture is tested for impairment when objective evidence indicates there has been impairment (as described in 3.10.1 above). Goodwill that forms part of the carrying amount of an investment in an affiliate is not recognized separately, and therefore is not tested for impairment separately. If objective evidence indicates that the value of the investment may have been impaired, the Group estimates the recoverable amount of the investment, which is the greater of its value in use and its net selling price.
3.11 Employee benefits
3.11.1 Post-employment benefits
The Group has a number of post-employment benefit plans. The plans are usually financed by deposits with insurance companies or with funds managed by a trustee, pension funds and provident funds and are classified as defined contribution plans and as defined benefit plans.
3.11.1.1 Defined contribution plans:
Defined contribution plans are post-employment benefit plans under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further contributions. The Group's obligations for contributions to defined contribution plans are recognized as an expense in profit or loss in the periods during which the related services are rendered by employees.
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3.11.1.2 Defined benefit plans:
Defined benefit plans are post-employment benefit plans other than defined contribution plans. The Group's net obligation in respect of defined benefit post- employment plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in return for their service in the current and prior periods. This benefit is discounted to determine its present value, and the fair value of any plan assets is deducted. The Group determines the net interest on the net liability (asset) in respect of a defined benefit, as determined at the beginning of the annual reporting period. The discount rate is the yield at the reporting date on Government bonds denominated in the same currency, that have maturity dates approximating the terms of the Group's obligations. The calculation is performed by a qualified actuary using the projected unit credit method.
The re-measurement of the net liability (asset) in respect of a defined benefit includes actuarial gains and losses, the yield on the plan assets (excluding interest) and any change in the effect on the asset ceiling (if relevant, excluding interest). Re- measurement is carried immediately through other comprehensive income to retained earnings. Interest costs on the defined benefit obligation and interest income on the plan assets carried to profit and loss are presented in financial income and expenses, respectively.
The Company offsets an asset relating to one benefit plan from the liability relating to another benefit plan only when there is a legally enforceable right to use the surplus of one plan to settle the obligation in respect of the other plan, and there is intent to settle the obligation on a net basis or to simultaneously realize the surplus of one plan and settle the obligation in the other plan.
3.11.2 Other long-term employee benefits
The Group's net obligation in respect of long-term employee benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on Government debentures denominated in the same currency, that have maturity dates approximating the terms of the Group's obligations. The calculation is performed using the projected unit credit method. Any actuarial gains or losses are recognized in profit or loss in the period in which they arise.
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3.11.3 Short-term benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided or upon the actual absence of the employee when the benefit is not accumulated (such as maternity leave). A liability is recognized for the amount expected to be paid under short-term cash bonus or profit- sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Classification of short-term benefits as current benefits or as other non-current benefits is made according to the time the liability is due to be settled.
3.11.4 Share-based payment transactions
The grant date fair value of options granted to employees is recognized as a salary expense, with a corresponding increase in retained earnings, over the period that the employees become unconditionally entitled to the options. The amount recognized as an expense in respect of share-based payment awards that are contingent on service terms as vesting conditions is adjusted to reflect the number of share options that are expected to vest.
3.12 Provisions
A provision is recognized if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation.
3.12.1 Warranty
A provision for warranty is recognized when the underlying products or services are sold. The provision is determined according to Management's estimate, which is based on historical data and a weighting of all possible outcomes against their associated probabilities.
3.12.2 Site restoration and environmental preservation
In accordance with the Group's published environmental policy and applicable legal requirements, a provision for the restoration of filling stations where a contamination of groundwater was identified and the related expense are recognized in the Company on the date on which the groundwater contamination was identified.
Paz Ashdod recognizes a provision for the management of its environmental policy while preventing contamination in the Company's facilities and producing the best restoration to the environment.
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In other subsidiaries, day-to-day expenses in respect of operation and maintenance of plants for the prevention of environment contamination and expected provisions relating to environmental rehabilitation, from current or past activities, are expensed to profit or loss.
3.12.3 Legal claims
A provision for claims is recognized if, as a result of a past event, the Company has a present legal or constructive obligation and it is more likely than not that an outflow of economic benefits will be required from the Group to settle the obligation and the amount of obligation can be estimated reliably. When the time value is material, the provision is measured at its present value.
3.13 Revenue
3.13.1 Sale of goods
Revenue from the sale of goods in the ordinary course of business is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. When the credit period is short and constitutes the accepted credit in the industry, the future consideration is not discounted. The Group recognizes revenue when the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably.
The timing of transfers of risks and rewards varies depending on the individual terms of the contract of sale. For sales of products in Israel, transfer usually occurs when the product is received at the customer's warehouse and tanks, but for some international shipments transfer occurs upon loading the goods onto the relevant carrier or as provided in the agreement.
3.13.2 Services
Revenue from services rendered is recognized in profit or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.
3.13.3 Commissions
When the Group acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by the Group.
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3.13.4 Rental income
Rental income is recognized in profit or loss on a straight-line basis over the term of the lease and the rent.
3.14 Environmental costs
The costs of day-to-day operation and servicing of facilities for the prevention of environmental contamination and anticipated provisions for the costs of environmental restoration due to current or past activities are recognized in profit or loss. The costs of setting up facilities for the prevention of environmental contamination that increase the useful life or the efficiency of the facility or that reduce or prevent environmental contamination, are carried to the cost of fixed assets and amortized in accordance with the Company's amortization policy.
3.15 Financial income and expenses
Financial income comprises interest income on funds invested, dividend income, gains on changes in the fair value of financial assets and liabilities at fair value through profit or loss and gains from derivative instruments that are recognized in profit or loss. Interest income is recognized as it accrues using the effective interest method. Dividend income is recognized on the date that the Group's right to receive payment is established.
Financial expenses comprise interest and linkage expenses in respect of borrowings, changes in time value of provisions, changes in the fair value of financial assets and liabilities at fair value through profit or loss, impairment losses recognized on financial assets (other than losses on trade receivables, which are presented under general and administrative expenses), changes in the fair value of debentures designated at fair value through profit or loss that are not attributed to the credit risk of the Company, and losses on derivative instruments that are recognized in profit or loss. Borrowing costs, which are not capitalized to qualifying assets, are recognized in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis as either financial income or financial expenses depending on whether foreign currency movements are in a net gain or net loss position.
In the statements of cash flows, interest and dividends received are presented in cash flows from investing activities. Interest and dividends paid are presented in cash flows from financing activities.
3.16 Income tax expense
Income tax comprises current and deferred tax. Current tax and deferred tax are recognized in profit or loss or are recognized directly in equity or in other comprehensive income to the extent they relate to items recognized directly in equity or in other comprehensive income.
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3.16.1 Current tax
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, which includes changes in tax payments in respect of previous years and tax increments for dividend distribution.
3.16.2 Offset of current tax assets and liabilities
The Group offsets current tax assets and liabilities if there is a legally enforceable right to offset current tax liabilities and assets and there is an intention to settle current tax liabilities and assets on a net basis or if the current tax assets and liabilities are settled simultaneously.
3.16.3 Tax uncertainties
Provision for tax uncertainties, including additional tax and interest expense, is recognized when it is more likely than not that the Group will be required to use its economic resources in order to settle the obligation.
3.16.4 Deferred taxes
Deferred taxes are recognized in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The Group does not recognize deferred taxes for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries, jointly controlled entities and affiliates, to the extent that it is probable that they will not reverse in the foreseeable future and to the extent the Group controls the date of reversal.
Deferred taxes are measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.
A deferred tax asset is recognized for deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilized. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realized.
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3.16.5 Offset of deferred tax assets and liabilities
The Company offsets deferred tax assets and liabilities if there is a legally enforceable right to offset current tax assets and liabilities, and they are attributable to the same taxable income levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax assets and liabilities on a net basis or their current tax assets and liabilities will be settled simultaneously.
3.16.6 Additional tax with respect to dividend distribution
The Group may be required to pay additional tax if a dividend is distributed between Group companies. This additional tax was not included in the financial statements, since the policy of the Group companies is to not distribute a dividend which creates an additional tax liability for the recipient in the foreseeable future.
3.16.7 Intra-company transactions
Deferred tax in respect of intra-company transactions in the consolidated financial statements is recorded according to the tax rate applicable to the acquirer.
3.17 Non-current assets held for sale
Non-currents assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. Immediately before classification as held for sale, the assets are re-measured in accordance with the Group's accounting policies. In subsequent periods, these assets are measured at the lower of their carrying amount and fair value less costs to sell.
3.18 New standards and interpretations not yet adopted
3.18.1 IFRS 9 (2014), "Financial Instruments" ("the Standard")
IFRS 9 (2014) represents the final version of the Standard and consists of updated provisions for the classification and measurement of financial instruments and a new model for measuring the impairment of financial assets. These provisions are added to the chapter on hedge accounting - general issued in 2013.
The Standard will be adopted in annual periods beginning on January 1, 2018 with a possibility for early application. The Standard will be adopted retroactively, excluding several exemptions.
The Group has not yet begun examining the implications of the Standard's adoption on the financial statements.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 3:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
3.18.2 IFRS 15, "Revenue from Contracts with Customers" ("the Standard")
The Standard supersedes the existing guidelines regarding recognition of revenue from contracts with customers and presents a new model for recognition of revenue from such contracts based on two revenue recognition approaches: over time or at a point in time. The model consists of five stages for analyzing transactions in order to determine the timing and amount of revenue recognition. The Standard also establishes new and broader disclosure requirements than the currently applicable disclosure requirements.
The Standard will be adopted for annual periods beginning on January 1, 2017. Early adoption is permitted. The Standard prescribes alternative transition provisions upon initial adoption: full retrospective adoption, full retrospective adoption including practical exemptions, or adoption of the Standard effective from the date of initial adoption by adjustment of retained earnings in respect of uncompleted transactions as of that date.
The Group is examining the implications of the Standard on its financial statements.
3.18.3 IFRS 16, "Leases" ("the Standard")
The Standard supersedes IAS 17, "Leases" and the related interpretations. The provisions of the Standard eliminate the existing requirement according to which lessees are required to classify leases as either operating or finance leases. Instead, with respect to lessees, the Standard introduces a new uniform accounting treatment model according to which all leases will be recognized by lessees in their financial statements as a lease asset and liability. The Standard also prescribes new and broader disclosure requirements than those currently applied.
The Standard is to be applied for annual periods beginning on January 1, 2019. Early adoption is permitted provided that the Company also early adopts IFRS 15, "Revenue from Contracts with Customers". The Standard provides various alternatives for the application of the transition provisions to allow entities on the date of initial adoption to choose between full retrospective adoption and adoption of the Standard from the date of initial adoption through adjustment of retained earnings as of that date.
The Group has not yet begun studying the implications of the Standard's adoption on the financial statements.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 4:- DETERMINATION OF FAIR VALUE
As part of the Group's accounting policies and disclosure requirements, the Group is required to determine the fair value of financial and non-financial assets and liabilities. Fair value has been determined for measurement and/or disclosure purposes based on the following methods. Further information about the assumptions made in determining fair value is disclosed in the notes specific to that asset or liability.
4.1 Fixed assets
The fair value of certain fixed asset items as well as of fixed assets recognized as a result of a business combination is based on their market value on the date of valuation. The market value of fixed assets is the estimated amount for which a fixed asset could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction wherein the parties each acted knowledgeably.
4.2 Intangible assets
The fair value of intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets.
4.3 Inventories
The fair value of inventories is determined based on the estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventories.
4.4 Investment in non-marketable shares measured at fair value through profit or loss
For information regarding the fair value measurement technique for non-marketable shares measured at fair value through profit or loss, see Note 30.5.2.2 below.
Moreover, for additional information on fair value hierarchy and the evaluation processes adopted by the Company with respect to this investment, see Notes 30.5.2 and 30.5.3 below, respectively.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 4:- DETERMINATION OF FAIR VALUE (Cont.)
4.5 Financial instruments at amortized cost
The fair value of financial instruments at amortized cost is estimated on the date of initial recognition using the future discounted cash flow method, discounted at the market rate of interest at the measurement date. In subsequent periods, the fair value of financial instruments at amortized cost is determined for disclosure purposes only using the future discounted cash flow method, discounted at the market rate of interest at the measurement date. See additional information on fair value hierarchy in Note 30.5.2 below.
4.6 Derivative instruments
The fair value of forward exchange contracts is based on their quoted price, if available. If a quoted price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using an appropriate interest rate for similar instruments, including the adjustments required for the parties' credit risks.
The fair value of futures on crude oil is based on their quoted market prices, as published on the London International Financial Futures Exchange.
The fair value of BAFMAN type foreign currency derivatives (leveraged bonus forwards) is calculated using standard models based on appropriate Reuters market data. The adjustment of the value to the credit risk is based on the default rate of the Company and the financial institutions and the recovery rate upon default. For further information regarding fair value hierarchy, see Note 30.5.2 below.
4.7 Non-derivative financial liabilities
4.7.1 The fair value of debentures that are traded on the Stock Exchange is based on the quoted price of the debentures on the Stock Exchange.
4.7.2 The fair value of debentures that are not traded on the Stock Exchange, as determined for disclosure purposes, is based on the future cash flows in respect of the principal and interest components, which are discounted at the market interest rate at the reporting date.
4.8 Share-based payment transactions
The fair value of employee share options is measured using the Black & Scholes model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on the weighted average historic volatility of the Company's shares, over the expected term of the options), the expected life of the instruments (based on historical experience and general option holder behavior), expected dividends, and the risk-free interest rate (based on Government bonds). Service conditions are not taken into account in determining fair value. For further information, see Note 21 below.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 5:- GROUP ENTITIES
December 31, 2015 2014 2013 % of ownership and voting
Paz Ashdod Refinery Ltd. (Paz Ashdod) 100 100 100 Paz Industries and Services (Oil) Ltd. 100 100 100 Investees of Paz Industries and Services (Oil) Ltd.: Pazgas Ltd. (and its subsidiaries) 100 100 100 Paz Lubricants and Chemicals Ltd. (and its subsidiary) 100 100 100 Pazvit Ltd. 100 100 100 Pazkar Ltd. (and its subsidiary) 100 100 100 Aviation Services Ltd. 100 100 100 Aviation Assets Ltd. 100 100 100 Pazgas Oil Marketing Company Ltd. 100 100 100 Pagnam Ltd. 100 100 100 Glilot Plant Ltd. 100 100 100 Investees in the R&W Division: Pazomat of the Paz Group Ltd. 100 100 100 Natanya Gas Station & Lubrication Ltd. 100 100 100 Paz-Movil (Fuel Transport) Ltd. 100 100 51 Paz-Movil Limited Liability Company 100 100 100 Sarah Valley Paz Hashalom Ltd. 100 100 100 Rama Rehovot Gas Station Ltd. 100 100 100 Z.K. Gas Station Ltd. 100 100 100 Nituv Gas Stations Ltd. 100 100 100 Station Properties Ltd. 100 100 100 Nativ Paz Agents Ltd. 100 100 100 Nativ Schnapp Ltd. 100 100 100 National Petroleum Marketing Ltd. 100 100 100
Associates Pi-Glilot Petroleum Terminals and Pipelines Ltd. ** 21.5 21.5 21.5 Hashomer Gas Station Ltd. 40 40 40 Gaztiv Natural Gas Distribution Ltd. - - -
Joint ventures Caesarea Partnership 75 - - Pazniv Yerid Hamizrach Ltd. 50 50 50 Gai Iron Ltd. 50 50 50 On Fuel Lubricants and Wash Ltd. 50 50 50 Kfar Aviv Gas Station Ltd. 50 50 50 Maoz Gasoline Station Ltd. 50 50 50 Neve Atlit Ltd. 50 50 50 Kenyon Shoket Ltd. 50 50 50 Solpaz Ltd. (held by Pazgas Ltd.) 43.5 43.5 43.5
* All the above companies are incorporated and active in Israel. ** See details of an agreement for the sale of the Company's interests in Pi-Glilot Petroleum Terminals and Pipelines Ltd. in Note 12b below.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 6:- CASH AND CASH EQUIVALENTS
December 31, 2015 2014 NIS in millions
Cash in banks 29 35 Call deposits 31 105
Total 60 140
The Group's exposure to credit risk, interest rate risk, currency risk and sensitivity analysis of financial assets and liabilities is disclosed in Note 30, Financial Instruments.
NOTE 7:- TRADE AND OTHER RECEIVABLES
7.1 Trade receivables
December 31, 2015 2014 NIS in millions
Total trade receivables 1,653 1,827 Less - allowance for doubtful accounts 34 38
1,619 1,789
The majority of the current trade receivables do not bear interest.
For linkage information, see Note 30.4.6 below.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 7:- TRADE AND OTHER RECEIVABLES (Cont.)
7.2 Other accounts receivable
December 31, 2015 2014 NIS in millions
Prepaid expenses 68 65 Government authorities 3 37 Advances to suppliers 7 14 Income receivable 20 36 Other 10 34
108 186
Add - current maturities of long-term loans and receivables 13 20
121 206
Trade and other receivables that are classified as current assets are realized within the Group's operating cycle.
For linkage information, see Note 30.4.6 below.
7.3 Long-term loans granted and receivables
7.3.1 Composition:
December 31, 2014 2013 NIS in millions
Loans to operators of filling stations, agents and others 163 171 Long-term trade receivables 129 24 Prepaid expenses 57 68 Long-term receivables in respect of employees 8 8 Other 20 20
377 291
Less - allowance for doubtful accounts 9 9 Less - current maturities 13 20
355 262
The principal loans to operators of filling stations, agents and others bear interest of 0%-7% (December 31, 2014 - 0%-7%). Other long-term receivables bear interest of 0%-7% (December 31, 2014 - 0%-7%). For linkage information, see Note 30.4.6 below.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 7:- TRADE AND OTHER RECEIVABLES (Cont.)
7.3.2 Maturity dates as of December 31, 2015:
Repayment Non- 2020 and date financial 2016 2017 2018 2019 thereafter undetermined assets Total NIS in millions
Loans to filling station operators, agents and others 11 29 8 27 78 10 - 163 Other long-term receivables 1 95 21 21 12 5 59 214
12 12429 48 90 15 59377
For further information regarding trade and other receivables in respect of related and interested parties, see Note 34, Related and Interested Parties.
The exposure of the Group to credit risk, currency risk and impairment losses in respect of trade and other receivables is disclosed in Note 30, Financial Instruments.
NOTE 7B:- INCOME RECEIVABLE FROM THE STATE
On April 14, 2005, Pazgas, a subsidiary of the Company, entered into an agreement with the Israel Land Administration for evacuating the Company's gas facilities from the Pi-Glilot site in 2004. According to this agreement, Pazgas bore the costs of discontinuing the Pi-Glilot activity and its relocation to an alternative site.
In return, Pazgas is entitled to reimbursement of evacuation and relocation costs in a total of $ 10.5 million from the Israel Land Administration or from the State of Israel. According to the agreement, this compensation will be paid within 12 years from August 1, 2004 (namely, July 31, 2016), linked to the CPI and bearing annual interest of 4%.
As of the statement of financial position date, the balance of income receivable approximates NIS 86 million.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 7C:- TRUST DEPOSIT FOR EMPLOYEE BENEFITS
On December 31, 2009, a special collective agreement was signed between Paz Ashdod, the workers' committee and the New General Labor Federation, pursuant to which the parties agreed to convert the amount funded that is to be used to secure the compliance of Paz Ashdod with the agreement for the early retirement of employees if Paz Ashdod fails to comply with its obligations under the trust agreement. The trust agreement supersedes the early retirement agreement and does not detract from the scope of the parties' rights and obligations provided for in the early retirement agreement and/or in the other special collective agreements in place to which Paz Ashdod is subject. The trust agreement was registered as a collective agreement by the Collective Agreements Registrar. It was agreed that the balance will be placed in a long- term deposit with a trustee. According to the trust agreement, Paz Ashdod will be paid the annual interest accrued on the deposit and, on the date of expiration of the original deposit, the updated amount of collateral that should be maintained in trust to secure Paz Ashdod's early retirement liability will be calculated.
As of the date of the statement of financial position, the deposit balance is approximately NIS 69 million, of which an amount of approximately NIS 42 million is held for payment in respect of employee retirement.
NOTE 7D:- LONG-TERM BANK DEPOSITS
As part of the Company's preparations for the repayment of debentures (series C), in December 2015, the Company deposited an amount of approximately NIS 550 million in long-term bank deposits which mature in May 2019.
After the statement of financial position date, in February 2016, the Company deposited another amount of NIS 700 million received from the expansion of the debentures (series D) (see details in Note 14 below) in long-term deposits which mature in May 2019.
These deposits serve the Company in minimizing the amount that it will be required to raise to repay the debentures (series C) when they mature.
Against these deposits and their respective lien and offset rights, the Company may take, from time to time, short-term credit bearing low interest rates from the interest earned on the deposits.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 8:- INVENTORIES
December 31, 2015 2014 NIS in millions
Raw, ancillary and consumable materials 488 588 Oil products and finished goods 511 440 Food and convenience products 19 24 Appliances, spare parts and other products 22 23
1,041 1,075
Inventories as of December 31, 2015 are net of a provision for impairment of approximately NIS 49 million (December 31, 2014 - NIS 123 million).
NOTE 9:- INVESTEES
9.1 Associates
9.1.1 Financial data of immaterial associates
The financial data presented below are adjusted to the Group's ownership interests:
Group's share of earnings Carrying amount of from continuing operations investments at December 31, and comprehensive income 2015 2014 2015 2014 NIS in millions
Associates 17 18 - -
9.1.2 Additional information on loans and guarantees granted to associates and dividends received from associates
As of December 31, 2015 and 2014, the balance of loans to associates is lower than NIS 0.5 million. No guarantees were provided to associates. Moreover, no dividends were received from associates in 2014-2015.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 9:- INVESTEES (Cont.)
9.2 Joint ventures
9.2.1 Financial data of individually immaterial joint ventures
The financial data presented below are adjusted to the Group's ownership interests:
Group's share of earnings Carrying amount of from continuing operations investments at December 31, and comprehensive income 2015 2014 2015 2014 NIS in millions
Joint ventures 13 12 1 *
* Less than NIS 0.5 million.
9.2.2 Additional information on loans and guarantees granted to joint ventures and dividends received from joint ventures
As of December 31, 2015, the Company extended loans totaling NIS 7 million to joint ventures (December 31, 2014 - approximately NIS 4 million). No guarantees were provided to these joint ventures. Moreover, dividends were received from these joint ventures in 2014-2015 in amounts that are lower than NIS 0.5 million.
9.3 Details of dividends received from subsidiaries
Year ended December 31, 2015 2014 2013 NIS in millions
From subsidiaries 153 131 209
NOTE 10:- INVESTMENTS
Breakdown by type of investment
December 31, 2015 2014 NIS in millions
Derivative instruments at fair value through profit or loss 10 15 Investment in non-marketable shares at fair value through profit or loss 76 68
86 83
In 2015, the Company received dividends of approximately NIS 9 million for its investment in non-marketable shares presented at fair value through profit or loss (in 2014 - approximately NIS 7 million).
For information regarding the fair value hierarchy of these financial instruments, see Note 30.5.2 below. For information on the evaluation processes adopted by the Company with respect to the investment in non-marketable shares, see Note 30.5.3 below.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 11:- FIXED ASSETS
11.1 Composition:
Machinery, Refinery Work in equipment machinery progress Installations Office furniture, Computers, Land and and and and spare and leasehold Motor equipment and hardware and buildings appliances equipment parts improvements vehicles accessories software Total NIS in millions
Cost or deemed cost: Balance as of January 1, 2015 2,706 1,799 3,803 176 44 148 78 294 9,048 Additions 18 83 20 83 - 22 1 15 242 Disposals (16) (30) - (8) - (26) - (3) (83)
Balance as of December 31, 2015 2,708 1,852 3,823 251 44 144 79 306 9,207
Balance as of January 1, 2014 *2,669 *1,771 3,773 *184 43 172 *77 *287 8,976 Additions 67 79 30 6 2 23 1 16 224 Disposals (26) (51) - (14) (1) (47) - (9) (148) Transfer to assets held for sale (4) ------(4)
Balance as of December 31, 2014 2,706 1,799 3,803 176 44 148 78 294 9,048
* Reclassified.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 11:- FIXED ASSETS (Cont.)
Machinery, Refinery Work in equipment machinery progress Installations Office furniture, Computers, Land and and and and spare and leasehold Motor equipment and hardware and buildings appliances equipment parts improvements vehicles accessories software Total NIS in millions
Depreciation: Balance as of January 1, 2015 711 1,218 1,086 - 17 76 55 228 3,391 Depreciation for the year 41 71 203 - 2 17 2 24 360 Disposals (9) (28) ---(17) - (3) (57)
Balance as of December 31, 2015 743 1,261 1,289 - 19 76 57 249 3,694
Balance as of January 1, 2014 671 *1,193 886 - 16 95 *53 *212 3,126 Depreciation for the year 42 74 200 - 2 18 3 25 364 Disposals (2) (49) --(1) (37) (1) (9) (99)
Balance as of December 31, 2014 711 1,218 1,086 - 17 76 55 228 3,391
Net book value: As of January 1, 2014 1,998 578 2,887 184 27 77 24 75 5,850
As of January 1, 2015 1,995 581 2,717 176 27 72 23 66 5,657
As of December 31, 2015 1,965 591 2,534 251 25 68 22 57 5,513
* Reclassified.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 11:- FIXED ASSETS (Cont.)
11.2 Collaterals
As of December 31, 2015, no pledges have been recorded on fixed assets.
11.3 Acquisition of fixed assets on credit
As of December 31, 2015, the Group acquired fixed assets on credit in the amount of approximately NIS 36 million (December 31, 2014 - approximately NIS 17 million).
11.4 Capitalized borrowing costs
In 2015 and 2014, no borrowing costs were capitalized to qualifying assets (through 2013 - an amount of approximately NIS 60 million was capitalized).
11.5 Details on real estate used as fixed assets by the Group
The Group leases lands from the Israel Land Administration under a capitalized lease for periods of 49 years (this after the initial lease contract of 49 years has ended, and the Group renewed the lease for an additional 49 years). In addition, the Group leases lands from the Israel Land Administration under a capitalized lease for periods of 98 years (49 years lease + extension option for additional 49 years).
NOTE 12A:- INVESTMENT PROPERTY
12.1 Composition:
2015 2014 NIS in millions
Cost: Balance as of January 1 43 75 Additions - - Transfer to asset held for sale (see 12.2 below) - (32)
43 43 Depreciation: Balance as of January 1 11 10 Depreciation for the year 1 1 Transfer to asset held for sale (see 12.2 below) -
12 11
Balance as of December 31 31 32
Fair value as of December 31 36 34
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 12B:- ASSETS HELD FOR SALE
In 2015, the Company signed final and binding agreements for the sale of three assets that were included as of December 31, 2014 in assets held for sale:
1. A real estate property in Pi-Glilot - in January 2015, the Company signed a binding agreement for the sale of its real estate rights (34 thousand sq. m. in the Pi-Glilot site) to a partnership/company of the Israel Canada Group in consideration of NIS 131 million plus VAT to be paid to the Company over a period of 26 months from the date of signing. According to the adjustment mechanisms prescribed in the agreement, the consideration may increase by an amount that is immaterial to the Company. The pre- tax capital gain recorded in the financial statements approximates NIS 27 million (approximately NIS 20 million net of taxes).
2. Shares in Pi-Glilot Petroleum Terminals and Pipelines Ltd. ("Pi-Glilot") - in January 2015, the Company signed a binding agreement for the sale of its holdings in (Pi- Glilot (21.5%) in consideration of NIS 106 million plus VAT that will be paid to the Company over a period of 26 months from the date of signing. According to the adjustment mechanisms prescribed in the agreement, the consideration may increase by an amount that is immaterial to the Company ("the share sale transaction").
On March 26, 2015, Glilot Corner Ltd. (a shareholder in Pi-Glilot) ("Glilot Corner") notified the Company of the exercise of a right of first refusal granted to it in keeping with the articles of association of Pi-Glilot in connection with the acquisition of the Company's entire stake in Pi-Glilot at the same price and under the same terms as in the share sale transaction. The Company filed an interpleader with the Court in which the Court was asked to decide who is entitled to purchase the Company's shares in Pi- Glilot, the company/partnership in the Canada Israel Group or Glilot Corner. On October 25, 2015, an arrangement was signed between the Company and Glilot Corner and companies/partnerships of the Israel Canada Group and the Acro Real Estate Group, which received the Court's approval on October 26, 2015 ("the arrangement").
According to the arrangement, following the exercise of the right of first refusal in keeping with Pi-Glilot's articles of association, an agreement will be signed between Glilot Corner and the Company for the sale of the Company's interests in Pi-Glilot (21.5%) for the same price and terms as those stipulated in the original share sale transaction (under the necessary adjustments) and the original agreement will be cancelled.
The parties decided that the share sale agreement will be signed after obtaining the approval of the Minister of Finance for the new composition of shareholders in Glilot Corner which will include, among others, the partnerships of the Israel Canada Group and the partnership of the Acro Real Estate Group.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 12B:- ASSETS HELD FOR SALE (Cont.)
According to the arrangement, Glilot Corner placed the first three installments pursuant to the agreement in a total of approximately NIS 32 million in escrow and on the date of signing the agreement, they will be released to the Company. In addition, certain provisions have been made regarding a guarantee that will be provided to secure the parties' liabilities towards the Company. The transaction for the sale of the Company's interests in Pi-Glilot is subject to the fulfillment of two suspending conditions: obtaining the Minister of Finance's approval and obtaining the approval of Pi-Glilot's board of directors.
The parties have decided on certain provisions in the event that the Minister of Finance does not approve a certain shareholder in Glilot Corner and the Company's option of notifying Pi-Glilot whether it is interested in having Glilot Corner purchase its interests in Pi-Glilot even if the partnerships of the Israel Canada Group and of the Acro Real Estate Group are not approved by the Minister of Finance and the implications of this option on the denial of the right of first refusal (according to Pi- Glilot's articles of association) from Glilot Corner, for a specific period or if at all, with respect to future transactions for the sale of the Company's interests in Pi-Glilot, as they will be. The arrangement also provides for the waiver of claims by the parties to the arrangement and an agreed compensation for the violation of the arrangement. The arrangement, which, as mentioned above, was approved by the Court, resulted in the conclusion of the Company's petition by way of the Company's interpleader.
Insofar as the suspending conditions detailed above are met and on the basis on a calculation prepared by the Company, the pre-tax gain which the Company is expected to record in its financial statements approximates NIS 84 million (approximately NIS 63 million net of taxes).
It should be emphasized that the agreement for the sale of the real estate in Pi-Glilot and the agreement for the sale of the Company's interests in Pi-Glilot are separate independent agreements.
3. Rights in a real estate property in Tel-Aviv - in January 2015, the Company signed a binding agreement for the sale of its rights in a property in Tel-Aviv in consideration of NIS 31 million (plus VAT) that will be paid on the dates prescribed in the agreement. The transaction did not have a material impact on the Company's financial results.
As of December 31, 2015, the item of assets held for sale includes the balance of the investment in Pi-Glilot shares.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 13:- INTANGIBLE ASSETS
13.1 Composition:
Operation agreements Agreement and Other to purchase distribution intangible Goodwill natural gas rights assets Total NIS in millions
Cost: Balance as of January 1, 2015 660 125 428 69 1,282 Additions -- 3 - 3 Disposals ---- -
Balance as of December 31, 2015 660 125 431 69 1,285
Balance as of January 1, 2014 660 125 430 68 1,283 Additions -- - 1 1 Disposals -- (2) - (2)
Balance as of December 31, 2014 660 125 428 69 1,282
Depreciation and amortization: Balance as of January 1, 2015 22 105 257 59 443 Amortization -12211 34 Disposals ---- -
Balance as of December 31, 2015 22 117 278 60 477
Balance as of January 1, 2014 22 93 236 57 408 Amortization -12222 36 Disposals -- (1) - (1)
Balance as of December 31, 2014 22 105 257 59 443
Net book value: As of January 1, 2014 638 32 194 11 875 As of December 31, 2014 638 20 171 10 839 As of December 31, 2015 638 8 153 9 808
13.2 Amortization and impairment losses
The current amortization in respect of all intangible assets is recognized in profit or loss as follows:
The amortization of the agreement for the purchase of natural gas is recognized in the cost of sales.
The amortization of operation agreements, distribution rights and other intangible assets is recognized in selling and marketing expenses.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 13:- INTANGIBLE ASSETS (Cont.)
13.3 Impairment testing for cash-generating units containing goodwill
For the purpose of impairment testing, goodwill is allocated to the companies in the Group's various operating divisions, which represent the lowest level within the Group at which the goodwill is monitored for internal management purposes.
The carrying amounts of goodwill allocated to each unit are as follows:
December 31, 2015 2014 NIS in millions
Refining and Logistics 566 566 Industries and Services 66 66 Retail and Wholesale 6 6
638 638
13.4 In accordance with International Accounting Standard No. 36, Impairment of Assets, the Company examined the recoverable amount of the Refining Division based on its value in use, as determined with the assistance of an independent appraiser. The appraiser determined that the carrying amount of the unit is less than its recoverable amount and hence there is no indication of impairment in this unit.
Value in use was determined by discounting the future cash flows generated from the cash generating unit and was, inter alia, based on a multiannual (7-year) projection of the anticipated cash flows as well as on the projection of refining margins prepared by KBC (an international consulting firm in the field of energy).
A pre-tax discount rate of 13.3% was applied in determining the recoverable amount of the Refining Division (in 2014 - 13.4%). The discount rate reflects a dollar debt price of 4.5%-5.5% and a required return on capital of approximately 17%, assuming normative debt leveraging of 40%-45% of the value of the assets. Also, a sensitivity analysis was performed of the cost of capital. Even with the addition of 1% to the weighted average capital, the estimated recoverable amount exceeds the carrying amount of the division.
C-55 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 14:- LOANS AND CREDIT FROM BANKS AND OTHERS
This note provides information regarding the contractual terms of the Group's interest-bearing loans and borrowings. Further information with respect to the Group's exposure to interest, currency and liquidity risks is disclosed in Note 30, Financial Instruments.
14.1 Current liabilities
December 31, 2015 2014 NIS in millions Composition: Short-term loans 507 18 Accrued interest 1 2 Short-term debentures 5 7
513 27
Current maturities of bank loans - 200
Total short-term loans and borrowings 513 227
Short-term loans bear interest of 0.4%-0.8% (December 31, 2014 - 1.75%-3%). Short-term debentures bear interest of 5.9%-6.3% (December 31, 2014 - 5%-7%).
For details of the expansion of debentures (series D) after the statement of financial position date, see Note 14.6.2 below.
For linkage information, see Note 30.4.6 below.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 14:- LOANS AND CREDIT FROM BANKS AND OTHERS (Cont.)
14.2 Non-current liabilities
Composition:
December 31, 2015 2014 NIS in millions Debentures and bank loans Debentures at amortized cost 3,874 3,877
3,877 3,877 Bank loans - 200
3,874 4,077 Other long-term liabilities Liabilities for concession fees 49 49 Long-term deferred revenue * 2 Other long-term balances 1 2
Total other long-term liabilities 50 53
Total non-current liabilities 3,924 4,130 Less - current maturities - 200
3,924 3,930
* Less than NIS 0.5 million.
Bank loans as of December 31, 2014 bear interest of 2%-3%.
For additional details of the interest rates and linkage terms of debentures, see Notes 14.3 and 30.4.6 below.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 14:- LOANS AND CREDIT FROM BANKS AND OTHERS (Cont.)
14.3 Additional details regarding debentures issued by the Company
Total par Name of value as of Book value as rating date of issue of 31.12.14 * Interest Nominal Interest payment Principal payment Linkage Series Date of issue company Rating (NIS millions) (NIS millions) type interest dates dates basis Series C May 14, 2009, expanded on Maalot AA- 3,117 3,117 Variable Bank of Israel Four times a year at the One payment on None April 27, 2010, on April 4, quarterly + 2.2% end of each quarter May 25, 2019 2011, on December 2, 2012 interest between 2009-2019 and on June 6, 2013 Series D June 12, 2014 Maalot AA- 752 753 Variable Bank of Israel Four times a year on One payment on None quarterly + 1.65% February 28, May 31, May 31, 2024 interest August 31 and November 30 between 2014-2024
* Excluding issuance expenses totaling approximately NIS 15 million and premium totaling approximately NIS 21 million.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 14:- LOANS AND CREDIT FROM BANKS AND OTHERS (Cont.)
14.4 On May 28, 2013, the Company published a shelf prospectus that enabled, among others, the expansion of the outstanding debentures (series C) as well as the issuance of debentures (series D, outstanding from June 2014) and the issuance of shares, new series of debentures, series of convertible debentures, options for the Company's shares, options for debentures and marketable securities.
On April 27, 2015, the ISA approved extending the Company's shelf prospectus by an additional 12 months until May 28, 2016.
The Company intends to act towards the approval of a new shelf prospectus that will be in effect from May 28, 2016.
On June 6, 2013, the Company issued NIS 302,842 thousand par value of debentures (series C) in the context of a public offering based on a shelf offering report issued by the Company in June 2013 by way of expansion of the existing debentures (series C). The gross issuance proceeds totaled approximately NIS 312 million (approximately NIS 309 million net of issuance expenses).
The debentures were rated at ilA(+) with a stable outlook by S&P Maalot Ltd. ("Maalot").
14.5 On April 1, 2015, Maalot raised the rating of the Company and of Paz Ashdod (including the debentures) to ilAA(-) with a stable rating outlook.
14.6 Issuance of debentures (series D):
14.6.1 On June 12, 2014, the Company allocated NIS 751,657,000 par value of debentures (series D) in the context of a public offering pursuant to a shelf offering report issued by the Company in June 2014, by virtue of the Company's shelf prospectus. The debentures (series D) earn annual interest at the rate of the BOI's interest plus a margin of 1.65%. The interest is paid quarterly and the principal will be repaid in a lump sum at the end of May 2024. The gross proceeds from the issuance total approximately NIS 752 million and the net proceeds less issuance expenses total approximately NIS 743 million. The debentures were rates at ilA(+) with a stable rating outlook by Maalot.
14.6.2 After the statement of financial position date, on February 2, 2016, the Company allocated an additional NIS 692,941,000 par value of debentures (series D) pursuant to a shelf offering report issued by the Company on February 1, 2016 by virtue of the Company's shelf prospectus, under the same terms as the outstanding debentures (series D). The gross proceeds from the additional allocation amount to approximately NIS 689 million (the proceeds net of issuance expenses amount to approximately NIS 682 million). The proceeds will be used to refinance an existing financial debt.
The debentures were rated by Maalot at ilAA(-) with a stable rating outlook.
C-59 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 14:- LOANS AND CREDIT FROM BANKS AND OTHERS (Cont.)
At its sole discretion, the Company will be entitled to execute, at any time, early full or partial repayment of the debentures (series D) in which case the provisions of the deed of trust of the debentures will apply. The frequency of the early repayments will not exceed a single repayment per quarter. The amount payable in the event of early repayment to the holders of debentures (series D) will be the higher of: (1) the median market value in the 30 trading days preceding the Board's decision on the early repayment of outstanding debentures; or (2) the liability value of the outstanding debentures (series D) for early repayment; or (3) the balance of cash flows of the outstanding debentures (series D) for early repayment discounted at the yield on Government bonds (as defined in the deed of trust) with the addition of interest at a rate of 1.5%.
14.7 In October and November 2014, the Company repaid the entire outstanding principal of the debentures (series A and B) with the accrued interest and linkage as of the repayment date in a total of approximately NIS 2,621 million.
On the same date, the Company performed an interest rate swap ("IRS") in the context of which it exchanged the exposure of debentures to changes in the CPI for their exposure to changes in NIS interest. The IRS proceeds totaled approximately NIS 484 million.
The net amount repaid by the Company in respect of the debentures less the IRS totaled approximately NIS 2,137 million.
14.8 Financial covenants
14.8.1 Within the framework of the issuance of debentures (series C and D), certain cases have been determined that give rise to a right to call for the immediate repayment of said debentures, such as the appointment of a liquidator for the Company, including a temporary liquidator, by a court of law or the issue of a liquidation order by the court, including an interim order, for the Company; the appointment of a receiver for the Company and/or for all or part of its material assets, which is not voided within the timeframe stipulated in the terms of the debentures; if the Company ceases to make payments due by it; if foreclosures or liens are imposed on all of the assets of the Company or a significant part thereof; if a petition is filed for stay of proceedings against the Company; if the Company is wound-up or written-off for any reason; a fundamental breach of the terms of the debentures and the deed of trust, and more. Certain timeframes have been established for some of the above grounds which allow the Company to rectify the breach.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 14:- LOANS AND CREDIT FROM BANKS AND OTHERS (Cont.)
In the context of the issuance of debentures (series D) as discussed in Not 14.6 above, certain cases were added whose occurrence will result in immediate repayment as follows: if the Company's equity is lower than NIS 17 billion over three consecutive quarters (and/or if the ratio of the Company's (consolidated) financial debt to its total (consolidated) equity and debt (CAP) (as defined in the deed of trust of the debentures (series D) exceeds 77% over three consecutive quarters and/or if the Company distributes a dividend and/or repurchases its shares as a result of which the Company's equity will drop below NIS 2 billion and/or if the control over the Company is transferred without the approval of the Prime Minister and/or Minister of Finance and/or any other regulator required according to the control permit in Paz Refinery and/or if a merger is effected without the advance approval of the meeting of the holders of the debentures (series D), unless the receiving company in the merger declares at least ten business days before the date of the merger that there is no reasonable concern that the receiving company will not be able to meet its liabilities based on the deed of trust and/or if the debentures cease being rated for a period in excess of 60 days and the discontinuance of rating does not depend solely on the Company.
Moreover, the deed of trust of the debentures (series D) states provisions for increasing the interest rate on the debentures if rating of the debentures (series D) by Maalot or an equivalent rating company as detailed in the deed of trust is lowered below il(A).
As of December 31, 2015, none of the events that give rise to the right to call for the immediate repayment of the debentures has come to pass.
14.8.2 To secure the credit received by Paz Ashdod (from the credit providers to Oil Refineries Ltd. ("ORL"), which Paz Ashdod assumed upon itself in 2006 following the acquisition of Paz Ashdod by Paz) ("Paz Ashdod's debentures"), it has undertaken to refrain from creating additional pledges in favor of third parties ("negative pledge") as well as to refrain from entering into leasing transactions in an amount exceeding US$ 10 million. The balance of Paz Ashdod's debentures as of December 31, 2015 in the consolidated financial statements is approximately NIS 5 million.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 15:- TRADE PAYABLES
Out of the balance of trade payables, an amount of NIS 1,349 million and NIS 2,140 million as of December 31, 2015 and 2014, respectively, represents open debts of suppliers.
The majority of supplier credit does not bear interest. Some of the short-term supplier's credit bears interest at market terms. The financial expenses incurred in respect of supplier's credit are immaterial to the Company. For details of linkage, see Note 30.4.6 below.
For further information regarding trade payables in respect of related and interested parties, see Note 34, Related and Interested Parties.
The exposure of the Group to currency and liquidity risks in respect of trade payables is disclosed in Note 30, Financial Instruments.
NOTE 16:- OTHER ACCOUNTS PAYABLE
Composition:
December 31, 2015 2014 NIS in millions
Deposits and advances from gas consumers (1) 190 198 Employees and payroll accruals 74 66 Government authorities 208 159 Trade payables 40 50 Other payables 39 24 Derivatives 2 125
553 622
(1) The change in deposits is mainly a result of the update of the liability in respect of the deposits following the issuance of an order which establishes the maximum deposit fee for gas equipment, see more information in Note 31.8 below.
The majority of other accounts payable do not bear interest. For details of linkage, see Note 31.8 below.
For further information regarding payables in respect of related and interested parties, see Note 30.4.6, Related and Interested Parties.
The exposure of the Group to currency and liquidity risks in respect of certain payables is disclosed in Note 30, Financial Instruments.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 17:- PROVISIONS
Legal Warranties Environmental claims Total NIS in millions
Balance as of January 1, 2015 11812 31 Provisions created during the period -1322 35 Provisions used and/or cancelled during the period (1) (16) (1) (18)
Balance as of December 31, 2015 -1533 48
Site restoration and environmental preservation
The Company recorded a provision in its books in respect of anticipated environmental expenses regarding the treatment of groundwater pollution, the quality of air and soil, the treatment of sludge, the removal of hazardous waste, the performance of surveys, etc. The amount estimated by the Company is based on the assessments of Management and the Company's experts. In the opinion of the Company's Management, the provision adequately reflects the anticipated environmental expenses of which the Company is aware at the date of the report.
Legal claims
Legal claims are filed against Group companies in the ordinary course of business. In the opinion of the Group companies' managements, which are based, inter alia, on legal opinions regarding the outcome of the claims, appropriate provisions in the amount of approximately NIS 33 million were included in the financial statements where such provisions are required in order to cover the exposure to such claims. See also Note 33 below.
NOTE 18:- EMPLOYEE BENEFITS
18.1 Employee benefits include post-employment benefits, short-term benefits and share- based payments.
As regards post-employment benefits, the Group has defined benefit plans for which it makes contributions to central severance pay funds and appropriate insurance policies.
The Company also has a defined contribution plan for some of its employees who are subject to Section 14 of the Severance Pay Law, 1963.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 18:- EMPLOYEE BENEFITS (Cont.)
18.2 In accordance with labor agreements in Paz Ashdod, the liability for post-employment benefits is calculated such that supplemental severance pay of 50% is paid for each year of seniority of 20-30 years and supplemental severance pay of 100% is paid for each year of seniority in excess of 30 years. Some of the employees that are employed under personal employment contracts are entitled, in certain cases, to the supplement of severance pay up to 200%. As of the report date, there is one employee of this group who has not yet retired.
In addition to pension and/or severance pay, the employees and pensioners of Paz Ashdod are entitled, at their individual choice, to additional benefits, consisting primarily of gifts for the holidays. The Company, based on the opinion of an actuary, has created a provision in respect of the pensioners of the Company and its employees, according to their remaining period of service until retirement.
Pursuant to its salary agreements with some of its employees, Paz Ashdod is obligated to compensate those employees in respect of unutilized sick days when they reach retirement age. The compensation for unutilized sick days is calculated as 20% of the balance of accrued sick days, up to a ceiling of 250 days. Paz Ashdod recorded a provision in respect of unutilized sick days based on an actuary's opinion.
18.3 Composition
December 31, 2015 2014 NIS in millions
Total present value of defined benefit plan obligations 105 112 Less - fair value of plan assets (53) (63)
Defined benefit plan liability, net 52 49 Other long-term benefit liability - -
Total employee benefits 52 49
Presented under the following items: Severance pay funded under "loans granted" and "long- term receivables" (3) (2) Long-term employee benefits 55 51
52 49
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 18:- EMPLOYEE BENEFITS (Cont.)
18.4 Defined benefit plans
18.4.1 Movement in defined benefit plans:
2015 2014 NIS in millions
Defined benefit obligation as of January 1 112 119
Expense (income) carried to profit and loss: Current service costs 3 5 Interest costs 4 4 Termination benefit 2 1
Recognized in other comprehensive income: Actuarial (gains) losses from changes in financial assumptions (1) (1) Other actuarial losses (gains) 1 1
Additional movements: Benefits paid (16) (17)
Balance as of December 31 105 112
18.4.2 Movement in defined benefit plan assets:
2015 2014 NIS in millions
Fair value of plan assets as of January 1 63 70
Expense (income) carried to profit and loss: Interest income 1 2
Recognized in other comprehensive income: Other actuarial (losses) gains (1) 1
Additional movements: Amounts contributed 2 2 Benefits paid (12) (12)
Fair value of plan assets as of December 31 53 63
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 18:- EMPLOYEE BENEFITS (Cont.)
18.4.3 Actual return:
Year ended December 31, 2015 2014 2013 %
Actual return on defined benefit plan assets 1.37 3.45 3.68
18.4.4 Actuarial assumptions and sensitivity analysis of actuarial assumptions:
Principal actuarial assumptions at the reporting date (expressed as weighted averages):
2015 2014 2013 %
Discount rate (nominal) as of December 31 3.12 3.29 3.52 Future (nominal) salary increase rate 1.54 1.77 2.38
Assumptions regarding future mortality rates are based on published statistics and standard mortality tables.
Below are reasonably possible changes that affect the defined benefit obligation at the end of the reporting period in each actuarial assumption assuming that all other actuarial assumptions are constant:
December 31, 2015 1% increase 1% decrease NIS in millions
Expected rate of future salary increase 3.59 (3.14)
Interest discount rate (5.17) 6.09
18.4.5 Effect of the plan on the Group's future cash flows:
The Group's estimate of anticipated contributions in the funded defined benefit plan in 2016 totals approximately NIS 1 million. The Group's estimate of the life of the plan (based on a weighted average) at the end of the reporting period is 6 years (2014 - 6.1 years).
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 18:- EMPLOYEE BENEFITS (Cont.)
18.5 Defined contribution plans
Year ended December 31, 2015 2014 2013 NIS in millions
Amount recognized as expense in respect of defined contribution plan 9 8 13
NOTE 19:- EQUITY AND CAPITAL RESERVES
19.1 Share capital and share premium
Ordinary shares 2015 2014 NIS
Issued and outstanding share capital as of December 31 (Ordinary shares of NIS 5 par value each) * 50,722,755 50,790,230 Fully diluted issued and outstanding share capital ** 50,839,660 50,978,785 Authorized share capital 150,000,000 150,000,000
* Excluding 2,489,571 dormant shares (2014 - 2,472,607 dormant shares).
** Assuming full conversion into Ordinary shares of all employee options (including to the Company's CEO) which represent 23,381 options (December 31, 2014 – 37,711 options) which are exercisable into no more than 23,381 Ordinary shares allocated pursuant to the employee option plan in Paz Group.
In 2015, 14,330 employee options were exercised into 3,469 shares of NIS 5 par value each for no consideration (in 2014 – 16,122 employee options were exercised into 2,758 shares of NIS 5 par value each for no consideration).
See Note 21, Share-Based Payments, regarding allocation of shares and options to employees.
19.2 Translation reserve from a foreign operation
The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of Paz Ashdod whose functional currency was the US dollar until December 31, 2008.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 19:- EQUITY AND CAPITAL RESERVES (Cont.)
19.3 Treasury shares
The reserve for treasury shares comprises the cost of the Company's shares held by the Company. As of December 31, 2015, the Group held 2,489,571 shares of the Company (December 31, 2014 - 2,472,607 shares of the Company). The rights attached to the treasury shares held by the Company are suspended until their reissuance.
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"). 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 Note 21 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.
According to the terms of the repurchase plan and in keeping with the allocation of RSUs to executives in the Company, in 2015, the Company repurchased 16,964 shares (instead of 22,000 shares).
19.4 Capital reserve from the net change in the fair value of debentures designated at fair value through profit or loss, which is attributed to the change in the credit risk of the Company
The capital reserve comprises the cumulative net change in the fair value of the Company's debentures designated at fair value through profit or loss, which is attributed to the change in the credit risk of the Company. Following the repayment of the debentures designated at fair value through profit or loss in 2014, as stated in Note 14.7, the capital reserve was reduced to zero.
19.5 Dividends
The following dividends were declared and paid by the Company:
Year ended December 31, 2015 2014 2013 NIS in millions
In 2015: NIS 41.39 per Ordinary share * In 2014: NIS 49.23 per Ordinary share *420 500 -
* Includes an amount of NIS 170 million (NIS 16.76 per Ordinary share) which was declared by the Company in December 2015 and paid to the shareholders on January 3, 2016.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 20:- EARNINGS PER SHARE
20.1 Basic earnings per share
The calculation of basic earnings per share as of December 31, 2015 was based on the income attributable to Ordinary shareholders in the amount of NIS 716 million (2014 - NIS 172 million, 2013 - NIS 110 million) divided by the weighted average number of Ordinary shares outstanding, calculated as follows:
Weighted average number of Ordinary shares
Year ended December 31, 2015 2014 2013 Ordinary shares of NIS 5 par value each: Balance as of January 1 10,158,046 10,155,288 10,146,843 Effect of share options exercised into shares 1,771 1,599 2,301 Effect of repurchase of shares (8,648) - - Weighted average number of Ordinary shares used to calculate basic earnings per share 10,151,169 10,156,887 10,149,144
20.2 Diluted earnings per share
The calculation of diluted earnings per share as of December 31, 2015 was based on the income attributable to Ordinary shareholders divided by the weighted average number of Ordinary shares outstanding, after adjustment for the effects of all dilutive potential Ordinary shares, calculated as follows:
Weighted average number of Ordinary shares
Year ended December 31, 2015 2014 2013 Weighted average number of Ordinary shares used to calculate basic earnings per share 10,151,169 10,156,887 10,149,144 Effect of share options exercised into shares 5,713 2,443 3,277
Weighted average number of Ordinary shares used to calculate diluted earnings per share 10,156,882 10,159,330 10,152,421
20.3 As of December 31, 2015, no warrants were excluded from the calculation of diluted weighted average number of Ordinary shares, as their effect had been anti-dilutive (December 31, 2014 and 2013 - 5,525 warrants were excluded as described above)
The average market value of the Company's shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the period that the options were outstanding.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 21:- SHARE-BASED PAYMENTS
21.1 The Company has two option plans: the 2006 option plan and the 2009 option plan. As of the statement of financial position date, there are no outstanding options in the 2006 plan.
The 2009 option plan ("the option plan") - the 2009 option plan was approved by the Company's Board of Directors on November 4, 2009 for granting, at no consideration, warrants that are each exercisable into one Ordinary share of NIS 5 par value of the Company, to employees and officers in the Company and in subsidiaries and to the providers of regular and ongoing services to the Company. Additionally, the Board of Directors decided to allocate to employees and officers in the Company and in subsidiaries up to 56,016 non-marketable warrants at no consideration, which are exercisable each into one Ordinary share of NIS 5 par value of the Company. As of the date of the financial statements, 54,308 of said warrants were allotted to employees of the Group, as detailed in the memorandum published by the Company on November 5, 2009 and in a private placement of the Company on February 24, 2010. The Board of Directors also approved the allocation of 1,052 warrants to a consultant. According the option plan, unless determined otherwise, 25% of the warrants will vest and become exercisable at the end of each year following their grant date. The memorandum stipulates various vesting periods for the warrants as follows: most of the optionees were given an initial vesting period of two years after the date of grant for 25% of the issue, and at the end of each year from the first vesting date, another 25% will vest, with a total of four batches. The second group of optionees was given an initial vesting date of January 1, 2012, for 25% of the issue, and at the end of each year from the date of the first vesting, another 25% will vest, with a total of four batches. The third group of optionees was given an initial vesting date of January 1, 2013, for 33% of the issue, and at the end of each year thereafter an additional 33% will vest, making a total of three batches. The fourth group of optionees was given an initial vesting date of July 1, 2013, for 33% of the issue, and at the end of each year thereafter another 33% will vest, with a total of three batches. The fifth group of optionees was given an initial vesting date of April 1, 2014, for 50% of the issue, and a year after the first vesting date another 50% will vest, making a total of two batches. The exercise price of the warrants will be the average closing price of the Company's share in the 30 trading days preceding the date of approval of the allotment subject to adjustments. Unless they expire earlier, each option that is not exercised within two years from the end of the vesting period of the last batch of options issued to the same optionee will expire. In addition, the option plan also provides for the entitlement of employees to exercise the option in the events of dismissal, resignation, death and illness.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 21:- SHARE-BASED PAYMENTS (Cont.)
On May 23, 2012, the Company's Board of Directors approved to grant to the Company's CEO, Mr. Yona Fogel, 12,085 non-marketable warrants (after the Company's Board of Directors approved to increase the pool of options under the plan), which are exercisable into 12,085 Ordinary shares of NIS 5 par value each of the Company. The options were granted to a trustee for the Company's CEO on June 14, 2012. The terms of the warrants granted to the CEO are in accordance with the option plan, except with respect to their vesting period, which is as follows: at the end of two years from the date of grant -50%, at the end of three years from the date of grant - 25%, and at the end of four years from the date of grant - the remaining 25%. Each warrant is exercisable at an exercise price of NIS 496.83, which is the average closing price of the Company's share in the 30 trading days preceding the date of approval of the allotment by the Board of Directors, with the adjustments detailed under the option plan. All options granted but yet to be exercised, including vested options, will expire and will be cancelled at the end of two years from the end of the vesting period of the last batch granted to the CEO. The total fair value of the options granted to the CEO according to the Black & Scholes model is NIS 2 million.
On March 20, 2013, following the approval of the Company's Remuneration Committee and Audit and Finance Committee, the Company's Board of Directors decided to grant an officer in the Company 5,525 non-marketable warrants which are exercisable into Ordinary shares of NIS 5 par value each of the Company based on the option plan. 50% of the warrants will vest and become exercisable at the end of two years from the date of grant and 25% of the warrants will vest and become exercisable at the end of each consecutive year, a total of three batches, provided that the officer is employed by the Company or by a subsidiary on the vesting date. The exercise price to be paid to the Company is NIS 561.3. The economic value of the options on the grant date according to the Black & Scholes model is NIS 1,250 thousand.
As of December 31, 2015, 23,381 options are outstanding under the option plan, of which 4,043 granted to the Company's CEO as detailed above. During 2010-2015, 17,944 options were forfeited following the retirement of several employees.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 21:- SHARE-BASED PAYMENTS (Cont.)
The warrants pursuant to the option plan are exercisable on a net cashless exercise basis. According to the option plan, on the date on which the Company receives an exercise notice from an optionee ("the exercise date"), the Company issues the exercise shares to the trustee (pursuant to the appropriate capping period) or to the optionee, as applicable, and the number of exercise shares is calculated in accordance with the following formula:
(A x B) - (A x C) B
A = number of options that the optionee wishes to exercise as stated in the exercise notice; B = the price in NIS of the Company's shares on the Stock Exchange on the exercise date; C = the exercise price in NIS for each option, as stated in the grant letter.
According to the option plan, options are granted pursuant to the capital gains track with a trustee under Section 102, while the options to the consultant are granted pursuant to Section 3(i) of the Income Tax Ordinance. On May 23, 2012, the Company's Board of Directors approved technical amendments to the option plan, following the TASE's guidance regarding change in the defrayal outline of convertible securities.
21.2 Movement in warrants and the weighted average exercise price
Weighted average exercise price (in NIS) Number of warrants 2015 2014 2013 2015 2014 2013
Balance at January 1 37,711 55,469 81,771 Forfeited during the period - (1,636) (1,930) Exercised during the period (1) (14,330) (16,122) (29,897) Granted during the period - - 561.3 - - 5,525
Balance at December 31 23,381 37,711 55,469
(1) The weighted average share price on the date of exercise of the warrants in respect of warrants exercised in 2015 was NIS 591.29 (2014 - NIS 553.16, 2013 - NIS 571.95).
C-72 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 21:- SHARE-BASED PAYMENTS (Cont.)
21.3 Additional details pertaining to equity-settled share-based payments
The fair value of the services received in return for the share options granted is based on the fair value of the warrants granted, which is measured using the Black & Scholes formula, based on the following inputs:
CEO Senior employees 2012 2013 2010 2009 Fair value on grant date of the balance of warrants (NIS millions) 2.0 1.2 0.2 12.5
Inputs considered in the calculation of fair value: Exercise price before price adjustment for dividend distribution after grant date (NIS) 496.83 561.3 546.79 363.8-570.1 Volatility 34.14% 32.8% 31.7%-33.4% 32.4% Risk-free interest rate 3.90% 3.2% 3.2%3.9-4.5% 3.42-4.3%
The expected volatility taken into consideration was determined by considering historic share price volatility. The dividend yield expected over the term of the options is 0%. The expected life of the options is determined on the basis of management's estimate of the period the employees will hold the option, taking into consideration their position with the Company and the Company's past experience regarding the turnover of employees. The risk-free interest was determined on the basis of NIS- denominated Galil Government bonds (CPI-linked) with a remaining life equal to the expected life of the options.
21.4 RSU plan
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 restricted stock units ("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 RSU plan offered to senior officers supersedes the multiannual bonus arrangement approved for them with the approval of the Company's remuneration plan and is contingent on each senior officer's consent to waive their inclusion in the multiannual bonus.
The overall fair value of the RSUs granted is approximately NIS 10 million. In 2015, the Company recorded an expense of approximately NIS 1 million in respect of the RSU plan which was carried against retained earnings. In 2015, 164 RSUs were cancelled due to employee retirement. The balance of RSUs as of December 31, 2015 is 16,800.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 22:- REVENUES
22.1 Composition:
Year ended December 31, 2015 2014 2013 NIS in millions
Sales of oil products ** 17,837 23,287 24,365 Less - excise duty (6,038)(5,868 ) (5,741)
Total sales of oil products, net 11,799 17,419 18,624
Yellow products and rental of properties in station sites 703 681 681 Revenues from services, electricity sale, commissions and other 245 301 216 Off-station rental income 2 2 2 Fixed usage fees 52 53 53 Installation and instrumentation 59 57 59
1,061 1,094 1,011
12,860 18,513 19,635
** Oil products include crude oil distillates, lubricants, chemicals and insulation and sealant products.
22.2 In 2015 includes revenues from a material customer amounting to approximately NIS 1,302 million.
The Group's revenues from its sales to said customer are included under the R&W segment. See also Note 29.
In 2014 and 2013, the Group did not derive revenues from a material customer.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 23:- COST OF SALES AND SERVICES
Year ended December 31, 2015 2014 2013 NIS in millions
Raw materials and oil products 9,546 15,749 16,894 (Gain) loss on transactions in derivatives on crude oil (258) (388) 30 Food products and consumables 476 461 457 Costs of spare parts and other products 24 22 30
Total cost of materials 9,788 15,844 17,411 Wages 155 150 144 Depreciation and amortization 230 228 212 Subcontracted work 44 47 56 Other costs 23 25 24 Royalties and concession fees 17 4 6 Maintenance, rent, taxes and insurance 170 175 162 Infrastructure and distribution expenses 74 69 77 Electricity, natural gas and water for manufacturing 211 153 122
Total expenses in the cost of sales 924 851 803
Total cost of sales 10,712 16,695 18,214
By source of income: Products manufactured by the corporation 9,399 14,908 15,714 Other products 1,313 1,787 2,500
10,712 16,695 18,214
NOTE 24:- SELLING AND MARKETING EXPENSES
Year ended December 31, 2015 2014 2013 NIS in millions
Wages and related expenses 185 183 184 Commissions paid 95 96 101 Advertising and sales promotion 37 35 33 Depreciation and amortization 145 152 152 Lease and operating fees, rent and building maintenance 331 332 331 Transport 78 79 79 Vehicle maintenance 23 28 31 Export expenses 35 38 39 Other selling and marketing expenses 35 34 32
964 977 982
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 25:- GENERAL AND ADMINISTRATIVE EXPENSES
Year ended December 31, 2015 2014 2013 NIS in millions
Wages and related expenses 97 83 92 Rent, taxes and maintenance 13 11 15 Vehicle maintenance 5 5 6 Professional consulting 27 27 28 Computers and communications 15 16 16 Management fees 6 6 6 Bad debts and doubtful accounts 9 1 4 Other expenses 8 7 11 Depreciation and amortization 21 23 24
201 179 202
NOTE 26:- OTHER INCOME
Year ended December 31, 2015 2014 2013 NIS in millions
Capital gain from sale of investments in investees, net -- (7) Capital gain from disposal of fixed assets, net (34) (27) - Income from management fees (1) (1) (1) Other, net 27 10 (9)
(8) (18) (17)
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 27:- FINANCIAL INCOME AND EXPENSES
27.1 Recognized in profit or loss
Year ended December 31, 2015 2014 2013 NIS in millions
Interest income on bank deposits, loans and other 21 20 33 Net gain from changes in exchange rates - - 113 Financial income in respect of employee benefits 1 1 1 Net income from derivatives and financial assets - 1 24 Revaluation and dividend received from financial asset presented at fair value through profit or loss 17 16 15
Financial income recognized in profit or loss 39 38 186
Interest expense on financial liabilities measured at amortized cost 101 129 163 Net loss from changes in exchange rates 10 152 - Net change in fair value of debentures designated at fair value through profit or loss - 7 78 Net change in fair value of derivative financial instruments 5 178 3 Financial expenses in respect of employee benefits 2 2 3
Financial expenses recognized in profit or loss 118 468 247
Less - capitalized borrowing costs - - (10)
Net financial expenses recognized in profit or loss 79 430 51
27.2 Recognized directly in other comprehensive income and equity
Year ended December 31, 2015 2014 2013 NIS in millions
Net change in fair value of debentures designated at fair value through profit or loss, attributable to the Company's credit risk - 9 (29)
- 9 (29)
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 28:- INCOME TAX
28.1 Details regarding the tax environment in which the Group operates
28.1.1 Corporate tax rates
The tax rates that are applicable to the Company and the Group companies (excluding Paz Ashdod, as explained below) in 2013-2014 are as follows:
2013 - 25%; 2014 and 2015 - 26.5%.
On August 5, 2013, the Israeli Parliament (the Knesset) passed the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 ("the Budget Law") which raised the corporate tax rate by 1.5% to 26.5% effective from 2014 and thereafter.
On January 4, 2016, the Israeli Parliament's Plenum approved the Law for Amending the Income Tax Ordinance (No. 216), 5756-2016, which prescribes, among others, a reduction of the corporate tax rate by 1.5% from 26.5% to 25% effective from 2016 onwards.
Following the completion of the projects in Paz Ashdod in 2011 and 2012, the refinery's capacity was increased to about 5.2 million tons a year. Paz Ashdod's total revenues from export sales account for more than 25% of its overall revenues. In addition, Paz Ashdod made a strategic decision according to which it will be required to export at least 25% of its revenues effective from 2013. Accordingly, Paz Ashdod is meeting the conditions stipulated in the Law for the Encouragement of Capital Investments, 1959 and as a preferred enterprise is entitled to a tax benefit of a reduced tax rate of 12.5% in 2013 and 16% from 2014 and thereafter.
The current taxes for the reporting periods are calculated according to the above tax rates.
28.1.2 On January 12, 2012, Amendment No. 188 to the Income Tax Ordinance (Revised), 1961 ("the ITO") was published in the Official Gazette which amended Section 87a to the ITO and introduced a temporary provision according to which Israeli Accounting Standard No. 29, "Adoption of International Financial Reporting Standards (IFRS)", will not be applied in determining the taxable income for the 2007-2011 tax years, even if it is applied in the financial statements ("the temporary provision"). On July 31, 2014, Amendment No. 202 to the ITO was issued according to which the scope of the temporary provision was extended to apply to the 2012 and 2013 tax years.
C-78 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 28:- INCOME TAX (Cont.)
28.1.3 Benefits under the Law for the Encouragement of Capital Investments
28.1.3.1 Amendment to the Law for the Encouragement of Capital Investments, 1959
On December 29, 2010, the Knesset passed the Law for Economic Policy for 2011 and 2012 ("the Amendment"), which prescribes, among others, amendments in the Law for the Encouragement of Capital Investments. Effective as of January 1, 2011, the Amendment applies to preferred income or income produced or generated by a preferred company, as defined in the Amendment, in 2011 and thereafter. According to the Amendment, companies in Development Area A only will be entitled to apply for the both grants track and the tax benefits track and receive the benefits offered by these two tracks simultaneously. In addition, the existing tax benefits tracks (the tax exemption track, the "Ireland" track and the "strategic" track) were cancelled and new tax tracks were defined - preferred enterprise and special preferred enterprise - which offer a reduced uniform tax rate on the entire income of eligible companies as follows: preferred enterprises - tax of 10% in Development Area A and 15% in the rest of the country in the 2011-2012 tax years; tax of 7% in Development Area A and 12.5% in the rest of the country in the 2013-2014 tax years; and tax of 6% in Development Area A and 12% in the rest of the country in the 2015 tax year and thereafter.
On August 5, 2013, the Knesset passed the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which cancelled the tax reduction outline whereby starting from 2014 the tax rate applicable to preferred income will be 9% in Development Area A and 16% in the rest of the country. It was also decided that the tax rate on dividends distributed to individuals and to foreign residents effective from January 1, 2014 that originate from preferred income will be raised to 20% instead of 15% today.
28.1.3.2 An industrial enterprise of a subsidiary was granted "approved enterprise" status in accordance with the Law for the Encouragement of Capital Investments. Income generated by the "approved enterprise" is subject to a reduced corporate tax rate for a period of up to 10 years beginning with the year in which the Company first generates taxable income. The benefits are contingent upon compliance with the terms of the approval (export rate, etc.) and the criteria set forth in the Encouragement Law. The tax benefit period for the approved enterprise operated in 2007 will end in 2017.
28.1.4 Benefits under the Law for the Encouragement of Industry (Taxes)
Certain subsidiaries qualify as "industrial companies" as defined in the Law for the Encouragement of Industry (Taxes), 1969 and accordingly they are entitled to benefits of which the most significant is accelerated depreciation.
28.1.5 In 2013, Pazgas filed applications for the merger of several of its subsidiaries into Pazgas. The merger date stated in the applications is December 31, 2013. As of the financial statement date, all the necessary approvals have been obtained within the relevant restrictions and conditions. Pazgas meets all the merger terms.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 28:- INCOME TAX (Cont.)
28.2 Composition of income tax expense (income)
Year ended December 31, 2015 2014 2013 NIS in millions Current tax expense Current period 147 96 96 Adjustments for prior years, net (1) (5) (5)
146 91 91 Deferred tax expense (income) Creation and reversal of temporary differences 47 (14) (30) Change in tax rate -- 30
47 (14) -
Total income tax expense 193 77 91
28.3 Reconciliation between the theoretical tax on the pre-tax income and the tax expense
Year ended December 31, 2015 2014 2013 NIS in millions
Income before taxes on income 912 250 204 Primary tax rate of the Company 26.5% 26.5% 25%
Tax calculated at the Company's primary tax rate 242 66 51 Additional tax (tax saving) in respect of: Addition (neutralization) of tax calculated in respect of the Company's share of earnings of investees accounted for at equity and tax-exempt partnerships- - Tax exempt income (3) (3) (1) Nondeductible expenses 1 3 2 Utilization of tax losses and benefits from prior years for which deferred taxes were not created 2 - - Effect of change in tax rates - - 30 Current year tax losses and benefits for which deferred taxes were not created (2) (5) (5) Taxes in respect of previous years (1) (5) (6) Effect of the difference between the primary tax rate at which temporary differences will be utilized - - (2) (Gains) losses for which income taxable at a special rate was created (48) 21 20 Other differences 2 - 2
Total income tax expense 193 77 91
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 28:- INCOME TAX (Cont.)
28.4 Deferred tax assets and liabilities
28.4.1 Recognized deferred tax assets and liabilities
Deferred taxes are calculated according to the tax rate anticipated to be in effect on the date of reversal as stated above.
Deferred tax assets and liabilities are attributable to the following items:
Fixed Carry- assets and forward tax investment Employee Financial losses and Other property benefits instruments deductions assets Other Total NIS in millions
Balance of deferred tax asset (liability) as of January 1, 2015 (618) 13 29 345 32 (21) (220)
Changes recognized in profit or loss (4) 1 (2) (43) 2 (1) (47) Changes recognized in capital reserves -1 - -- -1
Balance of deferred tax asset (liability) as of December 31, 2015 (622) 15 27 302 34 (22) (266)
Fixed Carry- assets and forward tax investment Employee Financial losses and Other property benefits instruments deductions assets Other Total NIS in millions
Balance of deferred tax asset (liability) as of January 1, 2014 (575) 16 31 273 31 (7) (231)
Changes recognized in profit or loss (43) (2) - 72 1 (14) 14 Changes recognized in capital reserves - (1) (2) - - - (3)
Balance of deferred tax asset (liability) as of December 31, 2014 (618) 13 29 345 32 (21) (220)
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 28:- INCOME TAX (Cont.)
28.4.2 Unrecognized deferred tax assets and liabilities
Deferred tax assets (liabilities) have not been recognized in respect of the following items:
December 31, 2015 2014 NIS in millions
Temporary differences on investments in investees (794) (411) Tax losses 4 11 Capital losses carried forward 1 1 Real difference from securities 40 40
(749) (359)
Tax losses and deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognized in respect of these items, since it is not probable that future taxable income will be available against which the Group can utilize the benefits therefrom. Temporary differences relating to investment in subsidiaries have not been recognized, since the decision to sell these companies is at the control of the Group, and the Group does not intend to dispose of them in the foreseeable future.
28.5 Tax losses and deductions carried forward
The Group's carry-forward tax losses and deductions due to inflation at reporting date amount to NIS 1,832 million (2014 - approximately NIS 2,102 million).
Balances of carry-forward losses and deductions were linked to the CPI until the end of 2007.
The balance of losses for which no deferred taxes were created is in the amount of approximately NIS 4 million (2014 - approximately NIS 11 million).
The real difference from marketable securities that was not deductible in the reporting year and may be carried forward to future years amounts at reporting date to adjusted NIS 40 million. This difference will be allowed in deduction in the coming years, linked to the CPI until the end of 2007, only against income from marketable securities generated in those years, if any. The balance of the aforesaid real difference for which deferred taxes were not created is NIS 40 million.
Additionally, the Group has carry-forward capital losses of approximately NIS 34 million (2014 - approximately NIS 40 million) of which deferred taxes were not created with respect to an amount of approximately NIS 1 million in 2015 (2014 - approximately NIS 1 million).
C-82 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 28:- INCOME TAX (Cont.)
28.6 Tax assessments
The Company has received final tax assessments up to and including the year ended December 31, 2010. Most subsidiaries have received tax assessments that are deemed final up to and including the year ended in December 31, 2011.
NOTE 29:- SEGMENT REPORTING
29.1 The Group has three reportable segments, as described below, which are 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, distributes and transports oil products at filling stations and markets, distributes and transports food and convenience products at the Yellow 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.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 29:- SEGMENT REPORTING (Cont.)
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.
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 29:- SEGMENT REPORTING (Cont.)
29.2 Information regarding the results of each reportable segment is included below. Performance is measured based on segment income before income tax, as included in the internal management reports that are reviewed by the chief operating decision maker. Inter-segment pricing is determined on an arm's length basis.
Profit and loss information:
Year ended December 31, 2015 Industries Refining Adjustments & & for Total R&W Services Logistics consolidation consolidated NIS in millions
External revenues 6,771 1,140 4,949 - 12,860
Inter-segment revenues 142 398 4,808 (5,348) -
Segment revenues 6,913 1,538 9,757 (5,348) 12,860
Segment results 389 218 491 1,098
Unallocated expenses (107)
Consolidated operating income 991
Financial expenses, net 79 Share of earnings of investees accounted for at equity -
Income before income tax 912
Capital expenditure 110 64 47 221
Depreciation and amortization 108 49 221 378 Unallocated depreciation and amortization 18
Total depreciation and amortization 396
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 29:- SEGMENT REPORTING (Cont.)
Year ended December 31, 2014 Industries Refining Adjustments & & for Total R&W Services Logistics consolidation consolidated NIS in millions
External revenues 9,216 1,284 8,013 - 18,513
Inter-segment revenues 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)
Consolidated operating income 680
Financial expenses, net 430 Share of earnings of investees accounted for at equity -
Income before income tax 250
Capital expenditure 126 56 40 222
Depreciation and amortization 112 52 219 383 Unallocated depreciation and amortization 20
Total depreciation and amortization 403
Year ended December 31, 2013 Industries Refining Adjustments & & for Total R&W Services Logistics consolidation consolidated NIS in millions
External revenues 9,831 1,452 8,352 - 19,635
Inter-segment revenues 324 546 7,028 (7,898) -
Segment revenues 10,155 1,998 15,380 (7,898) 19,635
Segment results 391 164 (201) 354
Unallocated expenses (100)
Consolidated operating income 254
Financial expenses, net 51 Share of earnings of investees accounted for at equity 1
Income before income tax 204
Capital expenditure 124 54 397 575
Depreciation and amortization 112 53 203 368 Unallocated depreciation and amortization 20
Total depreciation and amortization 388
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Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 29:- SEGMENT REPORTING (Cont.)
The Group's revenues from external sales, by geographical area, are as follows:
Year ended December 31, 2015 2014 2013 NIS in millions
Domestic market sales 7,938 10,784 11,493 Sales outside Israel * 4,922 7,729 8,142
Total consolidated revenues 12,860 18,513 19,635
* Includes sales of oil distillates by Paz Ashdod to dealers. The oil distillates are loaded onto ships at the Ashdod Seaport and their final destination is yet unknown on selling date. In addition, includes sales to the Palestinian Authority, sales of jet fuel to aviation companies and other sales.
NOTE 30:- FINANCIAL INSTRUMENTS
30.1 General
30.1.1 The Group has exposure to the following risks from its use of financial instruments:
- Credit risk - Liquidity risk - Market risk
This note presents quantitative and qualitative information about the Group's exposure to each of the above risks, and the Group's objectives, policies and processes for measuring and managing risk.
30.1.2 The Company is exposed, in the ordinary course of business, to index, interest, credit, currency and commodity related risks. Its operations of crude oil purchase and refining and sale of its products on the local market as well as internationally, requires management to take market risks due to changes in the prices of crude oil and its derivative products, changes in the exchange rate of the NIS in relation to the US dollar and changes in interest and inflation rates.
30.1.3 The Company's risk management policy is aimed at serving as a tool to be used by the management in achieving the Company's business objectives, by assessing the possible outcomes of the exposure and limiting it in accordance with criteria set by the Company's Board of Directors. These criteria are based on the risk assessment taking into consideration forecasts of developments in prices, exchange rates, interest rates and inflation rates.
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30.1.4 The management of market risks related to Group exposures in the field of crude oil and its products is the responsibility of the Head of the Refining & Logistics Division, under the close supervision of Paz Ashdod's Board of Directors and in accordance with the policy set by the Company's Board of Directors.
30.1.5 The management of risks related to currency exposure is supervised by the Company's Board of Directors, which instructs the Company's Management to take actions to maintain the linkage balances in compliance with the policy set by the Board of Directors. Detailed linkage balances are presented once a quarter to the Company's Board of Directors, as part of the discussions of the financial statements.
30.1.6 For details in respect of risk management of exposures to customer credit, see Note 30.2 below.
30.1.7 Risk management in the Group companies is the responsibility of the CEOs and CFOs of the companies. The person responsible for overseeing the management of Group risks is the chief legal advisor, attorney Iris Penso. Risk management is supervised by the Company's Audit and Finance Committee in accordance with the policy set by the Board of Directors as part of the process conducted by the Company under the enterprise risk management (ERM) plan.
30.2 Credit risk
30.2.1 Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group's trade and other receivables.
Within the framework of the Company's activity in direct marketing, the Company gives some of its large customers credit for significant amounts of money without collateral and/or without full collateral and therefore is exposed to the non-payment of the credit. There is no geographical concentration of credit risk.
An economic recession might adversely affect the ability of the Company's customers to make payments and lead to a decrease in debt payment ethics and a decrease in private consumption and business activity, which may reduce the Company's income and profit.
The Company monitors the financial position of its customers, and is constantly strengthening and improving the collateral received from its customers and adjusting the amount of the sales in accordance with the risk level that it attributes to its customers.
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30.2.2 The Group's exposure to credit risk is influenced mainly by the individual characteristics of each customer.
The Palestinian Authority is a material customer of the Company and its largest customer. Within the context of the agreement signed between the Company and the Palestinian Authority, the scopes of the credit that the Company gives to the Palestinian Authority are amounts that are material to the Company. As collateral for the credit, the Palestinian Authority undertook to allow the Company to collect debts due to it from the tax money held for the Palestinian Authority by the Government of Israel. The Company cannot estimate the possibility and the amount of time that would be required in order to collect the money from the Government of Israel, if and insofar as the Company demands the money from the Government of Israel. The Company has not been given any other collateral. For details in regards to extension of the supply agreement with the Palestinian Authority, see Note 31.2 below.
30.2.3 Credit terms to customers are decided by the unit managers or the central credit committee, or executive credit committee, based on the customer's credit facility and collateral amount, in accordance with criteria set in the Group. Each customer is assigned a credit facility based on its monthly consumption projection, as derived from the agreement with the customer, taking into account the customer's terms of payment and fuel prices. As a rule, the credit facility is to be constantly adapted to the volume of activity of the customer and the collateral amount. For this purpose, the utilization rates of the facility are reviewed and updated at least once a quarter. Customers failing to meet the Group's credit quality covenants may transact with the Group on a cash basis only.
30.2.4 An allowance for doubtful accounts is calculated specifically for customer debts whose collection is doubtful, based on an assessment of the risk and of the loss that could result from the debts of these customers, taking into account collateral placed by them and according to an assessment by the management, which is partly based on the opinion of its legal counsel. In determining the adequacy of such provisions, management relies, inter alia, on the information available to it concerning the financial position of the debtors, the Company's past experience regarding the collectability of debts from these customers, the duration in which the debt is outstanding, the volume of activity of the customers and the assessment of the collateral received therefrom. Some Group companies also calculate a general provision, in addition to the specific provision, as a percentage of the debt of various customer groups and in accordance with the risk level that characterizes the customer group.
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30.2.5 Exposure to credit risk
The carrying amount of financial assets represents the maximum credit exposure, regardless of the carrying amount of collaterals or other credit enhancements. The maximum exposure to credit risk at the reporting date was:
Carrying amount December 31, 2015 2014 NIS in millions
Trade receivables 1,619 1,789 Loans and receivables 346 287 Trust deposit for employee benefits 69 *70 Long-term bank deposits 550 - Cash and cash equivalents 60 140 Derivative financial instruments 10 15
2,654 2,301
* Reclassified.
The above balances are included under cash and cash equivalents, trade receivables, other receivables and other investments, including derivatives.
Breakdown of customers as of December 31 for which a concentration of a credit risk exists
December 31, 2015 2014 NIS in millions
Business customers 1,468 1,632 Allowance for doubtful accounts (32) (32)
Business customers, net 1,436 1,600
Institutional customers 79 96 Allowance for doubtful accounts - -
Institutional customers, net 79 96
Private customers 106 99 Allowance for doubtful accounts (2) (6)
Private customers, net 104 93
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Total sales to these customers were as follows:
Year ended December 31, 2015 2014 2013 NIS in millions
Business customers 9,726 14,875 15,692 Institutional customers 264 411 612 Private customers 2,870 3,227 3,331
12,860 18,513 19,635
Aging of debts and provision for impairment
The aging of trade receivables is as follows:
December 31, 2015 2014 2013 NIS in millions
Not past due 1,483 1,661 1,833 Past due 0-120 days 99 92 83 Past due 120 days to one year 17 9 8 Past due more than one year 54 65 60
1,653 1,827 1,984
Less - allowance for doubtful accounts 34 38 38
Total, net 1,619 1,789 1,946
Aging of doubtful accounts and provision for impairment
The movement in the provision for impairment of trade receivable balances during the year was as follows:
2015 2014 2013 NIS in millions
Balance as of January 1 38 38 47 Impairment loss recognized 9 1 3 Provisions recognized as bad debts (13) (1) (12)
Balance as of December 31 34 38 38
The impairment provision accounts are used to record impairment losses, unless the Group is satisfied that no recovery of the amount owing is possible; at that point the amounts considered irrecoverable are written off directly against the financial asset (as to the use of estimates, see Note 2.5 above).
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30.3 Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its financial obligations when these are due. The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The fluctuations in oil prices affect the Group's working capital, where a decline in oil prices reduces the working capital required for the Group's activity, improves its financial ratios and decreases its financing costs.
30.3.1 Following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements:
December 31, 2015 Over Carrying Contractual Up to one Second Third Fourth five amount cash flows year year year year years NIS in millions
Non-derivative financial liabilities Short-term loans 507 507 507 - - - - Trade payables 1,555 1,555 1,555 - - - - Other payables 468 468 468 - - - - Debentures, including current maturities 3,880 4,231 90 85 85 3,160 811 Liability for concession fees 49 49 4 4 4 4 * Other long-term balances 11 -1- -- Financial liabilities - derivative instruments 22 2-- --
December 31, 2014 Over Carrying Contractual Up to one Second Third Fourth five amount cash flows year year year year years NIS in millions
Non-derivative financial liabilities Short-term loans 218 222 222 - - - - Trade payables 2,341 2,341 2,341 - - - - Other payables 287 287 287 - - - - Debentures, including current maturities 3,884 4,350 99 91 91 91 3,978 Bank loans ------Liability for concession fees 49 49 4 4 4 4 * Other long-term balances 22 11- -- Financial liabilities - derivative instruments 125 125 125 - - - -
* Annual liability of NIS 4 million for an indefinite period. See also Note 31.3 below.
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30.4 Market risks
30.4.1 General
Market risk is the risk that changes in market prices, such as foreign exchange rates, the Consumer Price Index, interest rates and prices of equity instruments and commodities will affect the Group's income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return.
In the ordinary course of business, the Group buys and sells derivatives and incurs financial liabilities in order to manage market risks. All such transactions are carried out within the guidelines set by the Board of Directors. Generally, the Group seeks to apply hedge accounting in order to manage volatility in profit or loss.
30.4.2 Currency risks
30.4.2.1 Since the Group operates mainly in the fuel market, a substantial part of its current assets and liabilities are affected by the exchange rate of the dollar, while its financial statements are measured and presented in NIS. Consequently, the Group is exposed to risks resulting from fluctuations in the dollar-NIS exchange rate. The Group's policy is to avoid currency-related balance sheet exposure and to hedge most of this exposure. The Group takes steps to balance its currency exposure on the Group level by receiving and repaying dollar loans and deposits, as well as by using various financial instruments, such as forward contracts. However, there is no certainty that the Group will not be exposed to changes in currency rates. The Group is not hedging the erosion on margins as a result from the strengthening of the NIS against the dollar.
As of the publication date of this report, the Group has a policy of maintaining a balance currency balance sheet that allows it, from time to time, to incur currency exposure in volumes of up to US$ 100 million, at the discretion of management (for this purpose, the majority of the fuel inventories are deemed a dollar item), other than specific transactions which are approved by the Board of Directors from time to time based on the Company's needs.
30.4.2.2 Forward currency transactions as of December 31, 2015:
Currency Currency Expiration Fair receivable payable date value NIS in millions
Current liabilities US dollar NIS January 2016 *
* Less than NIS 0.5 million.
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Forward currency transactions as of December 31, 2014:
Currency Currency Expiration Fair receivable payable date value NIS in millions
Current liabilities NIS US dollar Jan-Dec 2015 126
If the exchange rate is higher than the exercise rate, the Company will incur a loss that will be reflected in the financial results over the period of the hedges. These hedges are a form of economic protection and therefore they are placed against dollar base assets that the Company expects to derive. In subsequent periods, these hedges will be reflected in the financial results simultaneously with the exercise of the base assets.
30.4.2.3 Sensitivity analysis
A strengthening of the dollar against the NIS would have increased or decreased the income for the period and the equity by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and excludes the tax effect. The analysis is performed on the same basis for 2014.
Impact on income (loss) December 31, 2015 2014 NIS in millions
Increase of 5% in the exchange rate of the dollar in relation to the NIS 2 (49) Decrease of 5% in the exchange rate of the dollar in relation to the NIS (2) 45
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30.4.3 Commodity price risks
30.4.3.1 The Company maintains an inventory of crude oil and oil products, the value of which varies according to changes in the global prices of crude oil and in the prices of oil products in the Mediterranean Basin. The Company has no influence over these prices. The prices of crude oil and the indicative refining margins (namely, the difference between the cost of crude oil and the proceeds from the sale of the product mix obtained from its refining) are set in the global market, are prone to sharp fluctuations and constitute the principal parameters used in determining the prices of oil products. These products are therefore exposed to high volatility which cannot be anticipated and prepared for so as to preclude a decline in the value of the inventory of crude oil and its products held by the Group following a worldwide decline in these prices. No correlation between changes in the prices of crude oil and changes in the prices of oil products cause high volatility in refining margins. The Company acts from time to time to mitigate to a certain extent the effects of refining margin fluctuations on its results through partial hedges of the refining margin or parts thereof. Prolonged changes in prices and refining margins could have a material effect on the results of Paz-Refining and, consequently, on the results of the Company as a whole. In the case of a material decrease of refining margins, the business and financial results of the Group are diminished.
30.4.3.2 The exposure to crude oil prices is created upon the setting of a price for the crude oil purchased by Paz Ashdod and continues to exist until the selling prices of the produced products are determined. The Company's policy is to limit the volume of unhedged inventory to 250 thousand tons, but not more than US$ 300 million. The Company's policy is to manage the volume of unhedged inventory in a flexible manner in accordance with the situation in the market and its assessment for price changes. As of the date of the financial statements, Paz Ashdod holds unhedged inventories at a scope of about 87 thousand tons in addition to the inventories used for self-consumption and losses. The price of the remaining inventory of crude oil owned by Paz Ashdod is hedged against timing differences between the date of acquisition of the inventory and the date of sale of the products, mainly by using future contracts. In 2015, the Company recorded an impairment loss on unhedged inventories totaling approximately NIS 71 million (2014 - approximately NIS 108 million).
It is important to note that even the hedged inventory cannot be fully hedged against the risk from changes in the price of crude oil, as this hedged inventory is exposed to differences between the type of crude oil acquired by Paz Ashdod (the underlying asset) and the hedging derivative instrument, and also to the effects of market expectation for contango or backwardation of crude oil prices. The Company conducts partial hedges in order to protect itself from such gaps.
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30.4.3.3 As aforesaid, in order to reduce the exposure to the above risks, the Company enters into economic hedges using financial instruments, including derivative instruments ("derivatives"). Since hedge transactions are made through banks and international companies, the Company does not expect significant credit exposure to arise in respect thereof. The Company carries out transactions in crude oil derivatives traded on stock exchanges abroad, with respect to which the Company provides margins according to the accepted practice in these markets.
30.4.3.4 The derivative financial instruments used to hedge the exposure to changes in the prices of crude oil and its products as of December 31, 2015:
Fair value NIS in millions
Future contracts and derivatives on refining margin 8
The derivative financial instruments used to hedge the exposure to changes in the prices of crude oil and its products as of December 31, 2014:
Fair value NIS in millions
Future contracts and derivatives on refining margin 15
30.4.3.5 Fair value sensitivity analysis of derivatives used to hedge commodity price risks
An increase in the future price of crude oil on the reporting date would have reduced the pre-tax income for the period and equity in the amounts presented below. This analysis is performed assuming that all other variables remain constant. The analysis for 2014 is performed on the same basis:
Impact on income (loss) December 31, 2015 2014 NIS in millions
5% increase in the future price of crude oil (16) (22) 5% decrease in the future price of crude oil 16 24
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30.4.4 Interest risks
As of the date of this report, most of the Company's borrowings from banks bear variable NIS interest. Accordingly, the Group is exposed to changes in interest rates. Significant changes in the interest rates could affect the scope of the Group's liabilities to banks and its financial results.
30.4.4.1 Interest profile
The interest rate profile of the Group's interest-bearing financial instruments is as follows:
December 31, 2015 2014 NIS in millions
Fixed interest instruments Financial liabilities (234) (245) Financial assets 137 143
(97) (102)
Variable interest instruments Financial liabilities (4,381) (4,095) Financial assets 74 155
(4,307) (3,940)
30.4.2.2 Cash flow sensitivity analysis for variable rate instruments
A change of 1% in interest rates at the reporting date would have increased or decreased the income for the period and equity by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for 2014.
December 31, 2015 2014 1% 1% 1% 1% increase in decrease in increase in decrease in interest interest interest interest rate rate rate rate NIS in millions
Variable interest instruments (32) 32 (29) 29
Increase (decrease) in cash flow sensitivity (net) (32) 32 (29) 29
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30.4.5 CPI risks
30.4.5.1 As of the date of the financial statements, the Company is exposed to changes in the CPI with respect to the scope of net assets in the amount of approximately NIS 50 million.
30.4.5.2 Sensitivity analysis of CPI
An increase in the CPI would have decreased the income for the period and equity by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2014.
Impact on income (loss) December 31, 2015 2014 NIS in millions
Increase of 1% in the CPI 1 1
A similar decrease in the CPI would have had the equal but opposite effect, assuming that all other variables remain constant.
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30.4.6 Linkage bases report:
Linkage basis report as of December 31, 2015 NIS Foreign currency CPI- Other Unlinked linked** Dollar Other items Total NIS in millions Assets Cash and cash equivalents 42 - 17 1 - 60 Trade receivables 1,327 - 291 1 - 1,619 Other accounts receivable 26 17 - - 78 121 Income receivable from the State - 86 - - - 86 Inventories * - - - - 1,041 1,041 Other investments, including derivatives 76 - 10 - - 86 Current tax assets - - - - 8 8 Assets held for sale - - - - 23 23
Total current assets 1,471 103 318 2 1,150 3,044
Income receivable from the State Long-term deposits 550 69 - - - 619 Long-term loans and receivables 173 122 1 - 59 355 Investment property, net - - - - 31 31 Investments in investees accounted for at equity - - - - 29 29 Loans to investees accounted for at equity 7 - - - - 7 Fixed assets, net - - - - 5,513 5,513 Intangible assets, net - - - - 808 808 Prepaid lease fees - - - - 23 23 Deferred tax assets - - - - 13 13
Total non-current assets 730 191 1 - 6,476 7,398
Total assets 2,201 294 319 2 7,626 10,442
Liabilities Short-term loans and credit 506 7 - - - 513 Trade payables 422 - 1,127 6 - 1,555 Other accounts payable, including derivatives 89 190 21 - 253 553 Current tax liabilities - - - - 38 38 Provisions - - - - 48 48 Dividend paid 170 - - - - 170
Total current liabilities 1,187 197 1,148 6 339 2,877
Debentures ** 3,874 - - - - 3,874 Liabilities to banks ------Other long-term liabilities 3 47 - - - 50 Employee benefits - - - - 55 55 Provisions ------Deferred tax liabilities - - - - 279 279
Total non-current liabilities 3,877 47 - - 334 4,258
Total liabilities 5,064 244 1,148 6 673 7,135
Total equity - - - - 3,307 3,307
Total liabilities and equity 5,064 244 1,148 6 3,980 10,442
Total balance sheet, net (2,863) 50 (829) (4) 3,646 -
* The majority of the operating inventory (oil products) are priced in dollars and offset against dollar liabilities.
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Linkage basis report as of December 31, 2014 NIS Foreign currency Other Unlinked CPI-linked Dollar Other items Total NIS in millions Assets Cash and cash equivalents 132 - 8 - - 140 Trade receivables 1,510 - 278 1 - 1,789 Other accounts receivable 52 15 23 - 116 206 Inventories * - - - - 1,075 1,075 Other investments, including derivatives 68 - 15 - - 83 Current tax assets - - - - 15 15 Assets held for sale - - - - 136 136
Total current assets 1,762 15 324 1 1,342 3,444
Income receivable from the State - 84 - - - 84 Long-term deposits - 70 - - - 70 Long-term loans and receivables 60 130 1 - 71 262 Investment property, net - - - - 32 32 Investments in investees accounted for at equity - - - - 30 30 Loans to investees accounted for at equity 5 - - - - 5 Fixed assets, net - - - - 5,657 5,657 Intangible assets, net - - - - 839 839 Prepaid lease fees - - - - 23 23 Deferred tax assets - - - - 40 40
Total non-current assets 65 284 1 - 6,692 7,042
Total assets 1,827 299 325 1 8,034 10,486
Liabilities Short-term loans and credit 219 8 - - - 227 Trade payables 408 - 1,924 9 - 2,341 Other accounts payable, including derivatives 83 200 129 - 210 622 Current tax liabilities - - - - 5 5 Provisions - - - - 31 31
Total current liabilities 710 208 2,053 9 246 3,226
Debentures 3,877 - - - - 3,877 Other long-term liabilities 3 48 - - 2 53 Employee benefits - - - - 51 51 Deferred tax liabilities - - - - 260 260
Total non-current liabilities 3,880 48 - - 313 4,241
Total liabilities 4,590 256 2,053 9 559 7,467
Total equity - - - - 3,019 3,019
Total liabilities and equity 4,590 256 2,053 9 3,578 10,486
Total balance sheet, net (2,763 ) 43 (1,728)(8 ) 4,456 -
* The majority of the operating inventory (oil products) are priced in dollars and offset against dollar liabilities.
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30.5 Fair value
30.5.1 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:
Interest rate used in December 31, determining fair Carrying Fair Carrying Fair value amount value amount value 2015 2015 2014 NIS in millions
Non-current assets Loans to operators and agents Linked+2% 153 166 161 *187 Loans to investees 3% 7 7 6 6
Non-current liabilities Debentures (including current Quoted market maturities and accrued interest) value 3,874 3,977 3,878 3,963
* Reclassified.
The fair value of the financial assets and liabilities presented in the table above is estimated using the future discounted cash flow model at market interest as of the measurement date.
30.5.2 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).
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NOTE 30:- FINANCIAL INSTRUMENTS (Cont.)
December 31, 2015 Level 1 Level 2 Level 3 Total NIS in millions
Financial assets at fair value through profit or loss: Derivatives 10 - - 10 Investments in non-marketable securities - - 76 76
10 - 76 86
Financial liabilities at fair value through profit or loss: Derivatives 2 - - 2
2- - 2
December 31, 2014 Level 1 Level 2 Level 3 Total NIS in millions
Financial assets at fair value through profit or loss: Derivatives *15 - - 15 Investments in non-marketable securities - - 68 68
*15 - 68 83
Financial liabilities at fair value through profit or loss: Derivatives - 126 - 126
- 126 - 126
* Reclassified.
30.5.2.1 Financial instruments measured at Level 3 fair value according to the fair value hierarchy
The table below provides reconciliation between the opening and closing balances of financial instruments measured at Level 3 fair value according to the fair value hierarchy:
2015 2014 Investment in non- marketable securities NIS in millions
Balance as of January 1 68 59 Total net gains recognized in profit or loss 8 9
Balance as of December 31 76 68
* Net gains are recognized in profit or loss under financing.
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30.5.2.2 Valuation technique for determining the fair value of financial instruments measured at Level 3 according to the fair value hierarchy
The fair value of investment in non-marketable shares which is measured at fair value is determined by an outside independent valuer with the appropriate and recognized professional skills using the DCF valuation technique. The significant inputs used by the valuer in determining the fair value were a discount rate of 10.5% and a long-term growth rate of 1.5%. The estimated fair value decreases as the discount rate of the cash flows increases. The estimated fair value increases as the long-term growth rate increases.
30.5.3 The valuation processes used by the Company
The fair value of investment in non-marketable shares is determined by an outside independent valuer. The valuation is reviewed and discussed by both the Company's CFO and by the Audit and Finance Committee.
NOTE 31:- COMMITMENTS
31.1 Paz Ashdod's sales to its customers in the domestic market are mainly based on monthly orders. Paz Ashdod has signed general master agreements with some of its customers, which stipulate the manner of carrying out the orders, the general conditions underlying the sale, the price formulas, payment terms and collaterals. The monthly scope of orders is generally determined on the order date. In addition, among others, Paz Ashdod undertook as part of annual agreements with some of its customers to supply products to customers which commit in advance to purchase predetermined amounts every month. The scope of sales made according to these agreements in 2015 was immaterial to the Group.
31.2 Agreement between the Company and the Palestinian Authority
Following the agreement from September 29, 2006 and the addendum to the agreement from December 2007 which were also signed by the current Palestinian Government ("the agreement"), the memorandum of understandings from December 30, 2010 ("the 2010 MOU") and the MOU signed in May 2012 ("the 2012 MOU") (collectively - "the previous MOUs"), on September 30, 2014, the Company and the Palestinian Authority (in this paragraph - "the Authority") signed a binding MOU for extending the supply agreement (by the Company and its subsidiaries) of at least 50% of the oil, LPG and asphalt products delivered to the West Bank and Gaza pursuant to the Authority's needs ("the 2014 MOU"). The 2014 MOU is in effect for a period of 27 months commencing on October 1, 2014 and ending on December 31, 2016 and is binding to the parties until the signing of a detailed agreement. Similarly to the agreement and the previous MOUs, either party may terminate the agreement, for whatever reason, subject to a 90-day advance notice.
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NOTE 31:- COMMITMENTS (Cont.)
Within the framework of the 2014 MOU, as in the previous MOUs, the Company undertook, inter alia, to provide the Authority with maintenance services, equipment and training based on the terms stipulated in the 2014 MOU. The 2014 MOU also provides arrangements with respect to payment terms, including the grant of credit.
As in the agreement and previous MOUs, as collateral for the payment, the Authority undertook to allow the Company to collect its payment from the tax monies held for the Authority by the Government of Israel (a commitment that was also signed by the current Palestinian Government). In this regard, it should be noted that the Company provides the Palestinian Authority credit in significant amounts and cannot estimate the possibility and the time that would be needed in order to collect the money from the Government of Israel, if and insofar as the Company demands the money from the Government of Israel. No additional collateral has been given to the Company.
According to the 2012 MOU and 2014 MOU, the Company supplies at least 50% of the Authority's oil product needs (including LPG and asphalt), both to the West Bank and to the Gaza Strip.
31.3 Paz Ashdod concession agreement
On July 27, 2006, ORL and the State of Israel signed an amendment to a concession agreement ("the amendment to the concession agreement") according to which ORL waived all its rights and claims with regard to the land which had been transferred to Paz Ashdod in accordance with the split agreement ("the allocated assets"). The State agreed to transfer the allocated assets to Paz Ashdod on the date of completion of the split between ORL and Paz Ashdod (September 2006), provided that on the completion date Paz Ashdod would commit to meet all of ORL's undertakings under the amendment to the concession agreement, to which Paz Ashdod agreed. Under the amendment to the concession agreement, any change in the designated use or the actual use of the land, which is a part of the allocated assets ("Paz Ashdod's land") requires the consent of the Comptroller-General, the Director- General of the Ministry of National Infrastructures Energy and Water Resources and the Director of the Israel Land Authority, and it may be given subject to conditions and payment. Any breach of these terms or failure to obtain the necessary consents will entitle the State to immediately take back all of the rights in the land with regard to which the breach was committed. It should be noted that an easement has been registered in favor of the State over Paz Ashdod's land, with regard to Paz Ashdod's aforesaid undertakings. Moreover, Paz Ashdod committed that these undertakings would be included in any future agreement signed between it and any third party with regard to the transfer of any kind of rights in Paz Ashdod's land. Paz Ashdod undertook to refrain from carrying out any transaction in Paz Ashdod's land unless the other party to the transaction commits to assume Paz Ashdod's undertakings as stated above. A caveat has been registered on Paz Ashdod's land with regard to this undertaking.
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NOTE 31:- COMMITMENTS (Cont.)
According to the amendment to the concession agreement, Paz Ashdod will pay the State annual amounts that range between $ 0.75 million and $ 2.9 million, which will be determined in accordance with the amount of Paz Ashdod's annual pre-tax income (which will be defined and measured according to consolidated financial statements) (in this paragraph - "the annual income") as follows: a fixed annual amount of $ 0.75 million and additional annual amounts as follows:
8% of the annual pre-tax income between $ 0-10 million; and 10% of the annual income between $ 10-17.5 million; and 12% of the annual income between $ 17.5 - 22.5 million. In any case, the annual amount of the payments shall not exceed a sum of $ 2.9 million. All the amounts will be converted into NIS in accordance with a minimum exchange rate of NIS 4.8 per dollar, and will be adjusted for the CPI (the base index being the index for May 2002). It should also be noted that Paz Ashdod is liable to pay the State a quarterly advance payment, no later than by the end of the first month of each quarter, at a rate of 20% of the annual payment that was calculated for the previous year. Paz Ashdod made a provision in its books for the present value of the fixed component ($ 0.75 million), which amounted, as of December 31, 2015, to approximately NIS 49 million.
31.4 Conditions for the merger between Paz Ashdod and Paz
On September 27, 2006, the Company and Paz Ashdod received the Antitrust Commissioner's approval for the purchase of the Ashdod Refinery by the Company. The conditions for the merger are as follows:
31.4.1 The Company will sell its holdings in Pi-Glilot Petroleum Terminals and Pipelines Ltd. ("Pi-Glilot") within the period set in the conditions. In 2015, the Company signed an agreement for the sale of its holdings in Pi-Glilot. Accordingly, the Company believes that the restriction imposed on the Company's holdings in the shares of Pi- Glilot is no longer relevant.
31.4.2 Paz Aviation Assets Ltd., the owner of a tank farm at Ben-Gurion Airport, will be subject to the provisions of chapter D of the Restrictive Trade Practices Law, and the duties that apply to a monopoly holder in every respect, including prohibition on unreasonably refusing to provide its services, providing services under conditions that are irrelevant to the subject of the transaction, determining different contract terms for similar transactions, distinguishing between customers on the basis of their identity, etc.
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NOTE 31:- COMMITMENTS (Cont.)
31.4.3 Paz Ashdod is prohibited from signing any cooperation agreements with Haifa Oil Refinery or with any other oil refinery that will be established in Israel without the consent of the Antitrust Authority. On November 23, 2006, the General Director gave approval to Paz and its associated companies (other than Paz Ashdod or the Ashdod Refinery), to make regular purchases of finished oil products from ORL. The permit was given for purchases at the standard format practiced at ORL. It should be noted that the agreement for the transfer of intermediate products between ORL and Paz Ashdod was approved by the Antitrust Authority and it was further determined that Paz Ashdod may engage with another refinery in Israel for the purchase or supply of refinery feedstock in order to provide an immediate solution to production difficulties. In October 2007, the Commissioner permitted Paz Ashdod to lease from ORL ships for transporting crude oil and distillates. The approval was extended until December 31, 2016.
In March 2009, the Commissioner approved an arrangement for the exchange of a fixed monthly amount of transport diesel and 95-gasoline between the refineries. Paz Ashdod provides ORL the needed quantities in the south of Israel whereas ORL provides Paz Ashdod with the needed quantities in the north of Israel.
The arrangement was conditional upon several terms and is extended from time to time. Recently, it was extended until December 31, 2016, after having failed to recruit an importer of oil distillates that is interested in joining the oil distillate swap arrangement with ORL at a fixed monthly quantity throughout 2016, as imposed by the Antitrust Authority (in 2015).
On April 10, 2011, the Commissioner approved an agreement for the transfer of intermediate products between Paz Ashdod and COL (a subsidiary of ORL). For additional details see Note 31.3 above.
31.4.4 The Antitrust Authority found it necessary to restrict the Company from entering into agreements with additional filling stations.
31.4.5 With regard to the supply of LPG, Paz Ashdod will be required to provide its services to all customers without prejudice, as is customary with restrictions placed upon a monopoly. Paz Ashdod may sell to Pazgas only the quantities that it had sold to Pazgas in the same calendar month in the previous year. There will be a complete corporate and accounting separation between the operations of Paz Ashdod and/or the Company on the one hand, and Pazgas' operations on the other. It should be noted that the Company has applied to the Antitrust Authority for cancelling the terms of the merger pertaining to Pazgas' LPG allocations.
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NOTE 31:- COMMITMENTS (Cont.)
31.4.6 Paz Ashdod may not enter into any arrangement for the purchase, lease or operation of infrastructure required for import and/or infrastructure required for storage or transport in Israel, nor will it enter into such arrangement with regard to infrastructure required for the operation of any other refinery in Israel, without the prior approval of the Antitrust Authority.
31.5 Agreements to purchase natural gas
In September 2004, Paz Ashdod signed a natural gas purchase agreement with Noble Energy Mediterranean Ltd., Delek Drilling (Limited Partnership), Delek Investments and Properties Ltd. and Avner Oil Searches Ltd (Yam Tethys reservoir) ("the Yam Tethys agreement" or "Yam Tethys partnership", as applicable). According to the Yam Tethys agreement, the annual amount of gas that Paz Ashdod is able to purchase from Yam Tethys partnership is the amount of daily quantities, whereby the maximum and minimum amounts that may be purchased have been defined for Paz Ashdod in advance. The duration of the Yam Tethys agreement is the earlier of ten years from the date when the natural gas supply begins or the date of buying the whole quantity of gas defined in the Yam Tethys agreement. The consideration for the natural gas purchased is calculated in accordance with a formula that is set out in the Yam Tethys agreement, and is subject to a defined price ceiling. The prices of natural gas in force around the world today are higher than the maximum price stated in the Yam Tethys agreement.
In June 2014, Paz Ashdod and Yam Tethys partnership signed an agreement whereby the period of the Yam Tethys agreement will be extended until the earlier of December 31, 2016 or until the entire outstanding natural gas amounts that should be supplied to Paz Ashdod pursuant to the Yam Tethys agreement that have not been supplied due to the shortage in natural gas that was experienced from the last quarter of 2011 through April 2013 are supplied.
Throughout 2015 and as of the date of these financial statements, Paz Ashdod continues to consume natural gas that is partly supplied according to the Yam Tethys agreement. The gas is supplied from the Tamar reservoir.
On April 2, 2012, an agreement was signed for the supply of natural gas between Paz Ashdod and the partners in the Tamar Project ("the Tamar agreement" or "the Tamar reservoir partnership", as applicable), according to which Paz Ashdod buys from the Tamar reservoir partnership natural gas for the purpose of operating Paz Ashdod's existing facilities, including the operation of the cogeneration power stations.
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NOTE 31:- COMMITMENTS (Cont.)
Pursuant to the Tamar agreement, the Tamar reservoir partnership will supply Paz Ashdod with natural gas on a total scale of up to approximately 111,800,000 MMBTU throughout the period of the Tamar agreement ("the total contractual amount"). The supply period is 15 years or until Paz Ashdod consumes the total contractual amount, whichever is earlier ("the supply period"). The parties have a right to extend the supply period for a period of up to an additional year, if by that date the total contractual amount has not yet been consumed. The supply period began in April 2013.
It should be noted that during different periods throughout the supply period, different gas quantities will be supplied, which will be added to the gas quantities that will be supplied to Paz Ashdod pursuant to the Tamar agreement and that during the supply period Paz Ashdod will be required to sign an additional agreement for the supply of natural gas.
The Tamar agreement includes additional consents that are customary in agreements of this kind, such as: compensation mechanisms in the event of insufficient supply, a "Take or Pay" payment mechanism for a minimal annual quantity of gas in an amount and in accordance with a mechanism that were determined in the Tamar agreement, the quality of the gas, a liability limit, an arbitration mechanism, etc. Moreover, the Tamar agreement includes arrangements relating to changes in regulations and/or additional taxation on the Tamar reservoir partnership.
The price of the gas that was determined in the Tamar agreement is linked to the electricity production price, as determined from time to time by the Public Utility Authority - Electricity ("the Electricity Authority"), and includes a "minimum price".
Pursuant to the Electricity Authority's decision of June 2012, in February 2013, an amendment to the Tamar agreement was signed according to which Paz Ashdod was given the option to reduce the minimum annual amount of natural gas that Paz Ashdod undertook to buy or pay for (Take or Pay) to 50% of the average annual amount that Paz Ashdod actually consumed in the three years preceding the notice regarding the exercise of the option, subject to the adjustments set out in the Tamar agreement. If the minimum annual amount is reduced as aforesaid, the other amounts of natural gas determined in the Tamar agreement will be reduced accordingly.
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NOTE 31:- COMMITMENTS (Cont.)
Paz Ashdod will be entitled to exercise the aforesaid option by way of giving notice to the Tamar reservoir partnership during a period that will begin at the end of the fourth anniversary of the date of beginning the supply of natural gas in commercial quantities to Paz Ashdod ("the commercial operation date") or January 1, 2018, whichever is later, and will end at the end of the seventh anniversary of the commercial operation date or December 31, 2020, whichever is later. If Paz Ashdod gives notice that it is exercising the option as aforesaid, the amount will be reduced relative to the amount stipulated in the Tamar agreement, at the end of a year from the date of giving the notice.
On December 28, 2015, the Antitrust Authority issued a resolution according to which contingent exemption will be granted to the restrictive agreements signed between the partners in the Tamar Reservoir and the natural gas consumers (including Paz Ashdod) ("the General Director's Resolution"). It should be noted that before the General Director's Resolution was issued, the Antitrust Authority avoided initiating any enforcement measures against any of the parties to the Tamar agreement (based on decisions made by it).
According to the General Director's Resolution, the consumers (including Paz Ashdod) will be able to exercise the right granted to them to notify the partners in the Tamar project of the reduction of the natural gas quota stipulated in the Take or Pay clause (up to a quantity equivalent to half of the average annual quantity consumed in the three years preceding the date of notification) over a period ending on the later of: (a) the period from January 1, 2020 through December 31, 2022 (instead of the period from January 1, 2018 through December 31, 2020 which was stipulated in the agreement) or (b) the period beginning on the fifth anniversary of the date of supply of natural gas (instead of the fourth anniversary as was stipulated in the agreement) and ending on the seventh anniversary.
Following the General Director's Resolution, Paz Ashdod will take steps opposite the Tamar reservoir partnership to revise the agreement signed between the parties.
At this stage, the Company cannot assess the ramifications of the General Director's Resolution on the Company since they mostly depend on the state of the market as it will be during the relevant years underlying the exercise of the right to announce the reduction of the quantity of gas purchased from the Tamar reservoir.
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NOTE 31:- COMMITMENTS (Cont.)
On July 22, 2013, the Electricity Authority issued an update of tariffs and also announced a change in the weighted production cost in the "basic production component" which also forms the basis for the linked price that Paz Ashdod should pay Tamar reservoir partnership for natural gas. In the update, the Electricity Authority also established other tariffs for the weighted production cost. Tamar reservoir partnership argues that it is entitled to the highest of the tariffs that were published. Tamar reservoir partnership also argues that the change in the weighted cost of production represents a material change in the method of calculation of the natural gas, which entitles it to request a change in the linkage mechanism of the price of natural gas as determined in the agreement between the parties. Paz Ashdod rejected Tamar reservoir partnership's arguments and stated that the lower of the issued tariffs should apply, as also clarified by the Electricity Authority. The dispute between the parties has yet to be resolved. In February 2015, the Electricity Authority updated the tariffs and cancelled the higher tariff thereby defining the period underlying the dispute. Based on Paz Ashdod's legal counsel, the Company estimates that when the dispute between the parties is heard, the Company's position will be accepted. It should be noted that there is no certainty that the Company's position will indeed be accepted.
In November 2012, Paz Ashdod and Tamar reservoir partnership signed an agreement whereby Tamar reservoir partnership will provide Paz Ashdod condensates (liquid byproducts produced by the condensation of natural gas) from the Tamar reservoir, used as a raw material in the refining process in the Ashdod Refinery. The agreement is in effect for a period of five years from the date of beginning the supply of condensates which began in April 2013 simultaneously with the beginning of the supply of natural gas from the Tamar reservoir. According to the agreement, the consideration payable to Tamar reservoir partnership was based on Brent prices less a predetermined margin. The agreement also stipulates daily, monthly and annual limitations on amounts to be supplied. In September 2014, Paz Ashdod and Tamar reservoir partnership signed a spot agreement for the purchase of additional quantities of natural gas that will be supplied to Paz Ashdod, at its request, in the event that Tamar reservoir partnership has excess natural gas. The agreement was signed for a period of 90 days and will be automatically renewed each time for an identical period with a possibility of cancelling the agreement by providing a seven-day notice. The agreement does not prescribe a liability to supply and/or purchase any quantities.
31.6 Agreements for storage and filling services
Pazgas has long-term agreements for leasing four accumulators for storing LPG, with a capacity of 750 tons each, from Eilat Ashkelon Pipeline Company Ltd. ("EAPC"). These accumulators were intended to allow Pazgas to store imported LPG. The lease period for the first and second accumulators will end in 2017, for the third accumulator in 2021, and for the fourth accumulator in 2025, all subject to the extension of EAPC's concession period, which ends in 2017.
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NOTE 31:- COMMITMENTS (Cont.)
Pazgas imports LPG to Israel and receives unloading and storage services ("handling services") from EAPC, pursuant to an agreement that was signed between the parties and that is valid until March 2017. According to this agreement, EAPC undertook to provide Pazgas with LPG handling services, and Pazgas undertook to purchase the handling services in a minimal amount and at a price fixed in the agreement.
In addition, Pazgas receives from EAPC filling services for mobile gas tanks by virtue of a filling agreement that was signed between the parties in April 2003 in effect until March 2017 according to which Pazgas undertook to buy filling services in a minimum annual amount and at the rates provided in the filling agreement.
Pazgas has operational dependency on EAPC with respect to the LPG handling and storage services.
31.7 Pursuant to the Control of Prices of Commodities and Services (Applying the Law to LPG) Order, 5770-2010, and its amendment of 2013, control is imposed at the level of reporting on the profits and prices of LPG, in accordance with the provisions of chapter 7 of the Control of Prices of Commodities and Services Law, 5656-1996.
In May and November 2013, Pazgas received drafts of studies prepared by the Ministry of National Infrastructures, Energy and Water Resources regarding the profitability of Pazgas' LPG activity. The drafts do not include any recommendation for establishing a controlled price and in the event that it is decided to impose price control, the controlled price will be based on the data of all the LPG marketing companies. In July and December 2013 and in January 2014, Pazgas filed its responses to the drafts. Pazgas addressed the errors committed in the various calculations and argued that they should be corrected before any decision is made regarding LPG price control in sales to the private sector through special systems and containers.
In August 2014, Pazgas received a demand from the Ministry of National Infrastructures, Energy and Water Resources to produce details which also stated that no decision has been made whether to enhance the degree of supervision in the industry. Pazgas produced the required details to the Ministry of National Infrastructures, Energy and Water Resources.
In February 2016, Pazgas received another demand for producing data from the Ministry of National Infrastructures, Energy and Water Resources in which it was also notified that the Ministry of National Infrastructures, Energy and Water Resources is preparing to reexamine the profitability of LPG used in the private sector. Pazgas is preparing to provide a response based on the data demand.
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NOTE 31:- COMMITMENTS (Cont.)
31.8 On November 19, 2015, the Control of Prices of Commodities and Services (Fixing Control Level and Maximum Prices of Gas Equipment Deposits) Order, 5775-2015 ("the Order") was issued. According to the Order, among others, a gas supplier may collect from a new home gas consumer a maximum deposit representing about half of the value of installing the borrowed equipment at the gas consumer's home. The Order also provides a mechanism for updating the deposit and the manner of calculation of the deposit that will be returned to the gas consumer after and before the Order becomes effective. The Order also states that in the event of theft or vandalization of gas equipment of a gas consumer, the gas supplier will be allowed to collect higher deposit rates from the gas consumer, all as elaborated in the Order. Following the enactment of the Order, the value of the deposits as of December 31, 2015 carried to financial income was adjusted.
31.9 Agreements with suppliers of raw materials
31.9.1 In December 2014, a master agreement was signed between Paz Ashdod and a crude oil supplier ("the supplier") for the purchase of 12-24 crude oil cargos per annum, each of an amount of between 80 and 130 thousand tons, which gives Paz Ashdod maximum operating and financial flexibility, until January 2017. The agreement also includes an option for extension of the credit terms stipulated therein by 20 days in return for market interest.
In November 2015, Paz Ashdod and the crude oil supplier signed another master agreement according to which Paz Ashdod will purchase from the crude oil supplier 12-36 cargos of fuel oil (a raw material used by Paz Ashdod in its activities) of 31.5- 38.5 thousand tons per annum based on a fixed price formula. In addition, Paz Ashdod will sell the supplier at least one cargo of cracked fuel oil (one of Paz Ashdod's products) a month for a period of 12 months.
31.9.2 Pazgas has an agreement for importing LPG with an international trade company in effect until the end of 2017 according to which each month Pazgas orders the quantity of LPG that it requires for the subsequent month. In 2015, Pazgas imported LPG from a single supplier.
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NOTE 31:- COMMITMENTS (Cont.)
31.10 Guarantees
Guarantees in respect of debts, bank guarantees and other guarantees
December 31, 2015 2014 NIS in millions Guarantees in respect of debts Filling stations 29 29
29 29 Bank guarantees Bank guarantees 63 57
92 86
In addition, the Group has provided guarantees in unlimited amounts to banks and others.
NOTE 32:- OPERATING LEASES
32.1 Lease and rent agreements
The Company has entered into lease agreements with respect to filling stations and a rent agreement with respect to the buildings that it uses. The lease fees and the rental are partly fixed and partly based on periodic evaluations of the amount of the lease. The payments are partly linked to the US dollar, partly to the CPI, partly to the Building Costs Index, partly to the volume of sales and partly unlinked. Additionally, subsidiaries have entered into lease and rent agreements. The payments under said agreements are partly linked to the US dollar and partly to the CPI. The projected lease fees and rental in the coming years calculated according to the lease fees in effect as of December 31, 2015 are as follows (the payments have not been discounted to the date of the statement of financial position):
2015 2014 NIS in millions
First year 225 227 Second year 187 190 Third year 154 156 Fourth year 124 126 Fifth year and thereafter 585 642
1,275 1,341
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NOTE 32:- OPERATING LEASES (Cont.)
Additionally, the Group leases out to external parties a number of commercial properties. The lease agreements are for an average of 4 years and are non-cancellable. Renewal of the agreements at the end of the period is subject to the consent of the Group and the lessees.
The future minimum lease fees receivable under the aforesaid non-cancellable lease agreements are as follows:
2015 2014 NIS in millions
Less than one year 48 49 One to five years 79 69 More than five years 5 1
132 119
The net amounts payable by the Company (lease fee expenses less income from lease fees) are as follows:
2015 2014 NIS in millions
First year 177 178 Second year 156 157 Third year 131 137 Fourth year 109 115 Fifth year and thereafter 570 635
1,143 1,222
32.2 The amortization expense recognized in profit or loss in respect of a lease and a sublease are as follows:
Year ended December 31, 2015 2014 2013 NIS in millions
Lease fees recognized as an expense * 1 1 *1 1
* Less than NIS 0.5 million.
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NOTE 33:- CONTINGENT LIABILITIES
33.1 Legal claims
33.1.1 In the ordinary course of business, legal claims have been filed and various legal proceedings are pending against Group companies, including monetary claims that have not yet been matured into legal claims (in this paragraph - "legal claims"). The managements of the Group companies believe, among others based on the opinion of legal counsel, that adequate provisions have been recorded in the financial statements in order to cover the potential exposure of these legal claims.
As of December 31, 2015, the overall amount in respect of legal claims filed against the Group companies regarding various issues whose likelihood to be materialized is remote approximates NIS 1,113 million.
The abovementioned amount and all the amounts in respect of any additional exposure presented in this Note are not linked to the CPI and do not include interest based on the interest and linkage rules.
Total Total provision claims Group of claims Nature of claims NIS in millions Restrictive practices Mainly declaratory claims for the cancellation of filling station operating agreements alleging the existence of restrictive practices and/or - 19 depriving condition in standard contract Proceedings with local Mainly disputes regarding current and authorities and retroactive municipal taxes, fees and levies; indictments indictments for absence of business license, 6(a) 79(b) legal violations and building permits Class actions Various motions for approval of claims as class actions against the Company and its subsidiaries, among others, alleging 27 884(c) noncompliance with laws, damage to the environment, collection of various fees, misleading of consumers etc. Various claims Mainly claims or monetary demands which are individually in the amount of up to NIS 10 10(d) 174 million each, including Palkal claims Total 43 1,156
Comments
(a) The provision in included in trade payables. (b) Total claims do not include claims in which the amount claimed is expressed in investments in fixed assets. (c) In claims in respect of which the specific amount of the claim for the Group cannot be assessed, the amount of the claim was calculated based on the Group's relative share in the relevant market. Claims that do not define the amount of claim or for which the Group's relative share in the claim cannot be assessed are not included in total claims. As for this type of claims, see also Note 33.1.2 in connection with a motion for approval of a class action filed in June 2015. (d) The provision includes an amount of approximately NIS 4 million included in trade payables.
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NOTE 33:- CONTINGENT LIABILITIES (Cont.)
33.1.2 In June 2015, a claim and motion for approval of the claim as a class action were filed against 11 defendants, including the Company and a wholly-owned subsidiary, for alleged air pollution in Haifa bay and resulting damages caused to the population of the area. The scope of the claim is approximately NIS 14.4 billion (the amount of the claim against the Company and the subsidiary was not specified). In the opinion of the Company's Management, based on its legal counsel, in view of the early stage of the proceeding, it is impossible to assess the Company's exposure or the chances of the proceeding and therefore no provision was recorded in the books in its respect.
33.1.3 After the statement of financial position date, on March 9, 2016, Paz Ashdod received a notice from the Ministry of Environmental Protection whereby the latter intends to levy a monetary sanction on Paz Ashdod in the amount of approximately NIS 18.6 million for the alleged violation of the conditions underlying the sea dumping permit in 2013, this by virtue of the Ministry of Environmental Protection's authority pursuant to the Law for the Prevention of Sea Pollution from Land Sources, 5758- 1988. Paz Ashdod categorically dismisses the arguments of the Ministry of Environmental Protection.
In the opinion of the Company's Management, based on its legal counsel, at this stage, before Paz Ashdod's arguments have been heard, it is impossible to assess the amount of the monetary sanction that will be levied on Paz Ashdod, if any, after its arguments are heard. This is also due to the fact that the entire professional documents to support this sanction have yet to be received.
33.2 Other contingent liabilities
33.2.1 Environmental issues
33.2.1.1 To date, suspected or actual contamination of the groundwater has been discovered in 31 of the Company's filling stations. Any required sampling and rehabilitation activities are performed in coordination with the Water Authority and the Ministry of National Infrastructures Energy and Water Resources. The Company is taking actions to rehabilitate the groundwater in 11 filling stations. 14 filling stations require periodic sampling only on an ongoing basis and 6 filling stations are still undergoing the Company's examination of the scope of groundwater pollution in coordination with the Water Authority.
In addition, in several stations built before the Water Regulations (Prevention of Water Pollution) (Gas Stations), 1997 came into effect, land pollution at various levels was found around the stations, and the Company is taking steps to remove the soil and/or to rehabilitate the land around these stations. The Company believes that the costs of rehabilitating a station where only land pollution is found (with no groundwater contamination) will be immaterial.
C-116 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 33:- CONTINGENT LIABILITIES (Cont.)
It should be noted that the Company may be required to make investments and pay financial expenses in larger amounts than estimated above in connection with the 11 filling stations in which the Company is required to treat the groundwater pollution and/or in connection with the other filling stations that are still under examination as discussed above due to the uncertainty involving the scope of groundwater pollution (in the filling stations under examination) and the authorities' requirements of the extent of treatment that will be needed in order to obtain approval for the conclusion of rehabilitation.
33.2.1.2 Since the 1980s, a number of pollution sources have been found in Ashdod's industrial area, which could endanger the quality of groundwater. These arise, inter alia, from fuels originating in various facilities located in the area, including the Ashdod Refinery. The Water Authority contacted ORL (formerly the owner of the Ashdod Refinery), requesting that it take steps with respect to the pollution of groundwater found in the area under the production areas in the Ashdod Refinery. At the beginning of the 1990s, the Water Authority examined a project that would provide a solution to the contamination discovered. At an early stage and even before the Water Authority had reached any decision, ORL began the independent development, based on hydrologic consultations, of a method for the production of water for industrial use from the aquifer, in a manner that would allow control over the "escape of pollutants" from the plant and the treatment of hydrocarbons, if and as necessary. ORL has drilled a number of drainage boreholes to form a hydrologic plain and prevent the expansion of the contamination to other areas. During the years 2006-2007, Paz Ashdod reached an agreement with the Water Authority (formerly the Water Commission) pursuant to which Paz Ashdod conducts hydrologic monitoring through 37 monitoring and pumping boreholes. Paz Ashdod furnishes the results of the boreholes to the Water Authority, which suggests that the aforesaid process is reducing the layer and preventing it from spreading to the peripheral monitoring boreholes in the oil refinery. Therefore, the Company believes that the continued treatment of the groundwater in the area of the oil refinery in the coming years will be as agreed with the Water Authority and in coordination with the Ministry of Environmental Protection. In 2011, Paz Ashdod increased the number of pumping and monitoring boreholes it conducts, in accordance with recommendation it received, in seven new boreholes. The costs of pumping and hydrologic monitoring, as agreed with the Water Authority, totaled in recent years in immaterial amount to the Company. The Company estimates that the costs in future years will be similar.
33.2.1.3 In the Haifa facility operated by Paz Ashdod, there has been a fuel lentil in shallow underground infrastructure for dozens of years. In the opinion of the Company, the fuel lentil probably resulted from the fuel activity conducted on the premises in the distant past. The treatment of the lentil issue is being conducted in accordance with the guidelines and methodologies of the Ministry of Environmental Protection and the Water Authority. In this respect, a historic land survey and monitoring boreholes were conducted in order to profile the lentil size according to which the lentil limits are within the Haifa facility boundaries. Also, tests and surveys were conducted in three boreholes in order to check the appropriate pumping method required for treating the lentil.
In the opinion of the Company, the pumping required for the lentil is liable to last several years but with immaterial costs.
C-117 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 33:- CONTINGENT LIABILITIES (Cont.)
33.2.1.4 A practical land survey that had been executed by Paz Lubricants in its plant in 2014 detected three sources of pollution. In August 2015, the Water Authority approved a plan submitted by Paz Lubricants for pumping and treating the sources of pollution ("the plan"). The plan's execution began in January 2016 for a trial run period of six months. At the end of this trial period, the Water Authority will study the plan and its scope and adoption and a decision will be made regarding any need for revising the approved plan. The Company estimates that the expected expenses in respect of conducting the plan are immaterial to the Company.
33.2.1.5 In tests that were carried out during 2005 on the earth around the facilities of Aviation Assets at Ben-Gurion Airport, soil pollution was discovered at a depth of about one meter. No pollution was found in the groundwater. Aviation Assets is working in accordance with the directives of the Ministry of Environmental Protection with regard to this pollution and it has carried out a soil study and drilled wells in order to monitor the groundwater. In view of the groundwater monitoring findings, effective from 2014, Aviation Assets is required to conduct tests once a year instead of twice a year.
In the context of infrastructure work carried out in early 2016 and in view of the findings of the land survey conducted, Aviation Assets is taking steps to clear the polluted soli from a small area in the Ben-Gurion Airport tank farm. According to the findings of land surveys carried out during the years 2008-2010, an old oil spill was found in soil in the possession of Aviation Services at Sde Dov. Aviation Services is carrying out rehabilitation works for the soil and the groundwater. Between 2012 and 2015, the scope of the spill was greatly reduced, and Aviation Services is continuing operations as required, in coordination with the Ministry of Environmental Protection.
33.2.2 Certain claims and payment demands which are covered by insurance policies and handled by the respective insurance companies have been filed against the Company and its subsidiaries. The Company estimates that it is not exposed in respect of these claims and demands other than the amount of the deductibles in their respect.
33.2.3 In March 2012, the Ministry of National Infrastructures Energy and Water Resources published the draft of the Fuel Sector Bill, 2012.
The bill contains several clauses that may affect the Company to the extent that the bill is approved in its current format, such as limitation of a refining or infrastructure license to 25 years and of other licenses to three years, forbidding holders of a refining license that supplies more than 25% of the gasoline and diesel oil dispensed in Israel and their controlling shareholders or interested parties therein from holding a fuel marketing license with rights in more than 33% of the public filling stations or from serving as controlling shareholders or interested parties in such holders of a marketing license, forbidding individuals from holding rights in more than 60% of the public filling stations in a certain district, unless authorized by the Fuel Administration and subject to the conditions approved by the Fuel Administration, forbidding holders of a refining license or controlling shareholders or interest parties therein from carrying out infrastructure activities or from serving as controlling shareholders or interested parties in holders of an infrastructure license unless authorized by the Fuel Administration.
C-118 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 33:- CONTINGENT LIABILITIES (Cont.)
If the bill is passed in the proposed or similar format, this may have material adverse effects on the operations of the Company and on its ownership rights. The Company will consider initiating legal proceedings in order to prevent an unfair damage to the Company and to prevent unreasonable restrictions on its continued natural development.
33.2.4 Following the Electricity Authority's demand that Paz Ashdod pay ex-post fees to the IEC (calculated at the marginal cost of production of electricity and arising from the added cost borne by the IEC due to the supply of power to Paz Ashdod's customers) for the period from December 2011 through August 2012 (during which there was a general shortage of natural gas in Israel), in the context of a hearing proceeding at the Electricity Authority, Paz Ashdod and the Electricity Authority reached a settlement according to which Paz Ashdod will pay the IEC ex-post fees for the abovementioned period in an amount that is immaterial to Paz Ashdod.
On August 10, 2015, Paz Ashdod was notified of Resolution no. 4 (989) issued by the Electricity Authority which establishes rates for electricity system management services (system tariffs) applicable to all private consumers ("the Resolution"). According to an appendix attached to the Resolution, Paz Ashdod is required to pay for system management services supplied by the IEC to the two cogeneration power stations operated by it an amount of approximately NIS 46 million for the period from June 2013 through September 2015.
Based on the opinion of its legal advisors, the Company's Management believes that the Resolution is illegal, 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.
In September 2015, Paz Ashdod filed a petition with the High Court of Justice against the Resolution. Based on Paz Ashdod's legal advisors, the Company's Management estimates that it is more likely than not that the petition pertaining to the retroactive charge will be accepted and therefore no provision was included in the financial statements in respect of the retroactive charge.
C-119 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 34 - RELATED AND INTERESTED PARTIES
34.1 Compensation of key management personnel (including directors)
34.1.1 An agreement was signed between the Company and Mr. Zadik Bino, Chairman of the Board of Directors of the Company and the controlling shareholder of the Company, to render Chairman of the Board services to the Company for a period of three years, commencing on November 28, 2011. In consideration of his service as chairman of the board of the Company, including his service as a director of various private subsidiaries of the Company (if and to the extent he will serve as director), the chairman will be entitled to receive the following: a monthly payment of NIS 175,000, linked to the CPI (the last CPI known prior to each monthly payment; the base index will be the index known at the starting date of this agreement. If the index decreases, the monthly payment will not be decreased, but will be taken into account if and when a future increase will occur), plus VAT; a cell phone for his use including maintenance expenses; a company car suited to his position (a class 7 car) for his use (including maintenance expenses), and reimbursement of expenses incurred in performing his job. The Company is entitled to reassess the approval of these expenses from time to time, including presenting them to the Audit Committee for approval. The agreement also stipulates that the payment may be to Mr. Zadik Bino directly or to a company owned by him, at his choice. The work of the chairman was estimated at a 90% position and the chairman will perform his work as an "independent contractor" (that is, there are no employee-employer relationships between the Company and Mr. Zadik Bino).
In addition, and subject to any law, the Company will continue to act in order that Mr. Zadik Bino will be insured in insurance policies that also apply to other directors and officers in the Company, and that the indemnification letter given to him will continue to be valid as for directors and other Officers in the Company.
On October 1, 2014, following the approval of the Company's Remuneration Committee of August 18, 2014 and the approval of the Company's Board of Directors of August 20, 2014, the Company's general meeting of shareholders decided to reapprove without changes the employment agreement between the Company and Mr. Zadik Bino for providing Chairman of the Board services for a period of an additional three years from November 28, 2014 to November 28, 2017. In 2015, the management fees paid to Mr. Zadik Bino amounted to approximately NIS 2,288 thousand (including car and cell phone expenses).
C-120 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 34 - RELATED AND INTERESTED PARTIES (Cont.)
In August 2014, in accordance with the Companies Regulations (Exemptions in Transactions with Interested Parties), 2000, the Company's Remuneration Committee and the Board of Directors approved the payment of directors' fees to Mr. Gil Bino, son of Mr. Zadik Bino, one of the controlling shareholders of the Company, in an amount of NIS 120,000 per annum and a fee for participation in meetings of the Company's Board and/or a Board Committee and/or a subsidiary's board in an amount of NIS 4,000 per meeting, all pursuant to the Companies Regulations (Rules of Remuneration and Expenses to External Directors), 2000 ("the Remuneration Regulations"). These amounts are linked to the CPI, pursuant to the Remuneration Regulations, commencing on February 6, 2010, to be paid including VAT as required by law. The approval of the Remuneration Committee and the Board of Directors was granted for a period of three additional years from November 28, 2014 to November 28, 2017, provided that Mr. Gil Bino continues to serve as director in the Company. As of the date of approval of said remuneration, the annual remuneration amounted to approximately NIS 131,120 and remuneration for participation in meetings amounted to NIS 4,371 per meeting (plus VAT as required by law). In 2015, the directors' remuneration paid to Mr. Gil Bino amounted to approximately NIS 178 thousand.
In October 2015, in accordance with the Companies Regulations (Exemptions in Transactions with Interested Parties), 2000 ("the Exemption Regulations"), the Company's Remuneration Committee, Finance and Audit Committee and Board of Directors approved the continued payment of directors' fees to Mrs. Hadar Bino Shmueli in the amount of NIS 96,342 per annum and a fee for participation in meetings of the Company's Board and/or a Board committee and/or the boards of subsidiaries of NIS 3,214 per meeting, plus VAT as required by law, pursuant to the Remuneration Regulations with respect to a director that does not possess accounting and financial expertise. The amounts are all linked to the CPI pursuant to the Remuneration Regulations. The aforementioned remuneration to Mrs. Bino Shmueli will be paid over an additional period of three years from November 21, 2015 and will apply until the earlier of as long as she continues to serve as a director in the Company or November 21, 2018. In 2015, the directors' fees paid to Mrs. Hadar Bino Shumeli aggregated an amount of approximately NIS 140 thousand.
The Company insures the Chairman of the Board, Mr. Zadik Bino, the director Mr. Gil Bino and the director Mrs. Hadar Bino Shumeli under directors' and officers' insurance policy which also applies to the other officers (and directors) in the Company or in its subsidiaries.
C-121 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 34 - RELATED AND INTERESTED PARTIES (Cont.)
34.1.2 The service terms of the Company's CEO, Mr. Yona Fogel:
According to the employment agreement, as amended in June 2015, the CEO will be paid a gross monthly salary of NIS 168,903, linked to the CPI of June 2015. Effective from July 2016, 5% will be added to the gross monthly salary as it will be for June 2016.
On June 25, 2015, following the approval of the Company's Remuneration Committee and Board, the general meeting approved an amendment to the tenure and service terms of the Company's CEO consisting of a raise in his monthly salary against which the CEO agreed that for his service from July 1, 2015 and thereafter, the Company's contributions in respect of severance pay to the pension arrangement will fully replace accrued severance pay pursuant to Section 14 to the Severance Pay Law, 5723-1963.
According to the CEO's service terms, if the Company's net income for accounting purposes in a certain year exceeds NIS 300 million ("the threshold condition"), the CEO will be entitled to an annual bonus of 2% of the difference between the Company's consolidated net income for accounting purposes in that year and the threshold condition, up to a ceiling of NIS 2 million. If the Company's net income for accounting purposes in a certain year is lower than the threshold condition, the decision on the actual payment and its amount will be at the absolute discretion of the Company's Board, subject to applicable laws.
According to the Company's net income for accounting purposes in 2015, the CEO is entitled to an annual bonus in the maximum amount for 2015. The Company recorded an adequate provision in its books in respect of the bonus.
The agreement provides for an early notice of termination of employer-employee relations of at least three months.
The CEO is entitled to social benefits, managers' insurance and study fund, in the customary manner and in accordance with the law, and to a reimbursement for expenses in Israel and abroad in the course of carrying out his duties. The CEO is entitled to have a company car (at least class 6).
For details of options granted to the Company's CEO, see Note 21 above.
On June 25, 2015, following the approval of the Company's Remuneration Committee and Board, the general meeting approved the share-based remuneration plan for the Company's CEO in accordance with article 7 to the Company's remuneration policy.
C-122 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 34 - RELATED AND INTERESTED PARTIES (Cont.)
34.1.3 The Company granted letters of indemnity and quittance to directors and senior officers and also purchases directors' and officers' liability insurance policies, all subject to the Company's articles of association and the provisions of applicable laws.
34.1.4 Compensation to key management personnel (including directors) that are employed by the Company:
Year ended December 31, 2015 2014 2013 No. of No. of No. of persons Amount persons Amount persons Amount NIS in NIS in NIS in millions millions millions
Short-term employee benefits 1 5 1 2 1 3 Termination benefits 1 - 1 - 1 - Other long-term benefits 1 - 1 - 1 - Share-based payments 1 * 1 1 1 1
53 4
* Less than NIS 0.5 million.
34.1.5 Compensation to key management personnel (including directors) that are not employed by the Company:
Year ended December 31, 2015 2014 2013 No. of No. of No. of persons Amount persons Amount persons Amount NIS in NIS in NIS in millions millions millions
Total compensation to director not employed by the Company 12 2 10 2 9 2 Total compensation to key management personnel not employed by the Company 121 2 1 2
13 4 11 4 10 4
C-123 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 34 - RELATED AND INTERESTED PARTIES (Cont.)
34.2 Transactions with related and interested parties
Year ended December 31, 2015 2014 2013 NIS in millions Amounts of transactions Related/interested party
Parent company 2 2 2
Parties having significant influence or joint control in the Company Cost of sales (13) (12) (6) Selling and marketing expenses (2) (1) * General and administrative expenses (*) (1) (4) Financial expenses - - -
Total (15) (14) (10)
Associates and other companies Sales 2 2 - Cost of sales (1) (1) - Selling and marketing expenses (1) (1) (1) General and administrative expenses (1) (1) (1) Other income 9 7 6 Financial income (expenses) * * *
Total 8 6 4
Other related parties Cost of sales - (*) (*) Selling and marketing expenses - (*) (*) Other income 1 1 1 Financial income (expenses) (*) * (*)
Total 1 1 1
* Less than NIS 0.5 million.
C-124 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD. AND ITS SUBSIDIARIES
Chapter C - Financial Statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2015
NOTE 34 - RELATED AND INTERESTED PARTIES (Cont.)
34.3 Balances with related and interested parties
December 31, 2015 2014 NIS in millions Amounts of balances Related/interested party
Parties having significant influence or joint control in the Company Other accounts receivable ** 9 4 Trade payables * (*)
Total 9 4
Associates and other companies Trade and other accounts receivable * * Loans granted and long-term capital notes 7 5 Trade payables (*) (*) Long-term loans * *
Total 7 5
Other related parties Trade receivables (*) - Trade payables *** (1) (*) Short-term credit (*) (*) Guarantees (1) (1) Cash and securities 225 175
Total 223 174
* Less than NIS 0.5 million. ** The highest balance in the reporting period (based on monthly closing balances) was NIS 13 million. *** The highest balance in the reporting period (based on monthly closing balances) was NIS 1 million.
The Group has transactions for the sale of oil distillates to related and interested parties. These transactions are carried out in the ordinary course of business, at arm's length and under credit terms that do not materially differ from those granted to other customers. The financial data presented above is exclusive of said transactions with those entities.
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F:\W2000\w2000\PAZ\M\15\EC12-PAZ.docx
C-125 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 D. Additional Details about the Company WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
Contents
1. Regulation 9D – Report of the Amount of Liabilities According to Maturity Dates………………...... 3 2. Regulation 10A – Summary of the Company's Comprehensive Income by Quarters……………...... 3 3. Regulation 10C – Use of Proceeds from Securities………………...... 3 4. Regulation 11 – List of Investments in Material Subsidiaries and Related Companies……………… .... 4 5. Regulation 12 – Changes in Investments in Material Subsidiaries and Related Companies………….….4 6. Regulation 13 – Income of Material Subsidiaries and Related Companies and the Company's Share therein………………………………………………………………………………………… ...... 4 7. Regulation 20 – Trading on the Stock Exchange……………………… ...... 5 8. Regulation 21 – Remuneration of Interested Parties and Senior Officers in the Company…………….6 9. Regulation 21A – Stating the Name of the Controlling Shareholder in the Company……………….. ...10 10. Regulation 22 – Transactions with Controlling Shareholders………………………...... 10 11. Regulation 24 – Holdings of Interested Parties…………………………………… ...... 15 12. Regulation 24A – Authorized Share Capital, Issued Share Capital and Convertible Securities ...... 16 13. Regulation 24B – Registrar of the Company's Shareholders………………………...... 16 14. Regulation 25A – Registered Domicile………………………...... 16 15. Regulation 26 – Directors of the Company…………………………… ...... 16 16. Regulation 26A – Senior Officers…………………………… ...... 30 17. Regulation 26B – Independent Authorized Signatories……………………………...... 36 18. Regulation 27 – Independent Auditor of the Company……………………… ...... 36 19. Regulation 28 – Change in Memorandum or Articles of Association………………………...... 36 20. Regulation 29 – Recommendations and Resolutions of the Board of Directors…………………...... 36 21. Regulation 29A – Resolutions of the Company………………………...... 38
D- 2 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
1. Regulation 9D – Report of the Amount of Liabilities According to Maturity Dates
The report of liabilities according to maturity dates is provided separately simultaneously with this report.
2. Regulation 10A – Summary of the Company's Comprehensive Income by Quarters
Summary of Consolidated Statements of Comprehensive Income by Quarters for 2015 (NIS in millions) Total Total Q1 2015 Q2 2015 Q3 2015 Q4 2015 2015 2014 Net income for the period 191 243 111 174 719 173 Items of comprehensive loss 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 - - - - - 9 Re-measurement of defined benefit plan - - - (1) (1) 1 Taxes in respect of other comprehensive income - - - - - (2) Total other comprehensive loss - - - (1) (1) 8 Total comprehensive income 191 243 111 173 718 181 Attributed to the equity holders of the Company 190 243 110 172 715 180 Non-controlling interests 1 - 1 1 3 1 Total other comprehensive income 191 243 111 173 718 181
For additional details of the summary of interim statements of income, see paragraph 3.1.1 of Chapter B - Report of the Board of Directors about the State of the Company's Affairs for the year ended December 31, 2015 ("Report of the Board of Directors").
3. Regulation 10C – Use of Proceeds from Securities
The Company issued a shelf prospectus on May 29, 2013 which was extended until May 28, 2016 based on the ISA's approval of April 27, 2015. According to the shelf prospectus and a shelf offering report of June 11, 2014, the Company issued to the public debentures (series D) in 2014. The issue proceeds were and are being used by the Company mainly for refinancing existing debt and for financing the Company's operating business activities (including payment of advances to suppliers). In 2016, the Company issued to the public debentures (series D) pursuant to the shelf prospectus and a shelf offering report of February 1, 2016. The issuance proceeds have been used by the Company mainly to refinance an existing financial debt. For further details, see Appendix B to the Report of the Board of Directors and Regulation 20 below.
D- 3 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
4. Regulation 11 – List of Investments in Material Subsidiaries and Related Companies
Cost of Total investment at Loans Name of subsidiary shares December 31, 2015 (2) NIS in millions Paz Ashdod Refinery Ltd. 2,873 2,752 1,102 Paz Industries and Services (Oil) Ltd. * 333 571 - Pazgas Ltd. (1) * 88 252 175
* Figures based on estimate. (1) Directly and indirectly held subsidiary of Paz Industries and Services (Oil) Ltd. / part of the Industries Division. (2) Includes current accounts receivable.
Rate of direct and Power to Name of subsidiary Issued share capital indirect holdings appoint of capital / voting directors 17,679 Ordinary B shares with of NIS 1 par Paz Ashdod Refinery Ltd. value each; 1 Ordinary A share of NIS 1 par 100% 100% value Paz Industries and Services 85,592,718 Ordinary shares with a nominal 100% 100% (Oil) Ltd. value of NIS 0.1 each 50 Ordinary A shares of NIS 1 par value each; Pazgas Ltd. 100% 100% 50 Ordinary B shares of NIS 1 par value each
5. Regulation 12 – Changes in Investments in Material Subsidiaries and Related Companies
For the sale of the Company's holdings in Pi-Glilot Oil Terminals and Pipelines Ltd. to an unrelated third party, see paragraph 3.11.2.1 to Chapter A to this Periodic Report.
6. Regulation 13 – Income of Material Subsidiaries and Related Companies and the Company's Share therein
Dividends Dividends that the distributed to Interest Management parent the parent Comprehensive received by fees received company is company in Name of subsidiary income (loss) Paz in by Paz in entitled to the Paz 2015 2015 receive after Group in balance sheet 2015 date NIS in millions Paz Ashdod Refinery Ltd. 381 - 41 15 - Paz Industries and Services (Oil) Ltd. (1) 162 141 - - - Pazgas Ltd. (2) 102 85 5 1 -
D- 4 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
(1) Holding company that holds shares of the subsidiaries, Paz Aviation Assets, Paz Aviation Services, Paz Lubricants, Pazkar and Pazga. The data are consolidated.
(2) Directly and indirectly held subsidiary of Paz Industries and Services (Oil) Ltd. / part of the Industries Division. Any dividend distributed by this company was distributed to Paz Industries and Services (Oil) Ltd. Moreover, the income of this company is included in the profits of Paz Industries and Services (Oil) Ltd.
As for interest and management fees subsequent to December 31, 2015, it should be noted that each quarter and in the ordinary course of business, the Company debits / credits the subsidiaries with interest, linkage differences and management fees.
7. Regulation 20 – Trading on the Stock Exchange
In February 2016, the Company listed for trade NIS 692,941,000 par value of debentures (series D) issued in the context of a fixed price offering by way of tender on the unit price consisting of NIS 1,000 par value each, based on a shelf offering report of February 1, 2016. See details in immediate reports of February 1, 2016 (TASE reference: 2016-01-021019), February 2, 2016 (TASE references: 2016-01-022033 and 2016-01-022036) and February 3, 2016 (TASE reference: 2016-01-022513) and Appendix B to the Report of the Board of Directors.
D- 5 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
8. Regulation 21 – Remuneration of Interested Parties and Senior Officers in the Company
The following are details of the remuneration that was paid in 2015 to each of the five highest remunerated senior officers in the Company or in companies controlled by it which were given to them with regard to their tenure in the Company or in companies controlled by it, as recognized in the financial statements for 2015 (the figures reflect the employer's cost for 2015, in NIS in thousands):
Details of recipient of remuneration Remuneration for services Total Holding Position Bonus Bonus without rate in the Share-based Management Name Position scope Salary for for Total share- Company's payment3 fees Other (%) 20141 20152 based capital (%) payment Zadik Bino (paragraph Chairman of the Board of - 90% 5 - - - 2,2886 2,288 2,288 8.1.1)4 Directors 23.09 - Yona Fogel (paragraph - CEO of the Company 100% - 2,000 425 - 5,313 4,888 8.1.2) 0.2 2,888 Head of the Refining and - Malachi Alper (paragraph Logistics Division and CEO 100% - 1,905 1,811 8.1.3) of Paz Ashdod Refinery 1,642 169 - 94 - Ltd. Sharona Novak (paragraph - CFO 100% - 130 - 333 - 1,624 1,291 8.1.4) 1,161 Hagai Zohar (paragraph CEO of Paz Lubricants and - 100% - 108 - 60 - 1,317 1,257 8.1.5) Pazkar 1,149
1 The amount in the table represents a bonus approved and paid in 2015 after the date of approval of the financial statements for 2014. Se details in paragraph 8.1.8 below. 2 See details in paragraph 8.1.9 below. 3 See details in paragraph 8.1.7 below. 4 Paid in 2015 to Dada Management Ltd. pursuant to the engagement with the Chairman of the Board. 5 Company shares that held through Bino Holdings Ltd. See details of Bino Holdings Ltd. in paragraph 9 below. 6 Includes approximately NIS 113 thousand in vehicle expenses and approximately NIS 4 thousand in cellular phone expenses.
D- 6 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
8.1 The following are details regarding the terms of the contracts with the senior officers that appear in the above table
8.1.1 For details of the terms of the contract with Mr. Zadik Bino, the Chairman of the Board of Directors and the controlling shareholder of the Company, see paragraph 10.1.1 below.
8.1.2 Mr. Yona Fogel, the CEO of the Company, has been employed by the Company since October 1, 2007. In addition to the terms specified in paragraph 8.1.6 below, Mr. Fogel is entitled to life and health insurance up to a sum of NIS 50,000 per annum (linked to the Consumer Price Index).
According to an amendment to the employment agreement signed with Mr. Fogel approved in September 2013, if the Company's annual consolidated net income for accounting purposes in the relevant year is higher than NIS 300 million ("the baseline"), Mr. Fogel will be entitled to an annual bonus at a rate equivalent to 2% of the difference between the Company's annual consolidated net income for accounting purposes in that year and the baseline up to a ceiling of NIS 2 million ("the ceiling"). If the Company's annual consolidated net income for accounting purposes in the relevant year is lower than the baseline, the decision on whether to pay the bonus and the amount of the bonus will be at the absolute discretion of the Company's Board and according to applicable laws. According to the Company's consolidated net income for accounting purposes in 2015, the CEO is entitled to an annual bonus for 2015 in the ceiling amount. For 2011 through 2014 (inclusive), the CEO was not granted an annual bonus.
See details of the CEO's employment terms in Note 34.1.2 to the Company's financial statements as of December 31, 2015 and immediate reports of July 29, 2013 (TASE reference: 2013-01-102693), September 3, 2013 (TASE reference: 2013-01-136893), May 20, 2015 (TASE reference: 2015-01- 023637), June 16, 2015 (TASE reference: 2015-01-049212) and June 25, 2015 (TASE reference: 2015-01-057006).
8.1.3 Mr. Malachi Alper has been employed by the Company as Vice President and Head of the Refining and Logistics Division and as CEO of Paz Ashdod Refinery Ltd. since March 1, 2008. For details of his employment terms, see paragraph 8.1.6 below.
8.1.4 Mrs. Sharona Novak has been employed at the Company since March 1, 2013. Effective from April 1, 2013, Mrs. Novak serves as the Company's CFO. For details of her employment terms, see paragraph 8.1.6 below.
8.1.5 Mr. Hagai Zohar has served as the CEO of Paz Lubricants and Chemicals Ltd. since February 2004 and as the CEO of Pazkar Ltd. since March 15, 2014. Before that and effective from July 6, 1997 he served in several positions in the Group. For details of his employment terms, see paragraph 8.1.6 below.
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8.1.6 According to the employment agreement of each of the officers mentioned in paragraphs 8.1.2- 8.1.4 above ("the four officers"), each of the parties is entitled to terminate the agreement at any time and for any reason, by giving three months' advance written notice (excluding Mr. Hagai Zohar whose early notice period is two months) and in accordance with the conditions provided in the employment agreement. The Company (or a corporation controlled by it) reserves the right not to make use of the early notice period in full or in part and to pay the relevant officer for the period that is not claimed. The salary of each of the four officers is linked to the Israeli CPI. Upon the termination of the employment agreement with the Company, each of the four officers will be entitled to severance pay (pursuant to Section 14 to the Severance Pay Law) [Mrs. Sharona Novak is entitled to severance pay pursuant to Section 14 to the Severance Pay Law from the first day of her term in the Company or in a corporation controlled by the Company whereas Messrs. Yona Fogel, Malachi Alper and Hagai Zohar are entitled to severance pay pursuant to Section 14 to the Severance Pay Law from their salary for July 2015 and thereafter (whereas for their previous service term they are entitled to severance pay pursuant to their monthly salary as of June 2015, linked to the CPI)]. Each officer is entitled to social and related benefits as customary in such agreements (including a company car) and, at times, also to funding of certain expenses approved by the Company. The non-compete period determined in the employment agreement with each of the four officers is 18 months from the date of termination of their employment with the Company (or a corporation controlled by it) (excluding Mrs. Sharona Novak and Mr. Hagai Zohar whose non-compete period as prescribed in the agreement signed with them is 12 months from the date of termination of employment).
8.1.7 In the context of the Company's employee option plan, the Company also allocated the four officers options in the past. An expense has been recorded in the books in 2015 in respect of their share. For further details, see Note 21 to the Company's financial statements as of December 31, 2015.
In addition, in the context of a share-based payment plan which consists of the grant of restricted stock units ("RSUs") to senior officers (who are not directors), the Company allocated RSUs to the four officers. In order to qualify for the plan, the four officers waived their entitlement to be included in the Company's multiannual bonus plan. See more details of the RSU-based payment plan in an outline issued by the Company in an immediate report of May 20, 2015 (TASE reference: 2015-01-023547), an immediate report on summoning a general meeting of shareholders to approve, among others, the allocation of RSUs to the Company's CEO of May 20, 2015 (TASE reference: 2015-01-023637) and an immediate report on the approval of the general meeting of the Company's shareholders of the allocation of RSUs to the CEO of June 25, 2015 (TASE reference: 2015-01-057006). See also details of the amount of RSUs allocated to the four officers in an immediate report of January 7, 2016 (TASE reference: 2016-01-005992).
8.1.8 On April 21, 2015, following the approval of the Company's Remuneration Committee, the Company's Board approved the grant of a bonus for 2014 to officers in the Company, including three of the officers included among the five highest rewarded officers as described above (other than the Chairman of the Board or the CEO) in an amount of 1.8 monthly salaries each, all pursuant to article 4.9 to the Company's remuneration policy. In view of the approval of the bonus as above, the costs in respect of the bonus were not recognized in the financial statements for 2014.
See details of the remuneration policy and its amendments in immediate reports of July 29, 2013 (TASE reference: 2013-01-102693), September 3, 2013 (TASE reference: 2013-01-136893), September 21, 2014 (TASE reference: 2014-01-161652) and October 1, 2014 (TASE reference: 2014-01-167808).
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8.1.9 According to the remuneration policy, the Company may approve the grant of an annual bonus to officers based on the Company's results and performances and the achievements of the officers and subject to the approval of the Company's Remuneration Committee and Board. As of the report date, the Company has yet to decide on the amount of the bonus that will be paid to each of the officers for 2015 and no provision was recorded in the financial statements for the amounts of the bonus to the officers in respect of 2015 (other than to the CEO whose entitlement to an annual bonus is stipulated in his employment agreement, as discussed in paragraph 8.1.2 above). The Company expects to hold a discussion on the issue of bonuses to officers in the second quarter of 2016, as customary in the Company.
8.1.10 The total cost of the remuneration and ancillary costs that do not go beyond what is customary, which were paid by the Company to the members of the Board of Directors: Aharon Fogel, Itzhak Ezer, Garry Stock, Gideon Chitayat, Dalia Lev, Gabriel Rotter, Ephraim Zedaka, Gil Bino, Menachem Brenner, Hadar Bino-Shmueli7, Meira Git and Shaul Zemach for 2015 amounted to approximately NIS 2,032 thousand.
7 In 2015, the remuneration for Gil Bino and Hadar Bino-Shmueli (who are the children of Zadik Bino, one of the controlling shareholders in the Company) was paid to Dada Management Ltd. For further details regarding the approval of the remuneration, see paragraphs 10.1.2 and 10.1.3 below.
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9. Regulation 21A – Stating the Name of the Controlling Shareholder in the Company
The controlling shareholders in the Company are Bino Holdings Ltd.8 (23.09%), Dolphin Energies Ltd.9 (2.81%) and Instanz Holdings Ltd.10 (4.26%), whether by virtue of holding the Company's shares or by virtue of agreements between them. See more details in paragraph 11.2 below.
10. Regulation 22 – Transactions with Controlling Shareholders
10.1 Transactions of the Company that fall within the scope of section 270(4) of the Companies Law, 1999 ("the Companies Law")
10.1.1 On October 1, 2014, following the approval of the Company's Remuneration Committee of August 18, 2014 and of the Board of Directors of August 20, 2014, the Company's general meeting decided to reapprove without any changes the Company's former engagement with Mr. Zadik Bino for providing Chairman of the Board services to the Company for an additional three-year period from November 28, 2014 to November 28, 2017. See more details in Note 34.1.1 to the Company's financial statements as of December 31, 2015 and an immediate report of October 1, 2014 (TASE reference: 2014-01-167808).
8 A private company that owns shares in the Company and whose shares are held by: (1) Mr. Zadik Bino (52.5%), (2) Mr. Gil Bino, the son of Mr. Zadik Bino (approximately 15.83%), (3) Mrs. Hadar Bino-Shmueli, the daughter of Mr. Zadik Bino (approximately 15.83%) and (4) Mrs. Dafna Bino-Or, the daughter of Mr. Zadik Bino (approximately 15.83%). There is a voting agreement between Bino Holdings Ltd., Barbino Ltd., Instanz Holdings Ltd. and Dolphin Energies Ltd. 9 A private company that owns shares in the Company and whose shares are held by: (1) Kafig Pty. Ltd. (approximately 99.99%), an Australian company held through Australian corporations and Australian trusts, whose primary beneficiaries are Mrs. Lee Lieberman, Mr. Joshua Lieberman, Mrs. Barrie Lieberman and Mrs. Casey Lieberman, all of whom are individuals that are citizens and residents of Australia; and (2) Mr. Joshua Lieberman (approximately 0.01%), a citizen and resident of Australia, who holds one share of Dolphin Energies Ltd. in trust for Kafig Pty. Ltd. Mrs. Lee Lieberman is the mother of Mr. Joshua Lieberman, Mrs. Barrie Lieberman and Mrs. Casey Lieberman. Mrs. Lee Lieberman is the widow of the late Mr. Leon Lieberman, the son of the late Mr. Jack Lieberman. The late Leon Lieberman was the brother of Mrs. Helen Abeles. In April 2015, Dolphin Energies Ltd. repaid the credit extended to it by Bank Leumi LeIsrael B.M. and the pledge recorded on the shares owned by it on that date was removed. In December 2015, Dolphin transferred 116,663 shares of the Company owned by it and registered in the name of Bank Hapoalim Registration Company Ltd. ("the shares") to Poalim Trust Services Ltd. ("the trustee"). The trustee will hold the shares for Dolphin and for Bank Hapoalim Ltd. as the owner of the pledge on the shares. There is a voting agreement between Bino Holdings Ltd., Barbino Ltd. (formerly a shareholder in the Company), Instanz Holdings Ltd. and Dolphin Energies Ltd. 10 A private company that owns shares in the Company and whose shares are owned by: (1) Instanz Pty. Ltd. (approximately 99.99%), an Australian company that is held through Australian corporations and Australian trusts where the primary beneficiaries are Mr. Michael Abeles (50%) and Mrs. Helen Abeles (50%), who are individuals and citizens and residents of Australia; and (2) Mr. Michael Abeles (approximately 0.01%), a citizen and resident of Australia, who holds one share of Instanz Holdings Ltd. in trust for Instanz Pty. Ltd. Mrs. Helen Abeles is the daughter of the late Mr. Jack Lieberman and the wife of Mr. Michael Abeles. There is a voting agreement between Bino Holdings Ltd., Barbino Ltd., Instanz Holdings Ltd. and Dolphin Energies Ltd.
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10.1.2 On August 20, 2014, following the approval of the Company's Remuneration Committee, the Company's Board of Directors approved the continued payment of remuneration to Mr. Gil Bino, in accordance with Regulation 1b(3) to the Companies Regulations (Reliefs in Transactions with Interested Parties), 2000 ("the Relief Regulations"), for an additional three-year period from November 28, 2014 to November 28, 2017, provided that Mr. Gil Bino continues to serve as director in the Company and in keeping with the Companies Regulations (Rules of Remuneration and Expenses to External Directors), 2000. For further details, see Note 34.1.1 to the Company's financial statements as of December 31, 2015 and an immediate report of August 20, 2014 (TASE reference: 2014-01-138201).
10.1.3 On October 21, 2015, after obtaining the approval of the Remuneration Committee and pursuant to Regulation 1b(3) to the Relief Regulations, the Company's Board of Directors approved the continued payment of remuneration to Mrs. Hadar Bino-Shmueli for an additional period of three years from November 21, 2015 to November 21, 2018 as long as Mrs. Hadar Bino-Shmueli continues to serve as director in the Company and in accordance with the Companies Regulations (Rules of Remuneration and Expenses to External Directors), 2000. For further details, see Note 34.1.1 to the Company's financial statements as of December 31, 2015 and an immediate report of October 21, 2015 (TASE reference: 2015-01-139218).
In 2006, the Company gave the Chairman of the Board of Directors, Zadik Bino, and the director Gil Bino letters of indemnification and exemption and in 2012 a letter of indemnification, all in an identical format to those given to the other directors and officers in the Company. Also, on July 3, 2013, the Company's general meeting approved the grant of an identical letter of indemnification and exemption to Mrs. Hadar Bino-Shmueli, a director. For details, see paragraphs 21.2.1, 21.2.2 and 21.2.3 below.
10.1.4 On June 25, 2015, following the approval of the Company's Remuneration Committee and Board of Directors, the general meeting approved extending the validity of the letter of indemnification granted to the Chairman of the Board, Mr. Zadik Bino, and to the directors Gil Bino and Hadar Bino-Shmueli, by three more years under the same terms as the current letter of indemnification. See more details in immediate reports of May 20, 2015 (TASE reference: 2015-01-023637) and June 25, 2015 (TASE reference: 2015-01-057006).
The Company insured and is insuring the Chairman of the Board of Directors Zadik Bino, director Gil Bino and director Hadar Bino-Shmueli in a directors' and officers' insurance policy that also applies to the other officers (including directors) in the Company or its subsidiaries. For details, see paragraph 21.2.4 below.
10.2 Other transactions of the Company where a controlling shareholder has a personal interest in their approval
10.2.1 In January 2016, the Audit and Finance Committee of the Company reaffirmed the criteria underlying irregular and immaterial transactions with the controlling shareholder in the Company or transactions in which the controlling shareholder has a personal interest. The criteria constitute standards pursuant to section 117(1a) of the Companies Law for the purpose of examining whether such transactions are irregular as well as guidelines for classification of transactions as immaterial pursuant to Regulation 41(4)(6) to the Securities Regulations (Annual Financial Statements), 2010 ("the criteria"). The criteria were determined for credit, deposit, foreign currency and other bank transactions as well as property rental and other transactions, all as specified below:
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Credit transactions - an irregular credit transaction is not conducted in the ordinary course of the Company's business and/or not at arm's length and/or at a scope or monetary value that exceeds 5% of the total balance sheet in the consolidated financial statements. An immaterial credit transaction is a transaction that is not irregular as defined above and whose scope or monetary value does not exceed the lower of 1% of the total balance sheet in the consolidated financial statements or NIS 135 million. As for determining the monetary value of said credit transactions, the total credit balance received (and not repaid) by the Company and its subsidiaries from banks that are controlled by the controlling shareholders will be taken into account and will be considered as a transaction in this context.
Deposit transactions - an irregular deposit transaction is a transaction not in the ordinary course of the Company's business and/or not at arm's length and/or at a scope or monetary value that exceeds 5% of the total current assets in the consolidated financial statements. An immaterial deposit transaction is a transaction that is not irregular as defined above and whose scope or monetary value does not exceed the lower of 1% of the total current assets in the consolidated financial statements or NIS 65 million. As for determining the monetary value of said deposit transactions, the total deposits placed by the Company and its subsidiaries at banks that are controlled by the controlling shareholders will be taken into account and will be considered as a transaction in this context.
Foreign currency transactions -an irregular foreign currency transaction is a transaction not in the ordinary course of the Company's business and/or not at arm's length and/or whose cumulative standardized margin exceeds a total of $ 1.5 million a month. In this context, the "standardized margin" refers to the multiplication of the foreign currency transaction scope by the rate of the gap between the actual sale or purchase price, as applicable, in the foreign currency transaction between the Company and the bank and the sale or purchase price, as applicable, published by that bank on the date of the foreign currency transaction. An immaterial foreign currency transaction is a transaction that is not irregular as defined above and whose cumulative standardized margin does not exceed $ 1 million a month.
Other bank transactions - an irregular other bank transaction is a transaction not in the ordinary course of the Company's business and/or not at arm's length and/or at a monetary value (namely the commissions paid in its respect) that exceeds NIS 5 million (adjusted to the occasional increase in the known CPI for December 2011). An immaterial other bank transaction is a transaction that is not irregular as defined above and whose monetary value (namely the commissions paid in its respect) does not exceed NIS 1 million (adjusted to the occasional increase in the known CPI for December 2011). The amounts in other bank transactions as above are the cumulative amounts paid during a calendar year for this type of transactions.
Property rental transactions - an irregular property rental transaction is a transaction not in the ordinary course of the Company's business and/or not at arm's length and/or at a monetary value (the annual rental fees paid for the property) that exceeds NIS 20 million (adjusted to the occasional increase in the known CPI for December 2011). An immaterial property rental transaction is a transaction that is not irregular as defined above and whose monetary value (the annual rental fees paid for the property) does not exceed NIS 5 million (adjusted to the occasional increase in the known CPI for December 2011).
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Other transactions - an irregular other transaction is a transaction not in the ordinary course of the Company's business and/or not at arm's length and/or in which the relevant parameters calculated for the transaction do not exceed 5%. An immaterial other transaction is a transaction that is not irregular as defined above and in which the relevant parameters calculated for the transaction do not exceed 0.5% and the scope of the transaction does not exceed NIS 25 million (adjusted to the occasional increase in the known CPI for December 2011).
The relevant parameters (one or more) for calculating the rate of the transaction will be determined in accordance with the nature of the transaction: the purchase of a fixed asset (non-current asset) - asset ratio (scope of transaction to total assets in the annual financial statements or in the latest issued interim financial statements); sale of fixed asset (non-current asset) - asset ratio and profit ratio (operating income/loss from the transaction to annual operating income/loss according to the latest issued consolidated financial statements); purchase/sale of products (other than fixed asset) and services - sales ratio (scope of transaction to total revenues from sales net of excise and VAT or cost of sales and services, as applicable, of products and services based on the Company's latest consolidated financial statements).
"Ordinary course of business" is defined as a transaction performed by the Company from time to time to manage its current business (such as sale and purchase of products or assets, provision and receipt of services, various bank transactions, property rental) and this type of transactions as conducted by the Company in the 12 months that preceded the date of approval of the transaction or this type of transactions as conducted by companies in the Company's line of business in the 12 months that preceded the date of approval of the transaction can be demonstrated.
"Arm's length" - is defined as one of the following: (1) the interest rate/commission/exchange rate/quoted financial instrument, whichever is higher or lower, as applicable, as opposed to the average interests/commissions/exchange rates/quoted financial instruments that are actually offered to the Company (quotes) in connection with the relevant transaction by two other banks that are not related to the Company's controlling shareholder. As for foreign currency transactions in a maximum amount of $ 1 million, the examination will be carried out by comparison using a table that summarizes all the quotes offered to the Company by the banks, to be updated at least semi- annually (if the Company's Management is aware of any change therein); provided that the Company estimates that there has been no change in the quotes from the latest date of update; or (2) the transaction terms are similar to the terms of at least two transactions that have similar characteristics (such as the type and characteristics of the customer or the counterparty; the scope of the transaction; the relevant market characteristics) prepared by the Company (including another member in the Group) during a period near the date of engagement in the relevant transaction, provided that they are prepared with unrelated parties; or (3) the transaction terms are similar to those of at least two other transactions in the relevant market as known to the Company in terms of characteristics and were conducted during a period near the date of engagement in the relevant transaction, provided that they are prepared by unrelated parties.
It should be noted the above criteria have been determined among others after taking into consideration the scope of the Company's assets, business and activities, including the activities that are relevant to the transaction type, the frequency of the relevant transactions and the existence of similar transactions in the banking market and in other relevant markets, the scope of the transactions and the degree of their effect on the Company's activities and results and the market terms on the date of approval.
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According to the above criteria, each transaction of any type and scope between the Company and the controlling shareholder in the Company and/or in which the controlling shareholder has a personal interest will be conducted at arm's length and in a manner that will not be granting preference or benefits of terms by the Company unless the transaction is conducted at terms according to which the Company conducts similar transactions with others that are not viewed as controlling shareholders or where the controlling shareholders have a personal interest therein. It should be noted that these criteria do not derogate from the Audit and Finance Committee's authority to determine that under special circumstances, a transaction that meets at least one of the criteria of an irregular transaction according to procedures or any other transaction will not be viewed as an irregular transaction or determine that a transaction that does not meet the criteria of an irregular transaction according to procedures will be viewed as an irregular transaction under the circumstances.
The Company's Audit and Finance Committee and Board of Directors also approved granting general authorization to the Company's Management and the managements of subsidiaries to enter into transactions of the types detailed below with the controlling shareholder or in which the controlling shareholder has a personal interest, provided that such transactions are immaterial based on the criteria of immaterial and irregular transactions as elaborated above and meet the following provisions: (1) property rental transactions; (2) credit taking transactions; (3) deposit transactions; (4) foreign currency transactions; (5) other bank transactions; (6) other transactions of sales of fuel to vehicles through Pazomat device or card.
The Company's Management and the managements of subsidiaries will produce a semi-annual report to the Company's personnel authorized by the Audit and Finance Committee regarding the aggregate scope of the transactions carried out in the past six months or regarding the scope of commissions paid in such transactions or regarding the cost/proceeds to the Company in said transactions, as applicable, and affirm that the transactions meet the criteria of immaterial and irregular transactions. The Company's internal auditor will review the classification of transactions actually conducted by Management semi-annually and deliver a report to the Audit and Finance Committee.
According to Article 117(2a) to the Companies Law, the Audit and Finance Committee decided that transactions with a controlling shareholder or in which the controlling shareholder has a personal interest (pursuant to the beginning of Section 270(4) to the Companies Law) that are neither irregular nor immaterial require the approval of the Company's Audit and Finance Committee.
According to these criteria, in 2015 and through the date of this report, the Company entered the following immaterial transactions:
a. Immaterial bank transactions consisting of foreign currency and other bank transactions with the First International Bank of Israel Ltd. Group ("the FIBI Group").
b. Sale of fuels in the ordinary course of business for vehicles used by the employees of the FIBI Group.
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c. Rental of two real estate properties to the FIBI Group for operating bank branches in Netanya, in an area of some 345 sq. m. until September 2017, and in Gai Iron, in an area of some 30 sq. m. until July 2014 and from July 2014 to July 2016 - about 70 sq. m. (with one option for extension by eight more years).
d. Engagement signed in 2016 with a company whose issued and outstanding share capital is about 20% held by the FIBI Group for the receipt of security issue coordination and distribution.
Moreover, in January 2016, the Company's Audit and Finance Committee reaffirmed standards regarding the legal requirement of maintaining competition in connection with the Company's transactions with the controlling shareholder or transactions in which the controlling shareholder has a personal interest pursuant to Section 117(1b) to the Companies Law and a mechanism of control and regulation based on the abovementioned mechanism regarding the criteria of immaterial and irregular transactions under the necessary adjustments.
11. Regulation 24 – Holdings of Interested Parties
11.1 For details, to the best of the Company's knowledge, of holdings of interested parties and senior officers in the shares and other securities of the Company, see the Company's immediate report of January 7, 2016 (TASE reference: 2016-01-005992).
Agreements between shareholders
Bino Holdings Ltd. and Barbino Ltd. (jointly and severally in this paragraph - "Bino") and Dolphin Energies Ltd. ("Dolphin") and Instanz Holdings Ltd. ("Instanz") (the last two jointly and severlly in this paragraph - "the Lieberman Group"; Bino and the Lieberman Group shall be referred to in this paragraph as "the parties") signed an agreement for settling, among others, issues pertaining to their mutual relationship as the controlling shareholders in the Company (in this paragraph - "the agreement"). As of the date of this report, the provisions of the agreement continue to apply to the parties and it will be terminated upon providing an advance written notice of 90 days by the Lieberman Group to Bino (in this paragraph - "the early notice"). The relevant provisions of the agreement as of the date of the report are as follows:
11.1.1 Mutual voting of the parties in the general meetings of the Company in all matters relating to shares held by each of the parties, at the absolute discretion of the party that holds more than half of the entire shares.
11.1.2 As long as Dolphin and Instanz jointly hold at least 8% of the Company's ownership interests de facto, they will be entitled to appoint one representative on their behalf on the Company's Board whose identity will be agreed upon between Dolphin, Instanz and Bino.
11.1.3 Since during the reporting year the joint holdings of Dolphin and Instanz in the Company were lower than an effective holding rate of 8%, according to the shareholders' agreement, they are no longer entitled to have one representative on their behalf serving as director on the Company's Board.
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11.1.4 Various provisions regarding the purchase and sale of Company shares by the parties: the parties to the agreement will not perform sales and/or transfers of shares in transactions in the context of the trading of the Company's shares on the TASE; the Lieberman Group may not sell shares to a third party without Bino's consent, unless as specifically prescribed in the agreement; Bino has a right of first refusal regarding the sale of shares held by the Lieberman Group to a third party whose sale was approved by Bino as discussed above; the Lieberman Group has a tag-along right in the event of sale of shares held by Bino to a third party; Bino can exercise a bring-along right to obligate the Lieberman Group to tag-along an agreement for the sale of its entire stake in the Company to a third party under the same terms; the parties each has a tag-along right in the purchase of the Company's shares by a third party under the terms prescribed in the agreement; and provisions were set forth for possible purchase of shares of the Lieberman Group by Bino under certain conditions during the early notice period.
11.1.5 The parties represent and warrant that subject to the provisions of applicable laws and to the approval of Paz's external auditors, the parties will exercise all efforts to ensure that in each tax year, Paz will distribute dividends out of its profits at a rate of at least 70% of its net earnings (after taxes) in the year in which the dividend is distributed11.
12. Regulation 24A – Authorized Share Capital, Issued Share Capital and Convertible Securities
For details, see Notes 19 and 21 to the Company's financial statements as of December 31, 2015.
13. Regulation 24B – Registrar of the Company's Shareholders
Regarding the registrar of the Company's shareholders, see the Company's immediate report of March 15, 2016 (TASE reference: 2016-01-006345).
14. Regulation 25A – Registered Domicile
Address: Euro Park, Holland Building (#4), Kibbutz Yakum, 60972 Telephone: 09-8631103 Facsimile: 09-8631320 E-mail address: [email protected]
15. Regulation 26 – Directors of the Company
On March 11, 2015, Mrs. Meira Git was appointed as external director in the Company and a member of the Audit and Finance Committee and Remuneration Committee. See more details in immediate reports of March 11, 2015 (TASE references: 2015-01-048760 and 2015-01-048757).
On November 26, 2015, Mr. Shaul Zemach was appointed as external director in the Company and as a member of the Company's Audit and Finance Committee and Remuneration Committee. See more details in immediate reports of November 26, 2015 (TASE references: 2015-01-165651 and 2015-01-165663).
11 See more details of the distribution of dividends in the Company in Chapter A of the Periodic Report.
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The following are details of the acting directors in the Company:
Name of director: Zadik Bino I.D. no. 043272178 Date of birth: October 13, 1941 Address: 5 Nehardea Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of None Directors: External director No Position held in the Company, a subsidiary or a Chairman of the Board of Directors of the Company; related company of the Company or an interested Director in the following companies: Bino Holdings Ltd. (the party therein: controlling shareholder of the Company), Barbino Ltd. (a company wholly owned by Bino Holdings Ltd.), Binohon Ltd., the First International Bank of Israel Ltd., Nerotech Ltd. (in voluntary liquidation)12, Bigro Commodities Limited, G.H.D. Investments (2006) Ltd., Dada Management Ltd. Year in which he began to hold office as director: 1994 Education Courses in Economics and Business Management at Tel-Aviv University Occupation in the last five years and details of Served as director in companies that are related to the Company additional corporations in which he holds office as or holds office as a director in companies owned by the interested director: party therein as stated above.
Family relationship to another interested party in Mr. Gil Bino, a director of the Company, a shareholder in Bino the Company (if any): Holdings Ltd. and CEO of Bino Holdings Ltd., is the son of Mr. Zadik Bino. Mrs. Hadar Bino-Shmueli, a director of the Company and a shareholder in Bino Holdings Ltd., is the daughter of Mr. Zadik Bino, and Mrs. Dafna Bino-Or, an indirect interested party in the Company, is the daughter of Mr. Zadik Bino. Does the director have accounting and financial Yes expertise?
12 The company was voluntarily liquidated in January 2016.
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Name of director: Aharon Fogel13 I.D. no. 010176485 Date of birth: April 19, 1947 Address: 3 Tarsat Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of No Directors: External director No Position held in the Company, a subsidiary or a Director in the Company related company of the Company or an interested party therein: Year in which he began to hold office as director: 1999 Education Bachelors' degree in Economics and Statistics from the Hebrew University of Jerusalem Occupation in the last five years and details of Director in Aharon Fogel Ltd.; additional corporations in which he holds office as Director in Hadassit Ltd. (until September 2014); director: Chairman of Migdal Insurance and Financial Holdings Ltd. (until September 2013); Chairman of the Board of Directors of the Israel Philharmonic Orchestra; Chairman of the Board of Directors of I.D.B. Development (from January 2014 to May 2014); Chairman of the Board of Directors of ZIM Integrated Shipping Services Ltd. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
13 On June 25, 2015, Mr. Aharon Fogel terminated his tenure as director in the Company. See additional information in an immediate report of June 25, 2015 (TASE reference: 2015-01-057057).
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Name of director: Gil Bino I.D. no. 023907611 Date of birth: September 28, 1968 Address: 19 HaNoter Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of None Directors: External director No Position held in the Company, a subsidiary or a Director in the Company; related company of the Company or an interested CEO of Bino Holdings Ltd. (one of the controlling shareholders party therein: of the Company); CEO of Barbino Ltd. (a company wholly owned by Bino Holdings Ltd.). In addition, he holds office as Chairman of the Board of Directors in FIBI Holdings Ltd., Director in the First International Bank of Israel Ltd., Director in Alden Hotel AG. Year in which he began to hold office as director: 1999 Education Bachelors' degree in Law and Bachelors' degree in Business Management from the Herzliya Interdisciplinary Center, EMBA in Business Management from Tel-Aviv University, Member of the Israel Bar Occupation in the last five years and details of CEO of Bino Holdings Ltd., CEO of Barbino Ltd. and CEO of additional corporations in which he holds office as G.H.D. Investments (2006) Ltd. director: He also held office as director of a related company of the Company or serves as director in companies owned by an interested party therein, as stated above. Family relationship to another interested party in Mr. Zadik Bino, Chairman of the Board of Directors of the the Company (if any): Company and controlling shareholder of the Company, is the father of Mr. Gil Bino (who holds office as a director of the Company), Mrs. Hadar Bino-Shmueli (who holds office as a director of the Company) and Mrs. Dafna Bino-Or (indirectly an interested party in the Company) are Mr. Gil Bino's sisters. Does the director have accounting and financial Yes expertise?
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Name of director: Itzhak Ezer I.D. no. 073610735 Date of birth: April 1, 1951 Address: 4 Gaaton Street, Ramat HaSharon Nationality: Israeli Membership of committees of the Board of None Directors: External director No Position held in the Company, a subsidiary or a Director in the Company. related company of the Company or an interested party therein: Year in which he began to hold office as director: 2005 Education Bachelors' degree in Accounting and Economics at University of Tel-Aviv, LLB from the Herzliya Interdisciplinary Center. C.P.A. (Isr.) Occupation in the last five years and details of Partner, through a company owned by him, in a firm that additional corporations in which he holds office as provides accounting services and economic advice. director: Director in Ezer Itzhak, CPA Ltd. (a private company that is wholly owned by Itzhak Ezer) and in Etgar, Portfolio Management Company of the United Mizrahi Bank Group Ltd. (until November 18, 2015); Member of the Board of Trustees of the Rishon LeZion College of Management and Chairman of the Audit Committee of the Rishon LeZion College of Management. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
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Name of director: Dr. Gideon Chitayat14 I.D. no. 72644339 Date of birth: August 29, 1939 Address: 32/29 Ben-Yosef Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of Vice-Chairman of Audit and Finance Committee, member of the Directors: Remuneration Committee External director Yes (expert external director) Position held in the Company, a subsidiary or a External director, member of the Audit and Finance Committee related company of the Company or an interested and Remuneration Committee party therein: Year in which he began to hold office as director: 2007 Education Bachelors' degree in Economics, Masters' degree in Business Management (specializing in finance), Hebrew University of Jerusalem, Masters' degree in Business Management and Applied Statistics, PhD in Business Management and Applied Economics, Warton School, University of Pennsylvania Occupation in the last five years and details of Chairman and President of GMBS Consultants Ltd.; additional corporations in which he holds office as Director in Delta Galil Industries Ltd.; director: Chairman of the Board of Directors of BATM; External director in Melisron Ltd.; Director in the Tel Aviv Museum. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
14 On February 4, 2016, Mr. Gideon Chitayat terminated his service as external director in the Company at the end of a nine-year term. See more details in an immediate report of February 4, 2016 (TASE reference: 2016-01- 023551).
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Name of director: Hadar Bino-Shmueli I.D. no. 028913754 Date of birth: January 16, 1972 Address: 5 Nehardea Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of No Directors: External director No Position held in the Company, a subsidiary or a Director in the Company; Manager in Dada Management Ltd.15 related company of the Company or an interested party therein: Year in which he began to hold office as director: 2012 Education Bachelors' degree in Business Administration from the Tel-Aviv College of Management, Masters' degree in Marketing Management, University of Middlesex, London Occupation in the last five years and details of Manager in various companies. additional corporations in which he holds office as director: Family relationship to another interested party in Mr. Zadik Bino, the Chairman of the Board of Directors of the the Company (if any): Company and controlling shareholder of the Company, is the father of Mrs. Hadar Bino-Shmueli. Mr. Gil Bino and Mrs. Dafna Bino-Or (among the interested parties in the Company) are brother and sister of Mrs. Hadar Bino-Shmueli. Does the director have accounting and financial No expertise?
15 A company held by Zadik Bino, Gil Bino, Hadar Bino-Shmueli and Dafna Bino-Or in equal parts.
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Name of director: Garry Stock16 I.D. no. 327202974 Date of birth: March 22, 1943 Address: 8 HaOren Street, Ramat Raziel Nationality: Israeli, Australian Membership of committees of the Board of No Directors: External director No Position held in the Company, a subsidiary or a Director in the Company; related company of the Company or an interested Director in the following companies: Dolphin Energies Ltd. party therein: (interested party in the company), FIBI Holdings Ltd. Year in which he began to hold office as director: 1999 Education Bachelors' degree in Economics and Political Sciences, Monash University, Masters' degree in Business Management, University of Melbourne. Occupation in the last five years and details of Chairman of the Board of Directors of James Richardson additional corporations in which he holds office as Proprietary Ltd.; director: Director in James Richardson (NZ) Ltd.; Served as director in the following companies: Remtec Holdings Ltd. (until February 1, 2015), Remtec Recycling Industries Ltd. (until February 1, 2015), Garry Stock Ltd., Small Giants Israel 2014 Ltd. (until November 24, 2015). Serves as director in the following companies: Garry Stock Company Pty Ltd., Delphinus Nominees Pty Ltd. Also served as director in related companies of the Company or serves as director in companies owned by an interested party therein, as stated above. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
16 On May 19, 2015, Mr. Garry Stock terminated his service as director in the Company. See more details in an immediate report of May 19, 2015 (TASE reference: 2015-01-022722).
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Name of director: Dalia Lev I.D. no. 007555337 Date of birth: August 2, 1947 Address: 16 Bnei Moshe Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of Member of the Audit and Finance Committee. Directors: External director No Position held in the Company, a subsidiary or a Director in the Company; Member of the Audit and Finance related company of the Company or an interested Committee; Director in First International Bank of Israel Ltd. party therein: Year in which she began to hold office as director: 2009 Education Bachelors' degree in Accounting from the Hebrew University of Jerusalem, Masters' degree in Law (LLM) from Bar-Ilan University, ISMP from Harvard University, certified mediator. Occupation in the last five years and details of Director in Balgal Ltd., Strauss Group Ltd, the Board of Trustees additional corporations in which she holds office as of the Ben-Gurion and Tel-Aviv Universities. director: Held office as Director in the Airports Authority (until April 26, 2012). Also held office as director in a related company of the Company as stated above. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
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Name of director: Ephraim Zedaka I.D. no. 046002747 Date of birth: July 10, 1946 Address: 5 Aryeh Dolchin Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of Chairman of the Audit and Finance Committee, Chairman of the Directors: Remuneration Committee. External director Yes (expert external director) Position held in the Company, a subsidiary or a External director; Chairman of the Audit and Finance related company of the Company or an interested Committee; Chairman of the Remuneration Committee. party therein: Year in which she began to hold office as director: 2010 Education: Bachelors' degree in Economics and Statistics, University of Tel- Aviv, PhD in Economics, MIT Occupation in the last five years and details of Served as full Professor and Chair of Economics at Tel-Aviv additional corporations in which she holds office as University; Chairman of the Salary Committee of the Heads of director: Higher Education Institutes Board (until December 31, 2012); External director in Bank Leumi LeIsrael B.M. (until July 2015). Serves as director in the following companies: Ravad Ltd.; Atidim - High-Tech Industrial Park Ltd.;Ashra Israel Foreign Trade Risk Insurance Company Ltd.; Director and major shareholder in Arzedaka Ltd.; Director and major shareholder in A.Z. Eretz Ratz Ltd.; Director in Elite Sports Center at the Tel-Aviv University Ltd.; Chairman of the Board of Management of the Pinchas Sapir Development Center; Member of the Professional Committee of the Israel Accounting Standards Institute; Chairman of the Board of Management of the Babylonian Jewish Heritage Center; Chairman of the Audit Committee of the Israel Democracy Institute; Member of the Executive Board of the Sapir Forum. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
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Name of director: Gabriel Rotter I.D. no. 054161005 Date of birth: March 4, 1957 Address: 5 Nehardea Street, Tel-Aviv Nationality: Israeli Membership of committees of the Board of No Directors: External director No Position held in the Company, a subsidiary or a Director in the Company related company of the Company or an interested party therein: Year in which she began to hold office as director: 2010 Education: Engineering, Civil Engineering (Building), Technicom College, Givatayim, Masters' degree in Business Management from Hebrew University of Jerusalem Occupation in the last five years and details of Joint CEO of Castro Model Ltd.; additional corporations in which she holds office as Director in the following companies: Castro Model Ltd., Rotter director: Holdings Ltd., Reshef Tzuk Holdings Ltd., Allenby 74 Housing Ltd., E.R. Botanical Cosmetics Ltd. (formerly: Diva Fashion Accessories Israel Ltd.), E.G. Rotter Ltd., Rotter Gabi Management Ltd., Eti and Gabi (Winery) Ltd., Elef Eti Holdings Ltd., C&F Fashion Ltd.; Director in several foreign companies that are members of the Castro Group. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
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Name of director: Menachem Brenner I.D. no. 010835486 Date of birth: August 12, 1944 Address: 18/30 Michael Ne'eman Street, Tel-Aviv Nationality: Israeli, U.S. Membership of committees of the Board of Member of the Audit and Finance Committee; Member of the Directors: Remuneration Committee. External director No Position held in the Company, a subsidiary or a Independent Director in the Company; Member of the Audit and related company of the Company or an interested Finance Committee; Member of the Remuneration Committee. party therein: Year in which she began to hold office as director: 2014 Education: Bachelor's degree in Economics from the Hebrew University of Jerusalem, MBA, majoring in Finance, and a Doctorate in Philosophy in Finance & Economics, both from Cornell University, U.S.A. Occupation in the last five years and details of Professor Lecturer for Finance at New York University for 23 additional corporations in which she holds office as years; director: Director in MGA Tova Ltd. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
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Name of director: Meira Git I.D. no. 04052841 Date of birth: July 11, 1946 Address: 46 Chen Blvd., Tel-Aviv Nationality: Israeli Membership of committees of the Board of Member of the Audit and Finance Committee; Member of the Directors: Remuneration Committee. External director Yes (expert external director). Position held in the Company, a subsidiary or a External Director in the Company; Member of the Audit and related company of the Company or an interested Finance Committee; Member of the Remuneration Committee. party therein: Year in which she began to hold office as director: 2015 Education: BA in Economics and Political Science from the Hebrew University of Jerusalem; directors' training course, Lahav. Occupation in the last five years and details of Senior Assistant to the Chief Executive Officer, in charge of the additional corporations in which she holds office as unit for handling customers in financial difficulties and member director: of divisional credit committees of Bank Leumi LeIsrael B.M. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
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Name of director: Mr. Shaul Zemach I.D. no. 023839418 Date of birth: August 22, 1968 Address: P.O.B. 314 Ein Vered Nationality: Israeli Membership of committees of the Board of Member of the Audit and Finance Committee; Member of the Directors: Remuneration Committee. External director Yes (expert external director). Position held in the Company, a subsidiary or a External Director in the Company; Member of the Audit and related company of the Company or an interested Finance Committee; Member of the Remuneration Committee. party therein: Year in which she began to hold office as director: 2015 Education: He holds a BA in Economies and International Relations from the Hebrew University of Jerusalem and an MA in Political Science from the Tel-Aviv University. Occupation in the last five years and details of Chief Executive Officer at The National Water, Energy and additional corporations in which she holds office as Infrastructures Office of Israel; director: Special Financial Administrator on behalf of the official receiver, Israel Broadcasting Authority (in liquidation); External Director, Leumi KMP Ltd. Family relationship to another interested party in No the Company (if any): Does the director have accounting and financial Yes expertise?
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16. Regulation 26A – Senior Officers
Name of officer: Yona Fogel I.D. no.: 052102001 Date of birth: March 26, 1954 Position held in the Company, a subsidiary or a CEO of the Company, Chairman of the Board of Directors in the related company of the Company or an interested Company's subsidiaries: Paz Ashdod Refinery Ltd., Paz Industries party therein: and Services (Oil) Ltd., Pazgas Ltd. Also serves as Chairman of the Board immaterial subsidiaries of the Company; Serves as director in Shufersal Finances Ltd. (in which the Company is a partner). Education: Bachelors' degree in Psychology from Bar-Ilan University, Masters' degree in Psychology from the Hebrew University of Jerusalem Occupation in the last five years: CEO of the Company Date of taking up office: October 1, 2007 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
Name of officer: Malachi Alper I.D. no.: 055934921 Date of birth: June 8, 1959 Position held in the Company, a subsidiary or a Vice President in the Company, CEO of the Refining and related company of the Company or an interested Logistics Division, CEO of Paz Ashdod Refinery Ltd. and party therein: director in Paz Ashdod Refinery Ltd. (a subsidiary of the Company), Chairman of the Board and owner of Alper M. Management Services Ltd. Education: Bachelors' degree in Chemical Engineering from the Technion, graduate of the Business Administration for Engineers Studies at Haifa University, Advanced Management Program (AMP) at Harvard University Occupation in the last five years: VP in the Company, CEO of the Refining and Logistics Division, CEO of Paz Ashdod Refinery Ltd. Date of taking up office: March 1, 2008 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
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Name of officer: Iris Penso I.D. no.: 056704968 Date of birth: February 1, 1961 Position held in the Company, a subsidiary or a Vice President, Chief Legal Advisor of the Company, Risk related company of the Company or an interested Management Officer of the Group17, serves as director in party therein: immaterial subsidiaries of the Company. Education: LLB from Tel-Aviv University Occupation in the last five years: Vice President, Chief Legal Advisor of the Company Date of taking up office: April 1, 2009 Is she an interested party or does she have a family No connection with another senior officer or interested party in the Company?
Name of officer: Yoram Eyal I.D. no.: 023737695 Date of birth: April 11, 1968 Position held in the Company, a subsidiary or a Vice President of the Company's Retail and Wholesale Division, related company of the Company or an interested director in in Pazgas Ltd. (a subsidiary of the Company) (until party therein: May 4, 2015); also serves as director in immaterial subsidiaries of the Company. Education: Bachelors' degree in Business Administration from Derby College Occupation in the last five years: Vice President of the Retail and Wholesale Division. Date of taking up office: January 1, 2008 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
Name of officer: Moshe Sabag I.D. no.: 054850334 Date of birth: September 28, 1957 Position held in the Company, a subsidiary or a Vice President and Head of Human Resources, Computers and related company of the Company or an interested Administration in the Company; serves as director in Pazgas Ltd. party therein: (a subsidiary of the Company); also serves as director in immaterial subsidiaries of the Company. Education: BSc in Computer Sciences from the Technion, MBA in Business Management from the University of Tel-Aviv Occupation in the last five years: Vice President for Information Technologies, Vice President for Human Resources, Computers and Information. Date of taking up office: September 1, 2010 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
17 As for the Group's risk management policy and officers, see Note 30.1 to the financial statements as of December 31, 2015.
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Name of officer: Israel Klepper I.D. no.: 55897631 Date of birth: June 7, 1959 Position held in the Company, a subsidiary or a Vice President of Retail and Wholesale; serves as director in related company of the Company or an interested Pazgas Ltd. (a subsidiary of the Company) (starting from May 4, party therein: 2015); also serves as Chairman of the Board and director in immaterial subsidiaries of the Company. Education: Bachelors' degree in Social Sciences and Arts from the Open University, Bachelors' degree in Law (LLB) from Shaarei Mishpat College, Masters' in Business Management from Derby College. Occupation in the last five years: Vice President of Retail and Wholesale Date of taking up office: September 1, 2010 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
Name of officer: Uri Kahalon I.D. no.: 055611602 Date of birth: March 11, 1959 Position held in the Company, a subsidiary or a Vice President of Real Estate and Operations; serves as director related company of the Company or an interested in immaterial subsidiaries of the Company. party therein: Education: Bachelors' degree in Business Management from the Israel Academic College Occupation in the last five years: Manager of Real Estate and Operations at the Company, Deputy Head of Entrepreneurship and Real Estate Division at the Company (from February 2010 to September 2012). Date of taking up office: March 25, 2012 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
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Name of officer: Hagai (Gil) Zohar I.D. no.: 57468175 Date of birth: March 27, 1962 Position held in the Company, a subsidiary or a CEO of the following subsidiaries: Paz Lubricants and Chemicals related company of the Company or an interested Ltd., Paz Lubricants and Chemicals (Marketing and Trading) party therein: Ltd.; Pazkar Ltd., Pazvit Ltd. and Pazkar Marketing 1993 Ltd. Education: Engineering, Industry and Management, Haifa Technion. Occupation in the last five years: CEO of Paz Lubricants and Chemicals Ltd., Paz Lubricants and Chemicals (Marketing and Trading) Ltd.; Pazkar Ltd., Pazoit Ltd. and Pazkar Marketing 1993 Ltd. Date of taking up office: From February 1, 2004 - CEO of Paz Lubricants and Chemicals Ltd.; From March 15, 2014 - CEO of Pazkar Ltd. Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
Name of officer: Shmuel Gotshal I.D. no.: 056175060 Date of birth: December 14, 1959 Position held in the Company, a subsidiary or a CEO of Paz Aviation Services Ltd. related company of the Company or an interested CEO of Paz Aviation Assets Ltd. party therein: Education: Bachelors' degree in Economics, Tel-Aviv University; Masters' degree in Public Administration, AUM University, USA; Coacher and mediator, the Israeli Management Center. Occupation in the last five years: CEO of Paz Aviation Services Ltd. CEO of Paz Aviation Assets Ltd. December 1, 2008 October 30, 2005 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
Name of officer: Pninit Collin-Mass I.D. no.: 023894736 Date of birth: January 2, 1969 Position held in the Company, a subsidiary or a Internal auditor related company of the Company or an interested party therein: Education: Bachelors' degree in Economics and Accounting, the Hebrew University of Jerusalem. Masters' degree in Business Administration, the Hebrew University of Jerusalem. CPA (Isr.). Occupation in the last five years: Temporary internal auditor in the Company (from January 1, 2013 to June 30, 2013); Internal comptroller at National Bank de Paris, Israeli branch (until April 30, 2012). December 1, 2008 July 1, 2013 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
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Name of officer: Sharona Novak I.D. no.: 029267994 Date of birth: April 14, 1972 Position held in the Company, a subsidiary or a VP and CFO of Paz Group and director in the following related company of the Company or an interested subsidiaries: Paz Ashdod Refinery Ltd., Pazgas Ltd. and Paz party therein: Industries and Services (Oil) Ltd.; also serves as director in immaterial subsidiaries of the Company. Education: Bachelors' degree in Accounting and Business Administration, Administration College. CPA (Isr.). Occupation in the last five years: VP and CFO of Paz Group from April 1, 2013; Corporate Controller in Check Point Software Technologies Ltd.
December 1, 2008 April 1, 2013 Is he an interested party or does he have a family No connection with another senior officer or interested party in the Company?
Name of officer: Amir Erez I.D. no.: 022468342 Date of birth: June 30, 1966 Position held in the Company, a subsidiary or a CEO of Pazgas Ltd.; also serves as Chairman of the Board and related company of the Company or an interested director in immaterial subsidiaries of the Company. party therein: Education: Bachelors' degree in Law and Business Administration, Interdisciplinary Center, Herzliya Occupation in the last five years: CEO of Pazgas from May 1, 2013; Vice President of Business Development and Services – Refining and Logistics Division in the Company (until March 31, 2013). December 1, 2008 May 1, 2013 Is he an interested party or does he have a family No. connection with another senior officer or interested party in the Company?
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Name of officer: Ilan Yefet I.D. no.: 057957631 Date of birth: January 1, 1963 Position that he holds in the Company, The Company's Comptroller; also serves as director in immaterial subsidiaries, affiliates of the Company or principal subsidiaries of the Company. shareholders therein: Education: CPA (Isr.), College of Administration, Haifa Occupation in the last five years: Chief Comptroller of the Company Date of taking up office: August 1, 2006 Is he a principal shareholder or does he have a No family connection with another senior officer or principal shareholder in the Company?
Name of officer: Miri Shaul I.D. no.: 038701751 Date of birth: February 29, 1976 Position that he holds in the Company, VP of Communications and Regulation subsidiaries, affiliates of the Company or principal shareholders therein: Education: BSc in Political Science from the Hebrew University of Jerusalem, LLM from the Bar-Ilan University. Occupation in the last five years: Head of Regulation and Spokesperson for Paz (from February 2013); media advisor to the Minister of Environmental Protection (until February 2013). Date of taking up office: March 19, 2015 Is he a principal shareholder or does he have a No family connection with another senior officer or principal shareholder in the Company?
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In 2015, the following senior officers terminated their service in the Company
1. On May 19, 2015, Mr. Garry Stock terminated his service as director in the Company. See more details in an immediate report of May 19, 2015 (TASE reference: 2015-01-022722).
2. On June 25, 2015, Mr. Aharon Fogel terminated his service as director in the Company and on May 28, 2014, Mr. Aharon Fogel was reappointed as director in the Company. See more details in an immediate report of June 25, 2015 (TASE reference: 2015-01-057057).
3. On February 4, 2016, Mr. Gideon Chitayat terminated his service as external director in the Company at the end of a nine-year term. See more details in an immediate report of February 4, 2016 (TASE reference: 2016-01-023551).
17. Regulation 26B – Independent Authorized Signatories
As of the date of this report, the Company does not have any independent authorized signatories, as this term is defined in the Securities Law.
18. Regulation 27 – Independent Auditor of the Company
Somekh Chaikin, C.P.A. (Isr.) 17 Ha'arba'a Street P.O. Box 609 Tel-Aviv 61006.
19. Regulation 28 – Change in Memorandum or Articles of Association
In 2015, there was no change in the Company's articles of association.
20. Regulation 29 – Recommendations and Resolutions of the Board of Directors
20.1 Payment of dividend or distribution, as defined in the Companies Law, by different means, or by distribution of bonus shares
For the resolutions of the Company regarding the distribution of dividends, see paragraph 1.4 of Chapter A - Description of the Company's Business.
20.2 Change in the Company's authorized or issued share capital
Except for the exercise of options for shares of the Company by employees as stated in Note 19 to the annual financial statements, during 2015 there were no changes in the Company's authorized or issued share capital.
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20.3 Resolutions of a Special General Meeting
20.3.1 On March 11, 2015, in the context of a special meeting, the general meeting of the Company's shareholders approved the appointment of Mrs. Meira Git as external director in the Company for a period of three years beginning on March 11, 2015. See more details in immediate reports of January 28, 2015 (TASE reference: 2015-01-020560) and March 11, 2015 (TASE reference: 2015- 01-048760).
20.3.2 On June 25, 2015, following the approval of the Company's Remuneration Committee and Board of Directors, the general meeting approved extending by three more years the validity of the letter of indemnification granted to officers in the Company and/or subsidiaries (including directors) who serve and/or will serve therein from time to time and who and/or whose relatives are controlling shareholders in the Company on said date and/or who are likely to have a personal interest in receiving a letter of indemnification, under the same terms as the current letter of indemnification. See more details in immediate reports of May 20, 2015 (TASE reference: 2015-01-023637) and June 25, 2015 (TASE reference: 2015-01-057006).
20.3.3 On June 25, 2015, following the approval of the Company's Remuneration Committee and Board of Directors, the general meeting approved the following resolutions regarding directors' and officers' liability insurance:
20.3.3.1 Engagement with an Israeli insurer in a liability insurance policy in respect of officers (including directors and the Company's CEO) of the Company and its subsidiaries, including officers and directors who and/or whose relatives are controlling shareholders in the Company on said date and/or who are likely to have a personal interest in being included in the insurance policy for the period from April 1, 2015 through March 31, 2016 at a premium of US$ 116,500 and a liability limit of up to US$ 132 million per claim and on an accrual basis.
Approving in advance the Company's engagement, from time to time, and during a period of three (3) years from April 1, 2015 in a liability insurance policy in respect of officers (including directors and the Company's CEO) of the Company and its subsidiaries, including officers and directors who and/or whose relatives are controlling shareholders in the Company on said date and/or who are likely to have a personal interest in being included in the insurance policy, subject to the following conditions:
(a) The insurance policy's annual premium does not exceed US$ 175,000 with a maximum annual markup of up to 20% (from the insurance period beginning on April 1, 2015) with a liability limit of up to US$ 150 million per claim and on an accrual basis.
(b) The Company's Remuneration Committee and Board approved the renewal of the insurance policy and determined that no material changes occurred in the insurance terms, excluding the potential increase of the liability limit to the extent that the increase in insurance fees does not exceed the rate prescribed in (a) above.
See more details in immediate reports of May 20, 2015 (TASE reference: 2015-01-023637) and June 25, 2015 (TASE reference: 2015-01-057006).
D- 37 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
20.3.4 On June 25, 2015, following the approval of the Company's Remuneration Committee and Board of Directors, the general meeting approved certain amendments to the CEO's service and tenure terms and also approved the CEO's entitlement to the RSU-based payment plan which was also approved for other executives in the Company.
See more details in immediate reports of May 20, 2015 (TASE reference: 2015-01-023637) and June 25, 2015 (TASE reference: 2015-01-057006) and paragraph 8.1.2 above.
20.3.5 On November 26, 2015, a special general meeting of the Company's shareholders approved Mr. Shaul Zemach's appointment as external director in the Company for a three-year term beginning on November 26, 2015. See more details in immediate reports of October 21, 2015 (TASE reference: 2015-01-13941) and November 26, 2015 (TASE references: 2015-01-165651 and 2015- 01-165663).
21. Regulation 29A – Resolutions of the Company
21.1 Regulation 29A(3): Transactions that Require Special Approvals
Apart from the transactions described in paragraph 10 (Regulation 22) above with regard to the controlling shareholders who also hold office as directors of the Company, there are no additional transactions as stated in Regulation 29A(3).
21.2 Regulation 29A(4): Exemption, Insurance or Undertaking to Indemnify an Officer
21.2.1 The Company's Undertaking for the Exemption of Officers of the Company from 2006
On November 13, 2006, the Company approved granting advance exemption to the officers of the Company, as they will be from time to time, from any liability towards the Company for any damage that will be caused to the Company as a result of a breach of the duty of care of the officer as an officer of the Company, provided that the officer has acted in good faith and subject to the provisions of the Companies Law. The aforesaid exemption shall not apply to the liability of an officer who holds office as a director of the Company for a breach of the duty of care in making a distribution, within the meaning thereof in the Companies Law. In addition, subsidiaries of the Company give their officers, from time to time, letters of exemption similar to those given by the Company.
21.2.2 Undertaking to Indemnify the Officers of the Company from 2006
(a) On November 13, 2006, the Company approved the undertaking to indemnify its officers, as they will be from time to time, for any liability or expense, as set out below, that will be imposed on them as a result of an act that they carried out by virtue of their being officers of the Company, provided that the indemnification undertaking for financial liability will be limited to the following cases:
D- 38 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
(1) A financial liability that will be imposed on an officer in favor of another person under a judgment, including a judgment that was given in a settlement or an arbitration award that was approved by a court.
(2) Reasonable litigation expenses, including legal fees, that the officer incurred or was found liable to pay by the court, in a proceeding that was filed against him by or on behalf of the Company or by another person, or in a criminal indictment of which he was acquired, or in a criminal indictment of which he was convicted for an offence that does not require proof of mens rea.
(3) Reasonable litigation expenses, including legal fees, that the officer incurred as a result of an investigation or a proceeding that was conducted against him by an authority that is competent to conduct an investigation or proceeding, which ended without an indictment being filed against him and without any financial liability being imposed on him in lieu of a criminal proceeding, or which ended without an indictment being filed against him but with a financial liability being imposed in lieu of a criminal proceeding for an offence that does not require the proof of mens rea, all of which in accordance with the provisions of section 260 of the Companies Law.
(b) The amount of the indemnification is limited, with regard to one set of events, to a sum of US$ 10 million, provided that the total amount of the indemnification to all of the officers for one set of events does not exceed a sum equal to forty per cent of the net worth of the Company according to the most recent annual financial statements of the Company that was published before the date of the indemnification.
If and insofar as the total of all the amount of financial liability that were imposed on officers and/or legal expenses that officers incurred, at any given moment, and for which they are entitled to indemnification under the letter of indemnification, on one of the matters that is the subject of the indemnification, exceeds the total amount of the indemnification or the balance of the total amount of the indemnification that will remain at that time, the total amount of the indemnification (or the balance thereof, as applicable) shall be divided between the relevant officers in such a way that the amount of the indemnification that each of them will receive de facto shall be calculated relative to the amount that each of the officers is entitled to receive and the amount of all the amounts that all of the officers are entitled to receive for that matter.
(c) The indemnification undertaking shall be valid both with regard to proceedings initiated against the officer during his term of office and with regard to proceedings that will be initiated against him after his term of office ends, provided that they relate to actions that were done by the officer during the period when he held office as an officer, either directly or indirectly, in the course of or as a result of his being an officer in the Company.
(d) Should the officers receive an indemnification from the insurer within the context of an officers' liability insurance policy that the Company bought, for the matter that is the subject of the indemnification, the indemnification shall be given by the Company, in the amount of the difference between the amount of the financial liability that was imposed on the officer, including the legal expenses, and the amount that was received from the insurer for that matter, provided that the amount of the indemnification that the Company undertook to pay does not exceed the total amount of the indemnification.
D- 39 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
(e) The officer will be entitled to indemnification for an act or omission that occurred with regard to one of the following actions and/or matters (in this paragraph, the term "the Company" shall include subsidiaries, on matters relating thereto, and it shall include other companies in which the officer acts as a representative of the Company): any transaction, within the meaning of that term in section 1 of the Companies Law; an issue of securities of the Company pursuant to a prospectus and any amendment to such a prospectus; all the matters that require disclosure in a prospectus, or in any draft thereof, that took place before the date of the prospectus, during the period when the prospectus was published until the end of the period for submitting orders, for which disclosure was not made as required under the law, and all of the matters that required disclosure in subsequent reports that the Company made ("insufficient or erroneous disclosure"); insufficient reporting or a misleading item in financial statements, periodic reports, immediate reports and any other reports that the Company is liable to make as a public company under the securities laws or under any other law; a financial liability that was imposed on the officer for a claim of third parties against the officer for insufficient or misleading disclosure, in writing or orally, to existing and/or potential investors in the Company, including in a case of a merger of the Company with another company; realization of a personal guarantee that the officer gave to the Company as collateral for the undertakings and/or declarations of the Company; failure to carry out full due diligence proceedings and/or a failure to carry out a proper due diligence for investments of the Company, which resulted in the loss of the investment in whole or in part and/or which caused harm to the Company's business and/or which caused a breach of an undertaking to a third party; cover for a deductible in a case where officer liability insurance is used; acts with regard to investments that the Company makes in various corporations, before or after making the investment, for the purpose of entering into the transaction, carrying it out, developing it, monitoring it and supervising it; acts of a sale, purchase or holding negotiable securities or other investments for or on behalf of the Company; a financial liability that is imposed on the officer for acts in which he took part with regard to Government institutions, the Stock Exchange institutions and the institutions of the Israel Securities Authority; acts of the Company with regard to the opening and/or renewal and/or deposit and/or closing of bank accounts; a report or notice that are submitted (or, as applicable, which should have been submitted) on behalf of the Company, under the Companies Law and/or the provision of any other law, including tax laws; the creation of charges, collateral or the receipt of loans; acts related to management, advice or other services that the Company gives to the subsidiaries; acts with regard to investments that the Company is examining and/or making, including acts of investment that the officer made on behalf of the Company or as an officer in the corporation that is the subject of the investment; acts relating to the purchase or sale of companies, government bodies and/or assets and/or rights, in Israel or abroad; a change in the structure of the Company or its reorganization, including a merger, split, change of capital, incorporation of companies, the liquidation thereof or the sale thereof; acts relating to employment relations and trade relations, including with employees, tenants, landlords, independent contractors, customers, suppliers and service providers of various kinds; an expression, statement, including an expression of a position or an opinion, which was made by the officer in the course of and by virtue of his office in the Company; acts with regard to the purchase of the Ashdod Refinery, including but not limited to the making of a due diligence, appraisals of value, holding negotiations and entering into agreements and other documents with the seller and with various regulatory authorities, holding negotiations and entering into a finance agreement to buy the Ashdod Refinery; a private issue of series A bonds to institutional investors, including carrying out acts that are involved in such a private issue; providing information and assistance in the preparation of a rating report for the series A bonds of the Company, for Standard & Poor's Maalot, the Israeli Securities Rating Company Ltd.; acts relating to the first issue to the public of the Company on the Tel-Aviv Stock Exchange, including but not limited to writing draft prospectuses and a final prospectus, preparing financial statements and pro forma financial statements, holding negotiations with various regulatory authorities, including the Israel Securities Authority, preparing presentations and meetings during a tender for the institutional bodies, entering into agreements with bond trustees, underwriters and other parties with regard to the aforesaid issue; a private issue for shareholders of the Company; adopting a share options plan for the senior employees of the Company and a share plan for the Company's employees.
D- 40 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
In addition, subsidiaries of the Company give their officers, from time to time, letters of advance exemption similar to those given by the Company.
21.2.3 Prospective Undertaking to Indemnify the Officers of the Company from 2012 and 2013
On July 4, 2012, the general meeting of the shareholders of the Company, after receiving the approval of the Board of Directors of the Company and approval of the Audit and Finance Committee, approved the granting of a new letter of indemnification ("the new letter of indemnification") for the directors and officers holding office in the Company and/or who will hold office in the Company from time to time. The general meeting of the shareholders also approved, after receiving approval from the Audit and Finance Committee and the Board of Directors of the Company, giving a new letter of indemnification to the officers of the Company and/or the subsidiaries (including directors) that hold office and/or that will hold office therein from time to time, and who and/or whose relatives are controlling shareholders in the Company and/or where controlling shareholders of the Company may have an interest in the grant thereof. For further details, see immediate reports of May 23, 2012 (TASE reference: 2012-01-133305), June 27, 2012 (TASE reference: 2012-01-167871) and July 4, 2012 (TASE reference: 2012-01-176637).
On July 3, 2013, the general meeting of the Company's shareholders approved the grant of a letter of indemnification to the director Mrs. Hadar Bino-Shmueli under the same format as those received by the other officers and directors of the Company. See additional information in immediate reports of May 22, 2013 (TASE reference: 2013-01-068431) and July 3, 2013 (TASE reference: 2013-01-082578).
On June 25, 2015, following the approval of the Company's Remuneration Committee and Board of Directors, the general meeting reapproved and extended the validity of the letter of indemnification granted to officers in the Company and/or subsidiaries (including directors) who serve and/or will serve therein from time to time and who and/or whose relatives are controlling shareholders in the Company on said date and/or who are likely to have a personal interest in receiving a letter of indemnification, under the same terms as the current letter of indemnification from 2012. See more details in immediate reports of May 20, 2015 (TASE reference: 2015-01- 023637) and June 25, 2015 (TASE reference: 2015-01-057006).
21.2.4 Officers' insurance policy
On June 25, 2015, after receiving approval from the Company's Remuneration Committee and Board, the general meeting of the Company's shareholders approved the Company's engagement, from time to time, and during a period of three (3) years from April 1, 2015, in a liability insurance policy in respect of officers (including directors and the Company's CEO) of the Company and its subsidiaries, including officers and directors who and/or whose relatives are controlling shareholders in the Company on said date and/or who are likely to have a personal interest in being included in the insurance policy, subject to the following conditions:
(a) The insurance policy's annual premium does not exceed US$ 175,000 with a maximum annual markup of up to 20% (from the insurance period beginning on April 1, 2015) with a liability limit of up to US$ 150 million per claim and on an accrual basis.
D- 41 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 Chapter D - Additional Details about the Company
(b) The Company's Remuneration Committee and Board approved the renewal of the insurance policy and determined that no material changes occurred in the insurance terms, excluding the potential increase of the liability limit to the extent that the increase in insurance fees does not exceed the rate prescribed in (a) above.
On June 25, 2015, after receiving approval from the Company's Remuneration Committee and Board, the general meeting of the Company's shareholders approved the Company's engagement with an Israeli insurer in a liability insurance policy in respect of officers (including directors and the Company's CEO) of the Company and its subsidiaries, including officers and directors who and/or whose relatives are controlling shareholders in the Company on said date and/or who are likely to have a personal interest in being included in the insurance policy for the period from April 1, 2015 through March 31, 2016 at a premium of US$ 116,500 and a liability limit of up to US$ 132 million per claim and on an accrual basis.
See more details in immediate reports of May 20, 2015 (TASE reference: 2015-01-023637) and June 25, 2015 (TASE reference: 2015-01-057006).
On March 16, 2016, following the approval of the Company's Remuneration Committee of March 14, 2016 and pursuant to Regulation 1b(1) to the Relief Regulations, the Company's Board approved the purchase of an officers' liability insurance policy for the period from April 1, 2016 through March 31, 2017 with a liability limit of up to US$ 132 million per claim and on an accrual basis at an annual premium of US$ 114,000 for the duration of the insurance period, this after having decided that the insurance policy meets the conditions prescribed in the general meeting's decision as above. The Company's Remuneration Committee and Board also approved including the Company's CEO, the Chairman of the Board, Zadik Bino, and the directors Gil Bino and Hadar Bino-Shmueli, the controlling shareholders in the Company, in the insurance policy. The other policy terms are specified in the general meeting's decision.
It should be noted that the officers' liability insurance policies mentioned above also cover the liability of the Company (including directors and officers in the Company and the subsidiaries) for claims pertaining to securities laws and that these policies are subject to precedence in favor of officers whereby the officers' right to receive indemnification according to the policies precedes the Company's right to indemnification.
______Paz Oil Company Ltd. Date: March 16, 2016 Names of signatories and their positions: 1. Zadik Bino, Chairman of the Board of Directors 2. Yona Fogel, CEO of the Company
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D- 42 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 E. Separate Financial Data as of December 31, 2015 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0
PAZ OIL COMPANY LTD.
SEPARATE FINANCIAL INFORMATION
AS OF DECEMBER 31, 2015
INDEX
Page
Special Auditors' Report on the Separate Financial Information 2
Data of Financial Position 3 - 4
Data of Profit and Loss 5
Data of Comprehensive Income 6
Data of Cash Flows 7 - 8
Additional Information to the Financial Data 9 - 16
------WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0
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
To The shareholders of Paz Oil Company Ltd. Europark, Industrial Area Yakum
Subject: Special auditors' report on separate financial data according to Regulation 9C of the Securities Regulations (Periodic and Immediate Reports), 1970
We have audited the separate financial data presented in accordance with Regulation 9C of the Securities Regulations (Periodic and Immediate Reports), 1970 of Paz Oil Company Ltd. ("the Company") as at December 31, 2015 and 2014, and for each of the three years the latest of which ended as at December 31, 2015 and which is presented in Chapter E to the Company's Periodic Report. The separate financial data are the responsibility of the Board of Directors and Management of the Company. Our responsibility is to express an opinion on the separate financial data based on our audits.
We did not audit the financial statements of certain investees accounted for at equity the investment in which totals approximately NIS 28,870 thousand and approximately NIS 28,768 thousand as at December 31, 2015 and 2014, respectively, and the Group's share in the earnings of which totals approximately NIS 242 thousand, approximately NIS 183 thousand and approximately NIS 1,054 thousand for each of the three years the latest of which ended as at December 31, 2015, respectively. The financial statements of those companies were audited by other auditors whose reports thereon were furnished to us, and our opinion, insofar as it relates to the amounts included in respect of those companies, is based on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards in Israel. Such standards require that we plan and perform the audit to obtain reasonable assurance that the financial data are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the separate financial data. An audit also includes assessing the accounting principles used in preparing the separate financial data and the significant estimates made by the Board of Directors and Management of the Company, as well as evaluating the separate financial data presentation. We believe that our audits and the reports of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the separate financial data has been prepared, in all material respects, in accordance with Regulation 9C of the Securities Regulations (Periodic and Immediate Reports), 1970.
Without qualifying our opinion above, we draw attention to the contents of Note 33.1.2 to the consolidated financial statements as of December 31, 2015 regarding a claim and a motion to approve the claim as a class action. In the opinion of the Company's Management, based on the opinion of its legal counsel, at this stage it is not possible to assess the impact of the claim, if any, on the financial statements and, therefore, no provision was made in respect thereof.
Somekh Chaikin Certified Public Accountants March 16, 2016
Somekh Chaikin, a partnership registered under the Israeli Partnership Ordinance, is the Israeli member firm of KPMG International, a Swiss cooperative.
E-2 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Data of Financial Position
December 31, Additional 2015 2014 information NIS in millions
Assets Cash and cash equivalents 2.1 31 101 Trade receivables 2.2 1,101 1,213 Other accounts receivable 2.3 1,310 1,381 Inventories 149 33 Current tax assets - 7 Other investments 76 68 Asset held for sale 23 136
Total current assets 2,690 2,939
Long-term receivables and loans granted 2.4 297 202 Long-term bank deposits 550 - Investment property, net 11 12 Prepaid lease fees 23 23 Balance in respect of subsidiaries 3,369 2,986 Investments in associates 29 29 Loans to investees 212 261 Fixed assets, net 1,790 1,796 Intangible assets, net 120 132
Total non-current assets 6,401 5,441
Total assets 9,091 8,380
The accompanying additional information is an integral part of the separate financial information.
E-3 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Data of Financial Position
December 31, Additional 2015 2014 information NIS in millions
Liabilities Short-term loans and credit 2.5 495 202 Trade payables 2.6 651 717 Other accounts payable 2.7 392 358 Dividend payable 170 - Current tax liabilities 20 - Provisions 31 12
Total current liabilities 1,759 1,289
Debentures 3,874 3,877 Other long-term liabilities 28 49 Employee benefits 9 10 Deferred tax liabilities 2.9 124 145
Total non-current liabilities 4,035 4,081
Total liabilities 5,794 5,370
Equity Share capital 194 194 Treasury shares (189) (180) Capital reserves 1,830 1,830 Retained earnings 1,808 1,512
3,643 3,356
Capital reserve from translation differences (346) (346)
Total equity attributable to equity holders of the Company 3,297 3,010
Total liabilities and equity 9,091 8,380
* Loans from investees are presented in other long-term liabilities.
The accompanying additional information is an integral part of the separate financial information.
Zadik Bino Yona Fogel Sharona Novak Chairman of the Board Chief Executive Officer Chief Financial Officer
Date of approval of the separate financial information: March 16, 2016.
E-4 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Data of Profit and Loss
Year ended December 31, Additional 2015 2014 2013 information NIS in millions
Revenues 6,858 9,383 10,112 Cost of sales 5,793 8,339 9,034
Gross profit 1,065 1,044 1,078
Selling and marketing expenses 699 707 704 General and administrative expenses 116 95 110 Other income, net (15) (32) -
Total operating expenses 800 770 814
Operating income 265 274 264
Financial income 73 111 161 Financial expenses 93 136 220
Financial expenses, net 20 25 59
Income after financial expenses, net 245 249 205
Share of earnings (losses) of investees 536 (18) (42)
Income before income tax 781 231 163
Income tax expenses 2.9 65 59 53
Net income for the period attributable to equity holders of the Company 716 172 110
The accompanying additional information is an integral part of the separate financial information.
E-5 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Data of Comprehensive Income
Year ended December 31, 2015 2014 2013 NIS in millions
Net income for the period attributable to equity holders of the Company 716 172 110
Items of other comprehensive income (loss) items 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 - 9 (29) Re-measurement of defined benefit plan 1 1 1 Taxes in respect of other comprehensive income (loss) items not carried to profit and loss * (2) 7
Total other comprehensive income (loss) for the period not carried to profit and loss, net of taxes 1 8 (21)
Total comprehensive income for the period attributable to equity holders of the Company 717 180 89
*) Less than NIS 0.5 million.
The accompanying additional information is an integral part of the separate financial information.
E-6 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Data of Cash Flows
Year ended December 31, 2015 2014 2013 NIS in millions
Cash flows from operating activities:
Net income for the period attributable to equity holders of the Company 716 172 110
Adjustments for: Depreciation and amortization 113 117 117 Financial expenses, net 20 25 59 (Gain) loss on sale of fixed assets (35) (26) 2 Share-based payment transactions 1 1 2 Share of (earnings) losses of investees (536) 18 42 Income tax expenses 65 59 53
Income for the period after adjustments to income 344 366 385
(Increase) decrease in inventories (116) 4 151 Decrease in trade and other accounts receivable 132 148 200 Decrease in trade and other accounts payable (95) (255) (5) Increase (decrease) in provisions and employee benefits 18 (15) (3)
(61) (118) 343
Income tax paid (59) (88) -
Net cash provided by operating activities 224 160 728
The accompanying additional information is an integral part of the separate financial information.
E-7 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Data of Cash Flows
Year ended December 31, 2015 2014 2013 NIS in millions
Cash flows from investing activities:
Interest received 48 87 113 Realization of derivatives in respect of interest differences - 484 108 Proceeds from sale of fixed assets and assets held for sale 54 31 2 (Investment in) proceeds from sale of intangible assets (3) 1 (2) Loans granted to filling station operators, agents, employees, fuel companies and others (9) (2) (4) Repayment of loans granted to filling station operators, agents, employees, fuel companies and others 18 14 15 Investment in fixed assets (92) (110) (100) Loans granted to investees (646) (611) (640) Repayment of loans from investees 695 654 626 Repayment of loan to the Fuel Administration - - 192 Prepaid lease fees paid (1) (1) (1) Betterment tax on sale of fixed assets (13) - - Dividend received from investees and other investments 161 138 215 Placement of long-term bank deposits (550) - - Decrease in current accounts with investees 74 508 385
Net cash (used in) provided by investing activities (264) 1,193 909
Cash flows from financing activities:
Issuance of debentures, net of issuance expenses - 743 309 Repayment of debentures - (2,139) (440) (Repayment) receipt of loans from banks (200) - 200 Increase (decrease) in short-term bank credit 493 - (152) Repayment of long-term loans from investees (21) - - Dividends paid (250) (500) - Purchase of treasury shares (9) - - Change in credit balances with investees 54 (9) 5 Interest paid (97) (666) (257)
Net cash used in financing activities (30) (2,571) (335)
(Decrease) increase in cash and cash equivalents (70) (1,218) 1,302 Cash and cash equivalents at beginning of period 101 1,319 17
Cash and cash equivalents at end of period 31 101 1,319
The accompanying additional information is an integral part of the separate financial information.
E-8 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
1. General
1.1 Presented hereunder are financial data from the consolidated financial statements of the Paz Group as of December 31, 2015 which are issued in the framework of the periodic reports ("the consolidated financial statements"), which are attributed to Paz Oil Company Ltd. itself ("separate financial information"), and are presented in accordance with Regulation 9C ("the Regulation") and the Tenth Addendum to the Securities Regulations (Periodic and Immediate Reports), 1970 ("the Tenth Addendum") regarding the Corporation's separate financial information.
The separate financial information should be read in conjunction with the consolidated financial statements.
In this separate financial information – subsidiaries/investees as defined in Note 1.2 to the consolidated financial statements.
1.2 Significant accounting policies adopted in the separate financial information
The significant accounting policies described in Note 3 to the consolidated financial statements have been consistently applied in all periods presented in the separate financial information, including the manner in which the financial data were classified in the consolidated financial statements, with any necessary changes deriving from the following:
1.2.1 Data of financial position include information on amounts of assets and liabilities included in the consolidated financial statements that are attributable to the Company itself (other than in respect of investees), according to categories of assets and liabilities. In addition, the balance in respect of investees includes information regarding the net amount, based on the consolidated financial statements, that is attributable to the Company's owners, of total assets less total liabilities, in respect of investees, including goodwill.
1.2.2 Data of profit and loss and comprehensive income include information on amounts of revenues and expenses included in the consolidated financial statements, allocated between profit or loss and other comprehensive income, attributable to the Company itself (other than in respect of investees), while specifying the categories of revenues and expenses. In addition, profit or loss from investees includes information regarding the net amount, based on the consolidated financial statements, that is attributable to the Company's owners, of total revenues less total expenses in respect of the operating results of investees.
1.2.3 Data of cash flows include information on amounts of cash flows included in the consolidated financial statements that are attributable to the Company itself (other than in respect of investees) based on the consolidated statement of cash flows, classified according to cash flows from operating activities, investing activities and financing activities with details of their composition. The cash flows from operating activities, investing activities and financing activities in respect of transactions with investees are presented separately in net amounts in the context of the respective activities based on the nature of the transaction.
1.2.4 Unrealized earnings and losses arising from transactions between the Company and its investees are presented in the context of the balance in respect of investees and in the context of the earnings from investees.
E-9 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
2. Additional information
2.1 Cash and cash equivalents
December 31, 2015 2014 NIS in millions
Cash at banks 11 7 Deposits 20 94
31 101
2.2 Trade receivables
December 31, 2015 2014 NIS in millions Composition: Total trade receivables 1,120 1,225 Less - allowance for doubtful accounts 19 12
1,101 1,213
The majority of the current trade receivables do not bear interest.
2.3 Other accounts receivable
December 31, 2015 2014 NIS in millions Composition: Income receivable, prepaid expenses, advances to suppliers and others 80 76 Investees 1,218 1,287 Current maturities of long-term loans and receivables 12 18
1,310 1,381
E-10 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
2.4 Long-term receivables and loans granted / loans to investees
2.4.1 Composition:
December 31, 2015 2014 NIS in millions
Loans to operators of filling stations, agents and others 161 168 Long-term trade receivables 129 24 Prepaid expenses 6 11 Long-term income receivable 20 20 Investees 3 7 319 230
Less - allowance for doubtful accounts 10 10 Less - current maturities 12 18
Total long-term loans and receivables 297 202
The majority of loans to operators of filling stations, agents and others bear interest of 0%-7% (December 31, 2014 - 0%-7%). Long-term trade receivables bear interest of 0%-7% (December 31, 2014 - 0%-7%)
2.4.2 Maturity dates as of December 31, 2015:
Repayment Non- 2020 and date financial 2016 2017 2018 2019 thereafter undetermined assets Total NIS in millions
Loans to filling station operators, agents and others 11 28 8 27 78 9 - 161 Long-term trade receivables 1 94 1 21 12 - - 129 Prepaid expenses ------6 6 Long-term income receivable - - 20 - - - - 20 Investees - - - - - 3 - 3
12 122 29 48 90 12 6 319
E-11 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
2.5 Short-term loans and credit
December 31, 2015 2014 NIS in millions Composition: Short-term loans 493 - Interest payable (0.4%-0.8%) 2 2 495 2
Current maturities of long-term liabilities - 200
- 200 Total current liabilities 495 202
2.6 Trade payables
December 31, 2015 2014 NIS in millions
Open debts *) 636 704 Accrued expenses 15 13
651 717
The balances are unlinked.
* Includes balances with related parties totaling approximately NIS 499 million (December 31, 2014 - approximately NIS 562 million).
E-12 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
2.7 Other accounts payable
December 31, 2015 2014 NIS in millions
Employees and payroll accruals 19 11 Government authorities 268 298 Other payables 17 14 Associates and related companies 88 35
392 358
The majorities of other accounts payable do not bear interest and are unlinked.
2.8 Financial instruments
2.8.1 Liquidity risk
Following are the contractual maturities of financial liabilities, including estimated interest payments:
December 31, 2015 Over Carrying Contractual Up to one Second Third Fourth five amount cash flows year year year year years NIS in millions
Non-derivative financial liabilities Short-term loans 493 493 493 - - - - Trade payables 651 651 651 - - - - Other payables 109 109 109 - - - - Dividend payable 170 170 170 - - - - Debentures, including current maturities 3,874 4,226 85 85 85 3,160 811 Other long-term balances 11 ** ---
December 31, 2014 Over Carrying Contractual Up to one Second Third Fourth five amount cash flows year year year year years NIS in millions
Non-derivative financial liabilities Short-term loans 200 200 200 - - - - Trade payables 717 717 717 - - - - Other payables 48 48 48 - - - - Debentures, including current maturities 3,877 4,343 91 91 91 91 3,979 Other long-term balances 22 ** * --
* Less than NIS 0.5 million.
E-13 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
2.9 Income tax
2.9.1 Composition of income tax expenses:
Year ended December 31, 2015 2014 2013 NIS in millions
Current tax expense (income) Current period 87 54 51 Adjustments for prior years, net (1) (3) (4) 86 51 47 Deferred tax expense (income) Creation and reversal of temporary differences (21) 8 (2) Change in tax rate - - 8
(21) 8 6
Total income tax expense 65 59 53
2.9.2 Recognized deferred tax assets and liabilities:
Carry- forward tax Fixed Employee Financial losses and assets benefits instruments deductions Other Total NIS in millions
Balance of deferred tax asset (liability) as of January 1, 2014 (157) 11 3 21 (13) (135)
Changes recognized in profit or loss 8 (2) (1) (11) (2) (8) Changes recognized in capital reserves - - (2) - - (2)
Balance of deferred tax asset (liability) as of December 31, 2014 (149) 9 - 10 (15) (145)
Changes recognized in profit or loss 23 (1) - (1) - 21
Balance of deferred tax asset (liability) as of December 31, 2015 (126) 8 - 9 (15) (124)
E-14 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
2.9 Income tax (Cont.)
2.9.3 Deferred tax assets have not been recognized in respect of the following items:
December 31, 2015 2014 NIS in millions
Temporary differences on investments in investees (797) (411) Real difference from marketable securities 40 40
(754) (371)
According to applicable tax laws, there is no time limitation on the utilization of tax losses or deductible temporary differences. No deferred tax assets have been recognized in respect of the above items since no taxable income is expected in the foreseeable future against which the tax benefits can be utilized. Temporary differences relating to investments in investees have not been recognized since the decision whether to sell these companies is held by the Company and it has no intention of selling any companies in the near future.
2.9.4 The Company received tax assessments that are deemed final through the 2010 tax year.
2.10 Material commitments and transactions with investees
2.10.1 Credit agreements
The Company has a credit agreement with other Group companies according to which the Company will grant the group companies loans from time to time and at its discretion. The terms of these loans are according to the Income Tax Ordinance and the regulations published thereunder.
2.10.2 Agreements for the grant/receipt of services with the Group companies
2.10.2.1 The Company entered into an agreement for the grant and receipt of services with Paz Ashdod according to which the companies charge each other for services granted such as: marketing of fuel products, purchase of oil and intermediate products, IT, finance, human resources and legal counseling, logistics, inventory and infrastructure management, management of the Haifa facilities and purchasing.
2.10.2.2 The Company entered into an agreement with its subsidiary Nituv for the receipt of manpower services for the daily operation of filling stations and convenience stores.
2.10.2.3 The Company entered into an agreement with its subsidiary Pazomat for the receipt of marketing, operating, data processing and customer collection services, with respect to sale of fuels through Pazomat-Identification-Devices and related accessories.
2.10.2.4 The Company entered into an agreement with its subsidiary Pazmovil for the receipt of fuel transport services and supply of food and convenience products to Yellow stores.
2.10.2.5 The Company entered into an agreement with its subsidiary Pazgaz for the supply of LPG to the Palestinian Authority and for the construction of LPG filling stations in the Company's filling stations.
2.10.2.6 The Company entered into an agreement with several Group companies for the rental of real estate.
E-15 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 PAZ OIL COMPANY LTD.
Chapter E - Separate Financial Information as of December 31, 2015 Additional Information to the Financial Data
2.10.3 Dividend
During 2015, investees declared the distribution of a dividend to the Company. The total dividend declared and received in cash amounted to approximately NIS 153 million (in 2014 - a dividend in a total of NIS 131 million was declared and received in cash).
For additional details regarding investees, see Note 9 to the consolidated financial statements.
2.10.4 Details of transactions with subsidiaries that are included in the Company's books:
Year ended December 31, 2015 2014 2013 NIS in millions
Revenues 145 207 320 Cost of sales 5,237 7,564 7,568 Selling, general and administrative expenses 86 78 75 Financial income 51 79 123 Financial expenses 4 3 4
2.11 Contingent liabilities
See Note 33.1.2 to the consolidated financial statements regarding a claim and a motion to recognize the claim as a class action. Based on legal opinion, the Company's Management estimates that at this stage, the effect of the above claim on the separate financial information, if any, cannot be assessed and therefore no provision has been made in respect of said claim in the financial statements.
2.12 Dividends
As for dividends declared and paid by the Company in 2015 and 2014, see Note 19.5 to the consolidated financial statements.
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E-16 WorldReginfo - b1d0d604-1d01-4a24-939b-ab2b538ff8c0 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 - b1d0d604-1d01-4a24-939b-ab2b538ff8c0