UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
FORM 20-F/A
(Amendment No. 1)
 
(Mark One)
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Date of event requiring this shell company report…
 
For the transition period from __________________ to __________________
 
Commission File Number 001-35284
 
ELLOMAY CAPITAL LTD.
(Exact Name of Registrant as specified in its charter)
 
ISRAEL
(Jurisdiction of incorporation or organization)
 
9 Rothschild Boulevard, 2nd floor
Tel Aviv 6688112, Israel
(Address of principal executive offices)
 
Kalia Weintraub, Chief Financial Officer
Tel: +972-3-797-1111; Facsimile: +972-3-797-1122
9 Rothschild Boulevard, 2nd floor
Tel Aviv 6688112, Israel
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Ordinary Shares, par value NIS 10.00 per share
 
NYSE American LLC

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
 
None
Title of Class
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
 
None
Title of Class
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:  10,675,5081 ordinary shares, NIS 10.00 par value per share.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
Yes £   No ☑
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes £   No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes ☑    No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes £   No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☐          Accelerated filer ☐          Non-accelerated filer ☑          Emerging growth company £
 

1
Does not include a total of 258,046 ordinary shares held at that date as treasury shares under Israeli law, all of which were repurchased by Ellomay. For so long as such treasury shares are owned by Ellomay they have no rights and, accordingly, are neither eligible to participate in or receive any future dividends which may be paid to Ellomay’s shareholders nor are they entitled to participate in, be voted at or be counted as part of the quorum for, any meetings of Ellomay’s shareholders.
 
2

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
 
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP £            International Financial Reporting Standards as issued ☑                 Other £
by the International Accounting Standards Board
 
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17 £  Item 18 £

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
 
Yes £    No ☑

3

 
Table of Contents
 
  Page
5
5
6

4

EXPLANATORY NOTE

This Amendment No. 1 to Form 20-F is being filed to amend the Annual Report on Form 20-F for the fiscal year ended December 31, 2017, filed by Ellomay Capital Ltd. (the “Company”) on March 29, 2018 (the “2017 Form 20-F”). This Form 20-F/A is being filed solely to replace the report of Somekh Chaikin, an independent registered public accounting firm and a member of KPMG International included in the audited financial statements of Dorad Energy Ltd. (the “Dorad Financial Statements”).

As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended, updated certifications of our principal executive officer and our principal financial officer are being filed as exhibits to the Form 20-F/A. This Form 20-F/A also includes Exhibit 15.2, which contains the consent of Somekh Chaikin, an independent registered public accounting firm and a member of KPMG International, with respect to their report included in the Dorad Financial Statements.

This Form 20-F/A should be read in conjunction with the 2017 Form 20-F and our other filings with the Securities and Exchange Commission.  This Amendment No. 1 to the 2017 Form 20-F speaks as of the date of the initial filing of the 2017 Form 20-F. Other than as expressly set forth above, this Form 20-F/A does not, and does not purport to, amend, update or restate the information in any part of the 2017 Form 20-F or reflect any events that have occurred after the 2017 Form 20-F was filed. The filing of this Form 20-F/A, and the inclusion of newly executed certifications, should not be understood to mean that any other statements contained in the 2017 Form 20-F are true and complete as of any date subsequent to March 29, 2018.

ITEM 18: Financial Statements
 
The following financial statements are included in this Form 20-F/A:
Financial statements of Dorad Energy Ltd. are included in pages FD-1 – FD-49 of this amendment to the 2017 Form 20-F.
 
5

ITEM 19: Exhibits
 
Number
 
Description
 
6

 
Number
 
Description
4.23
4.25 Talmei Yosef Lease Agreement (summary of Hebrew version)(8)*
8 List of Subsidiaries of the Registrant(8)
15.1 Consent of Somekh Chaikin, Member Firm of KPMG International, Independent Registered Public Accounting Firm with respect to our financial statements(8)
 
_____________________________________
 
*
The original language version is on file with the Registrant and is available upon request.
 
(1)
Previously filed with the Registrant’s Form 20-F for the year ended December 31, 2012 and incorporated by reference herein.
(2)
Previously filed with the Registrant’s Form 20-F for the year ended December 31, 2011 and incorporated by reference herein.
(3)
Previously filed with the Registrant’s Form 20-F for the year ended December 31, 2014 and incorporated by reference herein.
(4)
Included in the Registrant’s Form 6-K dated October 14, 2005 and incorporated by reference herein.
(5)
Included in the Registrant’s Form 6-K dated December 1, 2008 and incorporated by reference herein.
(6)
Previously filed with the Registrant’s Form 20-F for the year ended December 31, 2010 and incorporated by reference herein.
(7)
Previously filed with the Registrant’s Form 20-F for the year ended December 31, 2013 and incorporated by reference herein.
(8)
Previously filed with the Registrant’s Form 20-F for the year ended December 31, 2017 and incorporated by reference herein.
(9)
Previously filed with the Registrant’s Form 20-F for the year ended December 31, 2016 and incorporated by reference herein.
 
7

SIGNATURES
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this amendment no. 1 to the annual report on its behalf.
 
 
Ellomay Capital Ltd.
 
  By: /s/ Ran Fridrich
    Ran Fridrich
    Chief Executive Officer and Director

Dated: March 30, 2018
8
Dorad Energy Ltd.
 
Financial Statements
 
As at December 31, 2017


 
Dorad Energy Ltd.

Financial Statements as at December 31, 2017
 
Contents
 
Page
 
   
FD-2
   
FD-3
   
FD-4
   
FD-5
   
FD-6
   
FD-7 - FD-49


 
 
Somekh Chaikin
KPMG Millennium Tower
17 Ha’arba’a Street, PO Box 609
Tel Aviv 61006, Israel
+972 3 684 8000
 
Independent Auditors’ Report

The Board of Directors
Dorad Energy Ltd.

Report on the Financial Statements
We have audited the accompanying financial statements of Dorad Energy Ltd., which comprise the statements of financial position as of December 31, 2017 and 2016 and the related statements of profit or loss, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes to the financial statements.

Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
 
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dorad Energy Ltd. as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

/s/ Somekh Chaikin
Somekh Chaikin
Certified Public Accountants (Israel)
Member Firm of KPMG International

Tel Aviv
February 28, 2018
 

FD-2

 
Dorad Energy Ltd.

Statements of Financial Position


         
December 31
   
December 31
 
         
2017
   
2016
 
   
Note
   
NIS thousands
   
NIS thousands
 
Current assets
                 
Cash and cash equivalents
   
4
     
184,182
     
80,967
 
Trade receivables
           
330,397
     
294,351
 
Other receivables
   
5
     
83,289
     
37,174
 
Total current assets
           
597,868
     
412,492
 
                         
Non-current assets
                       
Restricted deposit
   
11A1B
 
   
405,306
     
411,574
 
Prepaid expenses
   
11A2, 11A5
     
43,821
     
45,938
 
Fixed assets
   
6
     
4,009,008
     
4,170,151
 
Intangible assets
           
6,097
     
8,551
 
Total non-current assets
           
4,464,232
     
4,636,214
 
                         
Total assets
           
5,062,100
     
5,048,706
 
                         
Current liabilities
                       
Current maturities of loans from banks
   
7
     
203,819
     
197,389
 
Current maturity of loans from related parties
   
9
     
140,464
     
80,000
 
Trade payables
           
415,798
     
293,613
 
Other payables
   
8
     
5,649
     
9,152
 
Financial derivatives
           
1,191
     
-
 
Total current liabilities
           
766,921
     
580,154
 
                         
Non-current liabilities
                       
Loans from banks
   
7
     
3,187,873
     
3,367,832
 
Loans from related parties
   
9
     
54,764
     
151,638
 
Provision for dismantling and restoration
           
36,239
     
35,700
 
Deferred tax liabilities, net
   
10
     
89,298
     
65,618
 
Liabilities for employee benefits, net
           
160
     
160
 
Total non-current liabilities
           
3,368,334
     
3,620,948
 
                         
Equity
   
12
                 
Share capital
           
11
     
11
 
Share premium
           
642,199
     
642,199
 
Capital reserve for activities with controlling shareholders
           
3,748
     
3,748
 
Retained earnings
           
280,887
     
201,646
 
                         
Total equity
           
926,845
     
847,604
 
                         
Total liabilities and equity
           
5,062,100
     
5,048,706
 
 
/s/ Erez Halfon
 
/s/ Eli Asulin
 
/s/ David Bitton
Erez Halfon
 
Eli Asulin
 
David Bitton
Chairman of the
 
Chief Executive Officer
 
Chief Financial Officer
Board of Directors
       

Date of approval of the financial statements: February 28, 2018

The accompanying notes are an integral part of the financial statements.

FD-3

Dorad Energy Ltd.

Statements of Profit or Loss
 
       
Year ended December 31,
 
       
2017
   
2016
   
2015
 
 
Note
   
NIS thousands
   
NIS thousands
   
NIS thousands
 
                       
Revenues
       
2,523,263
     
2,299,565
     
2,356,832
 
                             
Operating costs of the power plant
                           
Energy costs
       
616,221
     
550,401
     
613,689
 
Electricity purchase and infrastructure services
       
1,212,431
     
1,104,826
     
1,000,947
 
Depreciation and amortization
       
208,705
     
209,057
     
209,953
 
Other operating costs
       
122,345
     
141,132
     
149,808
 
                             
Total cost of power plant
       
2,159,702
     
2,005,416
     
1,974,397
 
                             
Profit from operating the power plant
       
363,561
     
294,149
     
382,435
 
                             
General and administrative expenses
   
13
     
18,712
     
19,178
     
25,681
 
                                 
Operating profit
           
344,849
     
274,971
     
356,754
 
                                 
Financing income
           
3,195
     
7,025
     
476
 
Financing expenses
           
245,122
     
226,054
     
216,808
 
                                 
Financing expenses, net
   
14
     
241,927
     
219,029
     
216,332
 
                                 
Profit before taxes on income
           
102,922
     
55,942
     
140,422
 
                                 
Taxes on income
   
10
     
23,681
     
4,736
     
37,607
 
                                 
Profit for the year
           
79,241
     
51,206
     
102,815
 
 
The accompanying notes are an integral part of the financial statements.
 
FD-4

Dorad Energy Ltd.

Statements of Changes in Equity
 
               
Capital
             
               
reserve for
             
               
activities with
             
         
Share
   
controlling
   
Retained
       
 
Share capital
   
premium
   
shareholders
   
earnings
   
Total equity
 
 
NIS thousands
   
NIS thousands
   
NIS thousands
   
NIS thousands
   
NIS thousands
 
For the year ended December 31, 2017
                             
                               
Balance as at January 1, 2017
   
11
     
642,199
     
3,748
     
201,646
     
847,604
 
                                         
Profit for the year
   
-
     
-
     
-
     
79,241
     
79,241
 
                                         
Balance as at December 31, 2017
   
11
     
642,199
     
3,748
     
280,887
     
926,845
 
                                         
For the year ended December 31, 2016
                                       
                                         
Balance as at January 1, 2016
   
11
     
642,199
     
3,748
     
150,440
     
796,398
 
                                         
Profit for the year
   
-
     
-
     
-
     
51,206
     
51,206
 
                                         
Balance as at December 31, 2016
   
11
     
642,199
     
3,748
     
201,646
     
847,604
 
                                         
For the year ended December 31, 2015
                                       
                                         
Balance as at January 1, 2015
   
11
     
642,199
     
3,748
     
47,625
     
693,583
 
                                         
Profit for the year
   
-
     
-
     
-
     
102,815
     
102,815
 
                                         
Balance as at December 31, 2015
   
11
     
642,199
     
3,748
     
150,440
     
796,398
 
 
The accompanying notes are an integral part of the financial statements.
 
FD-5

Dorad Energy Ltd.

Statements of Cash Flows

   
Year ended December 31,
 
   
2017
   
2016
   
2015
 
   
NIS thousands
   
NIS thousands
   
NIS thousands
 
Cash flows from operating activities:
                 
Profit for the year
   
79,241
     
51,206
     
102,815
 
Adjustments:
                       
Depreciation, amortization and fuel consumption
   
286,542
     
238,484
     
237,295
 
Taxes on income
   
23,681
     
4,736
     
37,607
 
Financing expenses, net
   
241,927
     
219,029
     
216,332
 
     
552,150
     
462,249
     
491,234
 
                         
Change in trade receivables
   
(35,465
)
   
(14,761
)
   
49,693
 
Change in other receivables
   
(84,857
)
   
(5,179
)
   
(20,876
)
Change in trade payables
   
123,045
     
48,807
     
(129,385
)
Change in other payables
   
(2,669
)
   
677
     
(6,842
)
Change in employee benefits, net
   
-
     
-
     
55
 
     
54
     
29,544
     
(107,355
)
                         
Net cash provided by operating activities
   
631,445
     
542,999
     
486,694
 
                         
Cash flows from investing activities:
                       
Proceeds from (payment for) settlement of financial derivatives
   
(10,596
)
   
(2,017
)
   
9,609
 
Release of pledged deposits
   
-
     
29,486
     
38,679
 
Insurance proceeds in respect of damage to fixed asset
   
38,742
     
-
     
-
 
Investment in long-term restricted deposits
   
(34,000
)
   
(143,891
)
   
(135,000
)
Release of long-term restricted deposit
   
25,790
     
70,000
     
-
 
Long-term prepaid expenses
   
-
     
(1,056
)
   
-
 
Investment in fixed assets
   
(121,361
)
   
(25,415
)
   
(447,338
)
Investment in intangible assets
   
(413
)
   
(2,804
)
   
(1,767
)
Interest received
   
1,268
     
624
     
115
 
                         
Net cash used in investing activities
   
(100,570
)
   
(75,073
)
   
(535,702
)
                         
Cash flows from financing activities:
                       
Receipt of long-term loans from related parties
   
-
     
16,689
     
23,208
 
Receipt of long-term loans from banks
   
-
     
242,772
     
318,100
 
Repayment of loans from related parties
   
(39,628
)
   
(147,219
)
   
-
 
Repayment of loans from banks
   
(161,668
)
   
(143,896
)
   
(105,121
)
Interest paid
   
(227,530
)
   
(408,071
)
   
(206,032
)
                         
Net cash provided by (used in) financing activities
   
(428,826
)
   
(439,725
)
   
30,155
 
                         
Net increase (decrease) in cash and cash equivalents
   
102,049
     
28,201
     
(18,853
)
                         
Effect of exchange rate fluctuations on cash and cash equivalents
   
1,166
     
872
     
(1,031
)
Cash and cash equivalents at beginning of year
   
80,967
     
51,894
     
71,778
 
                         
Cash and cash equivalents at end of year
   
184,182
     
80,967
     
51,894
 

The accompanying notes are an integral part of the financial statements.
 
FD-6

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 1 -  General

A.            Reporting entity

Dorad Energy Ltd. (hereinafter - “the Company”) was incorporated on November 25, 2002, with the aim of engaging in the production of electricity and construction of the infrastructure required for said operation.

The company's shareholders:
Eilat Ashkelon Infrastructure Services Ltd. (hereinafter – EAIS) – 37.5%
Zorlu Enerji Elektrik Uretim A.S (a foreign company) (hereinafter – Zorlu) – 25%
U. Dori Energy Infrastructures Ltd. (hereinafter – Dori Energy) – 18.75%
Edelcom Ltd. (hereinafter – Edelcom) – 18.75%
 
B.          Definitions
 
In this financial statement
 
·
Related party as defined in international accounting standard (2009) 24 regarding related parties.
·
Interested parties as defined in paragraph 1 of the definition of “interested parties” in a cooperation section 1 of the securities law 1968.

C.
Licenses and legal environment

1.
The construction of the power plant was officially designated a “National Infrastructure” Project, as defined in paragraph 1 of the Planning and Building Law-1965 by the Prime Minister, Minister of Finance and Minister of the Interior. In July 2009, the Licensing Authority of the National Planning and Construction Board for National Infrastructures approved the building permit for the establishment of a power station. (Building License No. 2-01-2008).

On April 13, 2014 the Public Utilities Authority - Electricity ("PUA") passed a resolution of which a permanent production license and a supply license will be granted to the Company, subject to the approval of the Minister of National Infrastructure, Energy and Water ("Minister of Energy"). Accordingly, on May 12, 2014 the Company was issued production licenses for 20 years with an option for additional period of extension and a supply license for one year and on May 19, 2014 the Company began commercial operation of the station.

On August 12, 2014 the Company filed a request to extend the supply license for an additional 19 years. On July 13, 2015, after the Company filed a petition with the High Court of Justice against the Minister of National Infrastructures and the Public Electricity Services Authority for issuance of a conditional order that will require extending the license for the said period, the license was received, which is effective up to May 11, 2034.
 
2.
On July 9, 2014 and on June 1, 2015, the company submitted to the High Court two petitions against the Public Utilities Authority - Electricity (“PUA”) and the Israeli Electric Corporation Ltd. ("IEC") in view of the PUA’s intention to make a decision which includes, inter alia, to require the private electricity producers to pay IEC a general tariff which referred to by the PUA as “system costs”. The Company’s claims which were raised in the petitions were, inter alia, that the decision is contrary to the explicit instructions of the Electricity Sector Law, 1996, with respect to the manner of determining tariffs by the PUA, also, it has the potential to change the rules of the game established by the PUA and in addition severely undermines the principle of reliance of the Company, the financing entities and other third parties who relied on the information and activities of the PUA.
 
FD-7

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
Note 1 – General (cont’d)

C.            Licenses and legal environment (cont’d)

2.
(cont’d)

In addition, the company claimed that the PUA did not provide the Company data, information and calculations that were in its possession when determining the rate of system cost, without which the Company is not able to fully and completely examine the proposed decision and the tariffs proposed therein, and it is not able to raise all of its contentions in connection therewith.
 
On December 7, 2014 and on June 22, 2015 the PUA filed a response to the petition in which it contended that the petition should be denied for various reasons as detailed in PUA’s response.

On June 25, 2015, the Supreme Court decided that there is no basis for instructing the PUA not to make the decision.

Pursuant to the decision of the Supreme Court, on July 5, 2015, the Company notified that it remains steadfast with respect to its petition and instructed to join the petitions regarding the matter of the system costs. On July 9, 2015, the Court rejected the Additional Petition since the proceeding was premature and the PUA had not yet decided with respect to the contentions regarding the hearing. On October 13, 2015, an agreed‑to request was filed on the part of the Company for cancellation of the petition and on October 15, 2015, the Court’s decision was rendered whereby the petition was cancelled.

In the meantime, the PUA published a summary decision regarding the “Determination of Tariffs for Management Services of the Electricity System (System cost Tariffs)”. As part of the decision, detail was provided of, among other things, management services for the system and it was provided that an accounting will be made with reference to the past commencing from June 1, 2013, however from the standpoint of the Company, only commencing from the commercial operation date at the rate of 90% of the annual system tariff.

As at December 31, 2015 the accounting had been completed for the period until June 2015 at the amount of NIS 73 million paid by the company to the IEC.

In 2015, the Company updated the provisions in its financial statements that as at December 31, 2014 amounted to NIS 123 million and adjusted them to, inter alia, the amounts that were paid according to the aforesaid. The aforesaid adjustment was included in the item of operating cost of the power plant.

3.
On January 21, 2015 PUA published a summary decision regarding “Electricity Rates for Customers of IEC in 2015” which includes a reduction of the rates for the Company’s customers. Pursuant to the decision the rates of the manufacturing component which serves as the basis for charging the Company’s customers and to which the gas price is linked, were reduced by about 9% as from February 1, 2015.

Later on, on September 7, 2015, PUA published another summary decision, which in accordance the rates for the production component was further reduced by about 6.8%, commencing from September 13, 2015. It should be noted that the linkage mechanism of the gas price including a final floor price which started to occur in March 2016.

FD-8

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 1 – General (cont’d)

C.            Licenses and legal environment (cont’d)

3.
(cont’d)
 
On December 19, 2016 the PUA published a summary decision regarding “Electricity Rates for Customers of IEC in 2016” which in accordance the average production component was reduced by about 0.5% as from January 1, 2017 and will remain in effect to the end of 2017. The effect of this update on the report was negligible.
 
In addition, it was stated in the decision that during 2017 the Electricity Authority intends to implement a new methodology adapted to the current market structure. A decision has not yet been made as of the publication of the report.
 
On January 15, 2018 the PUA published a decision regarding “Electricity Rates for Customers of IEC in 2018” which in accordance the average production component will increase by about 6% from January 15, 2018 and will remain in effect to the end of 2018.
FD-9

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 2 -  Basis of Preparation

A.            Declaration of compliance with international financial reporting standards.

The financial statements have been prepared by the Company, in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board.
 
The financial statements were authorized for issue by the Company’s Board of Directors on February 28, 2018.
 
B.            Functional and presentation currency

These financial statements are presented in NIS, which is the Company’s functional currency, and have been rounded to the nearest thousand. The NIS is the currency that represents the principal economic environment in which the Company operates.
 
C.            Basis of measurement

The financial statements have been prepared on the historical cost basis except for the following assets and liabilities:
·
Derivative financial instruments at fair value through profit or loss;
·
Deferred tax liabilities
·
Provisions

For further information regarding the basis of measurement of the above assets and liabilities, see Note 3, regarding Significant Accounting Policies.
 
D.
Use of estimates and judgments

The preparation of financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

The preparation of accounting estimates used in the preparation of the Company’s financial statements requires management 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.
 
FD-10

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 2 -  Basis of Preparation (cont’d)

D.            Use of estimates and judgments (cont’d)

Information about assumptions made by the Company with respect to the future and other reasons for uncertainty with respect to estimates that have a significant risk of resulting in a material adjustment to carrying amounts of assets and liabilities in the next financial year.

Useful lives of fixed assets and residual value
On May 19, 2014 the construction of the power plant was completed and is available for use as of this date and therefore as of this date, the depreciation of the power plant began. Accordingly, the Company examined the useful life of each significant item of fixed assets as described in Note 3C below considering the expected residual value at the end of the useful life. The estimated residual value, depreciation method and useful life, will be evaluated by the Company, as of the date of depreciation and an update will be made if necessary. Regarding the change in the useful life of the maintenance component in the fixed assets see note 11(15).
 
Impairment of assets
The Company examines on each cutoff date whether there have been any events or changes in circumstances that indicate impairment of fixed assets. It is examined whether the carrying amount of the fixed assets is recoverable out of the discounted cash flows expected from that asset or the fair value of the asset less selling costs (“net selling price”) of that asset, and if necessary an impairment provision is recorded up to the amount that is recoverable.

Assessment of the probability of contingent liabilities
The Company creates provisions or reverses provisions in respect of contingent liabilities on the basis of, inter alia, whether it is more likely than not that an outflow of economic resources will be required in respect of the aforesaid liabilities.

E.            Operating cycle period

The Company’s normal operating cycle is one year. As a result, current assets and current liabilities include items whose exercise date will take place in the Company’s normal operating cycle.
 
The accounting policies set out below have been applied consistently for all periods presented in these financial statements.
 
FD-11

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 3 -  Significant Accounting Policies

A.            Foreign currency transactions
 
Transactions in foreign currencies are translated to the respective functional currency of the Company entities at exchange rates 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 period, adjusted for effective interest and payments during the period, and the amortized cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. 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.

B.            Financial instruments

1.
Non-derivative financial assets

Initial recognition of financial assets
The Company 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 Company becomes a party to the contractual provisions of the instrument, meaning on the date the Company undertook to purchase or sell the asset.
 
Non-derivative financial assets include accounts receivables, other accounts receivable and restricted deposits.

Derecognition of financial assets
Financial assets are derecognized when the contractual rights of the Company to the cash flows from the asset expire, or the Company 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 Company 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.

See (2) hereunder regarding the offset of financial assets and financial liabilities.

Loans and receivables
Loans and receivables include cash and cash equivalents, restricted deposits, trade receivables and other receivables. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable transaction costs. After initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment losses.
 
FD-12

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 3 -  Significant Accounting Policies (cont’d)

B.            Financial instruments (cont’d)
 
1.
Non-derivative financial assets (cont’d)
 
Cash and cash equivalents include cash balances available for immediate use and call deposits. Cash equivalents include 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.

2.
Non-derivative financial liabilities

Initial recognition of financial liabilities
Non-derivative financial liabilities include loans and borrowings from banks and related parties, trade and other payables.
 
The Company 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 Company becomes a party to the contractual provisions of the instrument.
 
Financial liabilities are recognized initially at fair value plus all of the costs that can be attributed to the transaction. After the initial recognition, the financial liabilities are measured at amortized cost according to the effective interest rate method.

Derecognition of financial liabilities
Financial liabilities are derecognized when the obligation of the Company, as specified in the agreement, expires or when it is discharged or cancelled.

Offset of financial instruments
Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Company 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.

3.
Derivative financial instruments

The Company holds derivative financial instruments for the purpose of economic hedging (not accounting hedging) against foreign currency risks. Changes in the fair value of such derivatives are recognized in profit or loss under financing income or expenses.
          
4.
CPI-linked assets and liabilities that are not measured at fair value

The value of CPI-linked financial assets and liabilities, which are not measured at fair value, is remeasured every period in accordance with the actual increase/decrease in the CPI.

5.
Share capital

Ordinary shares

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognized as a deduction from equity.

FD-13

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 3 -  Significant Accounting Policies (cont’d)

C.
Fixed assets

1.
Recognition and measurement

Fixed asset items are measured at cost less accumulated depreciation and accumulated impairment losses.
 
The cost of self-constructed assets includes costs directly attributable to the assets, direct labor, any other costs directly attributable to bringing the assets to a working condition for their intended use, estimates of dismantling and restoration costs of the power plant, and capitalized borrowing costs. During the running period, the Company capitalized costs and revenues incurred as a result of competence tests attributed to the power plant.

Spare parts, auxiliary equipment and backup equipment are classified as fixed assets once they meet the definition of fixed assets in accordance with IAS-16, otherwise they are classified as Inventory.

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 “other expenses”, as relevant, in profit or loss.

Changes in commitments to dismantle and restore the power plant except for changes caused by the passage of time, are added to or deducted from the cost of asset during the period in which they occur. The amount deducted from the cost of asset will not exceed its book value. The balance, if any, is recognized immediately in the profit or loss statement.

2.
Subsequent costs

The cost of replacing part of a fixed asset item and other subsequent expenses is recognized in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the company and its cost can be measured reliably. The costs of day-to-day servicing are recognized in profit or loss as incurred.

3.
Depreciation

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Recoverable amount is the cost of the asset, or other amount replacement cost, less its residual value.

Depreciation of fixed assets begins when it is available for use. This means that it should be in the location and condition necessary for it to be capable of operating in the manner intended by the management. As stated in Note 1B (1), the Company began to depreciate fixed assets from the day of the beginning of commercial operations, in accordance with the depreciation rates listed below. Depreciation is recognized in the profit and loss statement on a straight-line basis (unless otherwise stated) over the estimated useful life of each significant part of the fixed asset, since this method reflects the expected pattern of consumption of future economic benefits best embodied in the asset.
 
FD-14

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 3 -  Significant Accounting Policies (cont’d)

C.
Fixed assets (cont’d)

3.
Depreciation (cont’d)

The estimated useful lives for the current period are as follows:

   
Depreciation
 
   
rate
 
   
(percentage)
 
Buildings and permanent connections
   
4
 
Turbine components
4 or by operating hours
 
Machinery, equipment and apparatus
 
mainly4
 
Monitoring station
   
10
 
Spare parts
   
4
 
Backup diesel
 
upon usage
 

Depreciation methods, useful lives and residual values are reviewed at each reporting period and adjusted when necessary.

D.            Intangible assets

1.
Recognition and measurement

Intangible assets are identifiable non-monetary assets that do not have a physical substance. The Company’s intangible assets consist of the costs of software systems that were adapted to the Company’s needs. Among others, these include the billing system, the customer consumption forecast system, operating system and the ERP system. The intangible assets that were acquired by the Company have a finite useful life and are measured at cost less accumulated amortization and accumulated impairment losses.

2.
Subsequent expenditure

Subsequent expenditure is capitalized 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.
Amortization

Amortization is the systematic allocation of the amount of an intangible asset over its useful life. Recoverable amount is the cost of the asset, or other amount replacement cost, less its residual value. Amortization is recognized in profit or loss on a straight-line basis over the estimated useful life of the intangible assets from the date that they are available for use, since these methods reflect the anticipated consumption program of future economic benefits embodied in the asset in the best form.
 
The estimated useful life for the current software systems is five years.

Estimates regarding the amortization method and useful lives are reviewed at each reporting period and adjusted when necessary.

FD-15


Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 3 -  Significant Accounting Policies (cont’d)

E.
Impairment
 
1)
Non derivative financial assets
 
A financial asset not carried at fair value through profit or loss is tested for impairment when objective evidence indicates that a loss event has occurred after the initial recognition of the assets, and that the loss event had a negative effect on the estimated future cash flows of the asset that can be estimated reliably.
 
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 the balance of the financial asset measured at amortized cost. Interest income on the impaired assets is recognized using the interest rate that was used to discount the future cash flows for the purpose of measuring the impairment loss.
 
2)
Non-financial assets

Timing of impairment testing
The carrying amounts of the Company’s non-financial assets, 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.

Determining 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”).

Measurement of recoverable amount
The recoverable amount of an assets or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value that reflects current market assessments of the value of money and the risks specific to the assets, for which the estimated future cash flows from the asset were not adjusted.

Recognition of impairment loss
An impairment loss is recognized if the carrying amount of an asset or cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognized in profit or loss.

Reversal of impairment loss
In respect of other assets, for which impairment losses were recognized in prior periods, an assessment is performed at each reporting date for any indications that these losses have decreased or no longer exist. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
 
F.            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 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. Foreign currency differences from credit in foreign currency are capitalized if they are considered an adjustment of interest costs. Other borrowing costs are expensed as incurred.
 
FD-16

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 3 -  Significant Accounting Policies (cont’d)

G.
Provisions

A provision is recognized if, as a result of a past event, the Company 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. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The carrying amount of the provision is adjusted each period to reflect the time that has passed and is recognized as a financing expense.

Provision for dismantling and restoration – The Company recognized a provision for removal and restoration costs regarding its commitment under long-term lease on which the power plant is located. Changes to this provision arising from changes of the interest rate are added to or deducted against the fixed asset.

H.            Indemnification Asset

The Company recognized an indemnification asset if it is certain that the indemnification does not exceed the amount of the provision.

I.
Revenues

The Company recognizes a revenue when it is probable that the economic benefits will flow to the Company and the revenue can be measured reliably.

Revenues are measured at the fair value of the amounts received and/or the amounts the Company is entitled to receive in respect of revenues from sale of electricity net of discounts and credits.

The company’s revenues mainly include revenues from selling electricity to end customers and to the IEC and from providing availability to the system manager.

J.
Taxes on Income

Income tax expense is comprised of deferred taxes.
 
Deferred taxes are recognized with respect to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The measurement of deferred taxes reflects the tax consequences that will result from the way the Company expects, at the end of the reporting period, to restore or remove the carrying amounts of assets and liabilities. Deferred tax is measured at the tax rates expected to apply to the 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 tax loss carry forwards, tax benefits and deductible temporary differences, when it is probable that future taxable income against which can be utilized. Deferred tax assets are reviewed at each reporting date and if it is not expected that the related tax benefit will be exercised, they are reduced.
 
The Company offsets assets and deferred tax liability if there is a legally enforceable right to offset the assets and current tax liabilities, and they relate to the same taxable income levied by the same tax authority.

FD-17

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 3 -  Significant Accounting Policies (cont’d)

K.            Defined contribution plans
 
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and has no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognized as an expense in profit or loss in the periods during which related services are rendered by employees.
 
L.            Leased assets

Leases, where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased assets are measured and a liability is recognized at an amount equal to the lower of its fair value and the present value of the minimum lease payments.

Other leases are classified as operating leases, and the leased assets are not recognized on the Company’s statement of financial position.

Lease fees paid 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.

M.
Financing income and expenses

Financing income and expenses include changes in the fair value of financial assets presented at fair value through the profit and loss and derivative hedging instruments which are recognized in profit and loss. Interest income is recognized as it accrues using the effective interest method. Financing expenses include interest expenses on bank loans, bank commissions and change in time value regarding provisions.

In the statements of cash flows, interest received is presented as part of cash flows from investing activities. Interest paid is presented as part of cash flows from financing activities.
 
Foreign currency gains and losses on financial assets and financial liabilities are reported on a net basis as either financing income or financing expenses depending on whether foreign currency movements are in a net gain or net loss position.

N.            Transactions with controlling shareholder

Assets and liabilities included in a transaction with a controlling shareholder are measured at fair value on the date of the transaction. As the transaction is on the equity level, the Company includes the difference between the fair value and the consideration from the transaction in its equity.

FD-18

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 3 -  Significant Accounting Policies (cont’d)
 
O.
New standards and interpretations not yet adopted

(1)
IFRS 9 (2014), Financial Instruments
 
IFRS 9 (2014) replaces the current guidance in IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 (2014) includes revised guidance on the classification and measurement of financial instruments, a new ‘expected credit loss’ model for calculating impairment for most financial assets, and new guidance and requirements with respect to hedge accounting.
 
IFRS 9 (2014) is effective for annual periods beginning on or after January 1, 2018 with early adoption being permitted.
 
The Company has examined the effects of applying IFRS 9 (2014), and in its opinion the effect on the financial statements will be immaterial.

(2)
IFRS 15, Revenue from Contracts with Customers

IFRS 15 replaces the current guidance regarding recognition of revenues and presents a new model for recognizing revenue from contracts with customers. IFRS 15 provides two approaches for recognizing revenue: at a point in time or over time. The model includes five steps for analyzing transactions so as to determine when to recognize revenue and at what amount. Furthermore, IFRS 15 provides new and more extensive disclosure requirements than those that exist under current guidance.
 
IFRS 15 is applicable for annual periods beginning on or after January 1, 2018 and earlier application is permitted. The Company has examined the effects of applying IFRS 15, and in its opinion the effect on the financial statements will be immaterial.

(3)
IFRS 16, Leases

IFRS 16 replaces IAS 17, Leases and its related interpretations. The standard's instructions annul the existing requirement from lessees to classify leases as operating or finance leases. Instead of this, for lessees, the new standard presents a unified model for the accounting treatment of all leases according to which the lessee has to recognize an asset and liability in respect of the lease in its financial statements.
 
IFRS 16 is applicable for annual periods as of January 1, 2019, with the possibility of early adoption, so long as the company has also early adopted IFRS 15, Revenue.
 
The Company is examining the effects of IFRS 16 on the financial statements with no plans for early adoption.
 
The Company intends to adopt the Standard as of January 1, 2019 in the cumulative effect approach, while adjusting the retained earnings as at January 1, 2019.
 
Material changes and expected effects:
It should be noted that the information regarding the effects of the initial implementation of the Standard constitutes an initial assessment of the Company and it is possible that an update will be required in respect of the issues identified below with progress in examining the implications of implementing the Standard. In addition, the company examines the expected effects of the implementation of the Standard, the company is unable at this stage to reliably estimate the quantitative impact on its financial statements.

The Company estimates that it is expected to have a material effect on the financial statements on the following matters:
·
An increase in non-current assets and in financial liabilities.
·
An increase in operating profit and financing expenses.
·
Increase in operating cash flow and decrease in cash flow from financing activities.
 
FD-19

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 4 -  Cash and Cash Equivalents

   
December 31
 
   
2017
   
2016
 
   
NIS thousands
   
NIS thousands
 
Balance in banks
   
6
     
6
 
Deposits on demand (*)
   
184,176
     
80,961
 
                 
     
184,182
     
80,967
 

(*)          Deposits on demand bear interest rate of 0.1%.
 
Note 5 -  Other Receivable

   
December 31
 
   
2017
   
2016
 
   
NIS thousands
   
NIS thousands
 
Government institutions
   
6,656
     
262
 
Receivables for warranty and insurance
   
55,921
     
25,751
 
Advances to suppliers and prepaid expenses
   
20,712
     
11,161
 
                 
     
83,289
     
37,174
 

FD-20

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 6 - Fixed Assets

A.            Composition

         
Furniture
   
Leasehold
       
   
Power plant
   
and equipment
   
improvements
   
Total
 
   
NIS thousands
 
Cost
                       
Balance as at January 1, 2016
   
4,739,535
     
2,393
     
736
     
4,742,664
 
Additions
   
16,882
     
103
     
-
     
16,985
 
Disposals
   
(26,174
)
   
-
     
-
     
(26,174
)
Balance as at December 31, 2016
   
4,730,243
     
2,496
     
736
     
4,733,475
 
Additions
   
128,513
     
42
     
-
     
128,555
 
Disposals
   
(59,190
)
   
-
     
-
     
(59,190
)
Balance as at December 31, 2017
   
4,799,566
     
2,538
     
736
     
4,802,840
 
                                 
Depreciation
                               
Balance as at January 1, 2016
   
354,555
     
1,020
     
118
     
355,693
 
Additions
   
233,050
     
682
     
73
     
233,805
 
Disposals
   
(26,174
)
   
-
     
-
     
(26,174
)
Balance as at December 31, 2016
   
561,431
     
1,702
     
191
     
563,324
 
Additions
   
251,294
     
347
     
74
     
251,715
 
Disposals
   
(21,207
)
   
-
     
-
     
(21,207
)
Balance as at December 31, 2017
   
791,518
     
2,049
     
265
     
793,832
 
Carrying amounts
                               
As at January 1, 2016
   
4,384,980
     
1,373
     
618
     
4,386,971
 
As at December 31, 2016
   
4,168,812
     
794
     
545
     
4,170,151
 
As at December 31, 2017
   
4,008,048
     
489
     
471
     
4,009,008
 

B.            Security

See Note 11C regarding a lien on the Company’s assets that serves as security for the liabilities of the Company and the shareholders.

C.            Acquisition of fixed assets on credit
 
In 2017 the company purchased fixed assets with credit in the amount of NIS 10 million. In addition, the company paid NIS 3 million for fixed assets purchased with credit in previous years (In 2016 the company paid NIS 8 million for fixed assets purchased with credit in previous years).
 
D.            Provision for restoration and dismantling

Changes in the time value of the provision on the books are recognized within financing expenses.


FD-21

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 7 -  Loans from Banks

Presented hereunder are contractual terms of the bank loans of the company and its carrying amounts. For further information regarding the company’s exposure to interest rate risks and liquidity risks see Note 14 – financial instruments.

Details regarding interest rates and linkage*
 
             
Carrying amount as at December 31
 
Currency and
                   
linkage base
   
Effective interest
   
2017
   
2016
 
     
%
   
NIS thousands
   
NIS thousands
 
Loans from banks
CPI-linked
     
5.58%-5.77
%
   
3,391,692
     
3,565,221
 
Less current maturities (including interest as at December 31)
NIS
             
(203,819
)
   
(197,389
)
                             
                 
3,187,873
     
3,367,832
 

*   See also Note 11A(1) regarding credit terms and financial covenants.

Note 8 -  Other Payables
 
   
December 31
 
   
2017
   
2016
 
   
NIS thousands
   
NIS thousands
 
Governmental institutions
   
-
     
72
 
Accrued expenses (*)
   
4,555
     
5,790
 
Other payables
   
1,094
     
3,290
 
                 
     
5,649
     
9,152
 
                 
(*)          Including other payables due to related and interested parties
   
680
     
4,140
 

Note 9 -  Loans from Related Parties
 
   
December 31
 
   
2017
   
2016
 
   
NIS thousands
   
NIS thousands
 
Shareholders (1)
           
Eilat-Ashkelon Infrastructure Services Ltd. (2)
   
74,011
     
85,680
 
Zorlu Enerji Elektrik Uretim A.S. (2)
   
46,176
     
59,344
 
U. Dori Energy Infrastructure Ltd. (2)
   
36,809
     
42,663
 
Edelcom Ltd. (2)
   
38,232
     
43,951
 
     
195,228
     
231,638
 
Less current maturities (2)
   
(140,464
)
   
(80,000
)
                 
     
54,764
     
151,638
 
 
FD-22

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 9 - Loans from Related Parties (cont’d)
 
1.
In accordance with the agreement regarding the subordinated shareholders’ loans, the loans bear interest at the rate of 10% and are linked to the CPI. As at December 31, 2017, the amount of loans received including accrued interest is NIS 1,168 million, of which an amount of NIS 642 million was converted to equity during 2011-2013. The remaining balance is expected to be repaid in the future subject to compliance with financial covenants as specified in the financing agreements. See Note 11A(1)(a).
 
2.
According to the financing agreements, two years after the date of commercial operation, and subject to the Company’s compliance with financial covenants and other commitments as specified in the agreement, it will be possible to repay shareholders’ loans. During 2017 the company repaid amount of NIS 50 million, NIS 11 million is repayment of interest and linkage differentials and the remaining balance of NIS 39 million is principle repayment. During 2016 the Company repaid amount of NIS 346 million out of approved amount of NIS 350 million and the remaining balance was repaid during 2017 (out of the approved amount NIS 204 million is repayment of interest and linkage differentials and the remaining balance of NIS 146 million is principle repayment). The Company expects to comply with the financial covenants and commitments provided in the financing agreements, and accordingly, after the report date, on January 7, 2018, the company repaid a shareholders’ loans in the amount of NIS 80 million and expect to repay an additional shareholders loan in the amount of NIS 60 million. Considering the above, the Company classified NIS 140 million as current maturities in the financial statements as at December 31, 2017
 
Note 10 - Income Tax

A.            Details regarding the tax environment of the Company

(1)
Presented hereunder are the tax rates relevant to the Company in the years 2015-2018:
2015 – 26.5%
2016 – 25%
2017 – 24%
2018 – 23%

On January 4, 2016 the Knesset plenum passed the Law for the Amendment of the Income Tax Ordinance (Amendment 216) - 2016, by which, inter alia, the corporate tax rate would be reduced by 1.5% to a rate of 25% as from January 1, 2016.
 
As a result of the reduction in the tax rate to 25%, the deferred tax balances as at January 4, 2016 were calculated according to the new tax rate specified in the Law for the Amendment of the Income Tax Ordinance, at the tax rate expected to apply on the date of reversal.
 
Furthermore, on December 22, 2016 the Knesset plenum passed the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018) – 2016, by which, inter alia, the corporate tax rate would be reduced from 25% to 23% in two steps. The first step will be to a rate of 24% as from January 2017 and the second step will be to a rate of 23% as from January 2018.
 
As a result of the reduction in the tax rate to 23% in two steps, the deferred tax balances as at December 31, 2017 were calculated according to the new tax rate specified in the Economic Efficiency Law (Legislative Amendments for Achieving Budget Objectives in the Years 2017 and 2018), at the tax rate expected to apply on the date of reversal.
 
Deferred taxes for the reported periods are calculated according to the tax rates presented above.
 
FD-23


Note 10 - Income Tax (cont’d)

A.
Details regarding the tax environment of the Company (cont’d)

(2)
On January 12, 2012 Amendment 188 to the Income Tax Ordinance (New Version) – 1961 (hereinafter – “the Ordinance”) was published in the Official Gazette. The amendment amended Section 87A to the Ordinance, and provides a temporary order whereby Accounting Standard No. 29 “Adoption of International Financial Reporting Standards (IFRS)” that was issued by the Israel Accounting Standards Board shall not apply when determining the taxable income for the tax years 2010-2011 even if this standard was applied when preparing the financial statements (hereinafter – “the Temporary Order”). On July 31, 2014 Amendment 202 to the Ordinance was issued, by which the Temporary Order was extended to the 2012 and 2013 tax years.
 
(3)
The Company is an “Industrial Company” as defined in the Encouragement of Industry (Taxes) 1969 and accordingly is entitled to certain benefits including accelerated depreciation.
 
B.            Composition of income tax expense
 
   
Year ended
   
Year ended
   
Year ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2017
   
2016
   
2015
 
   
NIS thousands
   
NIS thousands
   
NIS thousands
 
                   
Deferred tax expense
   
23,681
     
4,736
     
37,607
 

FD-24

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 10 - Income Tax (cont’d)

C.
Deferred tax liabilities and assets recognized

The deferred taxes are calculated using the tax rate expected to apply when reversed as described above. Changes in the tax liabilities and assets are attributed to the following items:

         
Provisions
             
         
and other
             
       
timing
   
Tax losses
       
 
Fixed assets
   
differences
   
carried forward
   
Total
 
 
NIS thousands
 
Balance of deferred tax asset (liability) as at January 1, 2016
   
(251,417
)
   
 13,452
     
177,084
     
(60,881
)
                                 
Changes recognized in the profit and loss statements
   
(146,564
)
   
(3,096
)
   
135,768
     
(13,890
)
impact of decrease in tax rate
   
44,931
     
(1,525
)
   
(34,250
)
   
9,154
 
     
(101,633
)
   
(4,621
)
   
101,518
     
(4,736
)
Balance of deferred tax asset (liability) as at December 31, 2016
   
(353,050
)
   
8,830
     
278,602
     
(65,617
)
                                 
Changes recognized in the profit and loss statements
   
(135,287
)
   
574
     
110,002
     
(24,711
)
Impact of decrease in tax rate
   
5,636
     
(23
)
   
(4,583
)
   
1,030
 
     
(129,651
)
   
551
     
105,419
     
(23,681
)
Balance of deferred tax asset (liability) as at December 31, 2017
   
(482,701
)
   
9,382
     
384,021
     
(89,298
)

FD-25

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
Note 10 - Income Tax (cont’d)

D.            Reconciliation between the theoretical tax on the pre-tax profit and the tax expense.

   
Year ended
   
Year ended
   
Year ended
 
   
December 31,
   
December 31,
   
December 31,
 
   
2017
   
2016
   
2015
 
   
NIS thousands
   
NIS thousands
   
NIS thousands
 
                         
Profit before taxes on income
   
102,922
     
55,942
     
140,422
 
                         
Statutory tax rate of the company
   
24
%
   
25
%
   
26.5
%
                         
Tax calculated according to the Company’s statutory tax rate
   
24,701
     
13,985
     
37,212
 
                         
Impact of decrease in tax rate
   
(1,030
)
   
(9,154
)
   
-
 
                         
Non-deductible expenses and others
   
10
     
(95
)
   
395
 
                         
Income tax expense
   
23,681
     
4,736
     
37,607
 
 
E.
Tax losses carried forward

The total amount of forward losses from business as at December 31, 2017 is about NIS 1,669 million (as of December 31 2016 – NIS 1,217 million). The Company has recorded deferred taxes in respect of these losses because it expects the exploitation against taxable incomes will be created in the foreseeable future.

F.
Tax assessments

The Company has not yet received tax assessments since its establishment. Although, the company has final tax assessments up to and including the year ended December 31, 2013  (subject to the limitations prescribed by law).

FD-26

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees

A.
Commitments

1.
Financing agreements

On November 29, 2010 (hereinafter: “the Financial Closing Date”), the Company signed a financing agreement and several related agreements with Bank Hapoalim Ltd. as the financial organizer, Clal Credit and Financing Ltd. from the Clal Insurance Enterprises Holdings Ltd. Group as the organizer of the institutional consortium as well as the bank and institutional investors consortium (hereinafter: “the Financing Parties”) to provide financing in the amount of up to NIS 3,850 million linked to CPI, though not more than 80% of the costs of the construction of a power plant for generating electricity in Ashkelon, subject to the terms of the provisions of the financing agreement and the related agreements (hereinafter: “the Financing Agreements”). Likewise, bank guarantees will be provided to third parties according to the project documents. The financing agreement includes representations and warranties concerning the Company and the project where breaching these representations and warranties is likely to lead, inter alia, to the demand for immediate repayment of the outstanding credit and/or a breach of its obligations and/or to the cancellation of the license.
Accordingly, the Company is required to comply the following debt coverage:

1.
The Company is required to maintain a debt coverage ratio of 1.10:1 over two consecutive calculation periods, and a debt coverage ratio of 1.05:1 over the entire calculation period.

2.
The Company is required to maintain a minimal loan life coverage ratio of 1.10:1.

As at December 31, 2017, in accordance with the expected Company cash flow, the Company is in compliance with the above coverage ratios.

On July 2016 the Company withdraw its final drawdown from the credit facilities of the project amount of NIS 243 million in order to finance construction costs and reserve accounts that were included under the credit facility of the project. Following the final drawdown the remaining facility was cancelled.

Within the framework of the Financing Agreements, and at the same time as the signing of the financing agreement, other agreements related to the financing agreement were signed including the following:

a.
Capital Injection Agreement and a Subordinated Loan Agreement

These agreements include the obligation of the shareholders towards the Company and the Financing Parties, to inject, separately, and each according to their relative share, from time to time and in parallel with each request to draw from the financing facilities, a total of up to approximately 20% cash (hereinafter: ”the Shareholders’ Investment”), and this either for the issuance of shares or as shareholders loans, which in any case, will be subordinate to and pledged to the obligations of the Company towards the Financing Parties, according to the terms of the agreements. According to the Capital Infusion Agreement and as security for the commitment of the shareholders to provide their relative portion of the Shareholders’ Investment, the shareholders provided on the same date, cash and bank guarantees in the amount of their obligation to inject the Shareholders Investment; this, less any equity provided to the Company prior to that date.
FD-27

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.            Commitments (cont’d)

1.
Financing agreements (cont’d)

a.
Capital Injection Agreement and a Subordinated Loan Agreement (cont’d)

The Capital Infusion Agreement includes representations and obligations with regards to the shareholders and the project where their breach is likely to lead, inter alia, to the demand for immediate repayment of the outstanding credit and/or a breach of the Company’s obligations and/or to the cancellation of the license. According to the Subordinated Loan Agreement, any shareholder loan will be linked to the CPI and bear interest at an annual rate of 10%. In addition, it was agreed that any distribution to the shareholders, including loans repayment, will be subject to the compliance of the company with the financial covenants as described in the financial agreement (see Note 9). During the period of this statement there was no change in the relative holdings of the shareholders. Within the framework of the financing agreement, there is a lien on all of the issued share capital of the Company in favor of Poalim Trust Services Ltd., as the trustee of the Financing Parties.

b.
Bank accounts agreement

The agreement sets the establishment of the project bank accounts and sets out the distribution of the cash flows among the accounts. In addition, the agreement sets out terms and procedures for executing deposits and withdrawals from each account, determines the minimum balances in each of the capital reserves, and sets out the priorities with respect to payments between the accounts and other terms regarding the management of the accounts, including the issue of transfers between accounts.

The main reserves are a debt service reserve, a heavy maintenance reserve, a reserve for third party guarantees and a distribution reserve.

As at December 31, 2017, the Company deposited in the debt service reserve an amount of NIS 200 million, an amount of NIS 60 million in the major maintenance fund and an amount of NIS 130 million in the distribution fund, an amount of NIS 15 million in the fines and regulation fund. These amounts are classified in the statement of financial position as “long‑term restricted deposits”.

2.             Agreement to lease land under operating lease

In 2008 an agreement was signed between the Company and EAIS for the lease of 74.5 dunams of land for the power plant, for a period of 24 years and 11 months from the date of its operation. Also, in 2008, the Company participated in this payment and transferred to EAIS the amount of NIS 3,047 thousand in respect of its relative share in the lease period which were paid by EAIS to ILA. This amount is classified as “long‑term prepaid expenses” and is amortized over the lease period.

During 2010 the Company signed on addendum to the land sub-lease agreement. According to the addendum to the agreement, in exchange for the lease of the lands designated for the project, an annual payment of NIS 3,705 thousand will be paid for a period of 25 years. See also Note 16.
 
FD-28

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.
Commitments (cont’d)

3.
The EPC Agreement

An agreement between the Company and Wood Group Gas Turbines Services Ltd. (hereinafter – the Construction Contractor) for the planning, purchasing and construction of the power plant at a set and predetermined price of $877,150 thousand.

On December 6, 2013 the Company received from the Construction Contractor notification of the estimated costs of a number of the project’s change orders that it alleges were caused as a result of it carrying out the Company’s request to make changes in the project’s planning. In view of the counter allegations that were raised by the Company and were discussed in negotiations with the Contractor, the accounts were settled and in December 2014 the parties reached a compromise by which the Contractor would receive an additional final payment for settling all the Company’s liabilities towards the Contractor (hereinafter: the additional payment).

As at December 31, 2015, the Company paid the construction contractor all of the contractual liabilities, including the additional payment.

4.            O&M Agreement

An agreement between the Company and the Eilat-Ashkelon Power Plant Services Company - EAPPS (“the Maintenance Contractor”) for the operation and maintenance of the power plant for a predetermined monthly payment defined in the Agreement for a period of 24 years and 11 months commencing the date of receipt of the Permanent Production certificate. The Maintenance Contractor will transfer some of the larger maintenance projects to a subcontractor (Zolru O&M) under a separate agreement, however it will retain full responsibility towards the Company with respect to all of its obligations under the agreement.

During 2013, the Maintenance Contractor entered into a sub-contracting agreement with EZOM Ltd, a related party held by related companies. The maintenance and operation will be managed by EZOM Ltd. The maintenance contractor will retain full responsibility regarding his obligations toward the Company.
 
During August 2016 and in accordance with price review mechanism existing in the O&M agreement there was an update for the prices of some of the items included in the O&M agreement. The update was applied retroactively from the beginning of 2016.
 
In December 2017 a direct agreement was signed between the company and EZOM which replaced EAPPS. The agreement terms are the same as the agreement with EAPPS.
 
FD-29

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.
Commitments (cont’d)

5.
Gas Pipeline Agreement
 
On November 25, 2010, the Company signed a standard agreement approved by the Gas Authority according to which in accordance the government company Israel Natural Gas Lines Ltd. (“INGL”) connected the power plant to the natural gas pipeline. Dorad paid connection fees in the amount of NIS 47 million which was recognized as prepaid expenses classified under non-current assets and will be amortized over the operating period. In addition, according to the agreement, Dorad is obligated to pay INGL a payment in respect of the pipe capacity commencing on the date that the connection is completed. In addition, Dorad is obligated to pay a variable payment for the gas flowing through the pipeline.
 
6.
Petrol Storage agreement

On June 17, 2013 the company entered into an agreement with Eilat Ashklon Pipeline Company Ltd (hereinafter: “EAPC”) regarding storage of petrol in their plant.
 
According to the agreement, the company will store petrol at the necessary quantities for backup of reserve fuel as required by Electricity Market Regulations and also for the Company’s current needs, estimating at 14,000 square meters.
 
EAPC are the Controller - of Eilat Ashkelon Infrastructure Services Ltd. who are an interested party and related party, see Note 16.

7.
Agreement to purchase natural gas

On October 15, 2012 the Company entered into an agreement with the partners in the Tamar license (“Tamar”) by which, subject to the fulfillment of suspense conditions provided in the agreement, the Company will purchase natural gas from Tamar for operating the power plant it is constructing in Ashkelon.
 
The Company is committed to purchase gas from the flow date, as it defined in the agreement. As at December 31, 2014 the amount of the obligation is estimated at NIS 100,800 million. This obligation was not recognized in the Company’s books. Nevertheless, according to the agreement, if the Company did not use the minimum quantity of gas as committed, it shall be entitled to consume this quantity every year during the three following years and this is in addition to the minimum quantity of gas the company is committed to.
 
On April 30, 2015 the Company received a notification from Tamar whereby the “interim period”, as defined in the agreement, began on May 5, 2015. Pursuant to the agreement, during the interim period supply of the gas to the Company will be subject to the quantities of the natural gas that will be available to Tamar at that time after supply of natural gas to other customers of Tamar with which contracts were signed for supply of natural gas prior to the signing of the agreement with the Company. The interim period will end when Tamar completes, should it ultimately complete, a project for expansion of the supply capacity of a system for treatment and transfer of natural gas from the Tamar reserve, upon existence of the preconditions detailed in the agreement. In the Company’s estimation, the impact of Tamar’s notification on its activities is not expected to be significant.
 
On November 26, 2016 the company received notification from Tamar whereby the interim period end in September 30, 2020.
 

FD-30

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.
Commitments (cont’d)

8.
Agreement to sell electricity

As at the reporting date the Company has agreements to sell electricity at a scope of 95% of the production capacity of the power station. The electricity delivery agreements are, mainly, based on a reduced rate compared to the rate applicable to electricity consumers in the general market, as defined by the Authority for Public Services-Electricity.

9.
Property tax assessments in respect of the station

In April 2014, the Company received a property tax assessment from Ashkelon Municipality for the years 2012-2014 in the amount of NIS 17,633 thousand including interest and linkage in the amount of NIS 2,487 thousand. It should be noted that the main assessments amount and interest expenses and linkage, refer to the period in which the Company had not yet received a completion of building permit. After negotiations for a compromise between the Company and the Municipality of Ashkelon, the parties reached a compromise whereby in exchange for the payment agreed upon in the compromise, all of the Municipality’s charges will be discharged for periods up to the end of 2015, and the final annual amount was also determined for the period up to and including 2025. The compromise amount was paid during the final quarter of 2015.

FD-31

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.            Commitments (cont’d)
 
10.          Claims by Dori Energy, Zorlu and Edelcom

a)
Petition to Approve a Derivative Claim filed by Dori Energy and Hemi Raphael

On April 12, 2015 the Company received two letters from representatives of Dori Energy (hereinafter- "The Representatives") that were addressed to the Company’s Chairman of the Board. As part of these letters, the company is requested to take legal action in order to reveal the engagement between one of the shareholders of the Company, Zorlu Enerji Elektrik Uretim A.S., and the construction contractor of the Dorad power station, Wood Group (EPC contractor). The aforesaid letters are advance notices to the Company regarding the intention of the representatives to file a derivative claim insofar as their requests are not accepted.
 
After examining all the facts relevant to the aforesaid letters and consulting with legal counsel, the Company replied to the representatives on May 26, 2015 and rejected their request to take legal action. On July 16, 2015 the representatives filed with the court a motion to approve a derivative claim in the name of the Company against Zorlu (including the representatives of Zorlu on the Company’s Board of Directors) and the EPC contractor. In the framework of the motion to which also the derivative claim was attached, the representatives demanded that documents and information regarding the engagement between Zorlu and the EPC contractor be disclosed and handed over.
 
On November 15, 2015 the Company filed its reply in which it reiterated its position that the motion for approval of the derivative claim should be denied.
 
On January 12, 2016 the representatives filed a motion to amend the motion for approval of a derivative claim (hereinafter: ‘the motion for amendment”). The motion for amendment raises new allegations by which Zorlu together with Ori Edelsberg (a director in Dorad) and companies under his control supposedly conspired to deceive the Company by “inflating” the cost of the EPC agreement for the purpose of splitting between them the profits from such “inflation”. In addition, in the framework of the motion for amendment it is requested to add Mr. Ori Edelsberg and companies under his control as defendants to the amended motion for approval of a derivative claim and, also, to remove from the claim the representatives of Zorlu on the Company's Board of Directors. It is noted that the motion for approval of a derivative claim as well as the amended motion for approval of a derivative claim that was attached to the motion for amendment, do not include any monetary relief rather request that the court give the representatives permission to split the relief so that they may file a separate monetary claim in the future on behalf of Dorad with respect to Dorad’s financial damages, after they receive all the documents and information they are requesting.
 
FD-32

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

 
Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.            Commitments (cont’d)

10.          Claims by Dori Energy, Zorlu and Edelcom (cont’d)

a)
Petition to Approve a Derivative Claim filed by Dori Energy and Hemi Raphael (cont’d)
 
It is noted that the motion for approval of a derivative claim as well as the amended motion for approval of a derivative claim that was attached to the motion for amendment, do not include any monetary relief rather request that the court give the representatives permission to split the relief so that they may file a separate monetary claim in the future on behalf of Dorad with respect to Dorad’s financial damages, after they receive all the documents and information they are requesting.
 
On April 20, 2016 a discussion in court focused on the application to amend the derivative claim was held in court. At the end of the discussion, the court accepted the application to amend the derivative claim in a matter that the amended derivative claim is on the agenda.
 
At the end of July 2016, the respondents filed their responses to the court regarding the amended application of the derivative claim. In accordance with their responses, they deny the Allegations included in the application and according to them they did not do any injustice to the company and therefore the company has no cause of action against them.
 
On December 27, 2016, following a negotiation between the parties, an arbitration agreement has been signed between the parties which in accordance, it was agreed to transfer the proceeding to arbitration and on January 3, 2017 The Representatives filed a motion to cancel the proceedings which was approved by the Supreme Court on January 8, 2017.
 
On April 30, 2017, Zorlu sent a third party notice to the Company, Dori Energy and Dori Group, according to which, to the extent Dori Energy claim is accepted, it will comply with all the rights it had in connection with its right to construct the power plant, including the right to the profits it was supposed to receive under this construction in such a manner that the third parties They would owe Zorlu.

In the Company's estimation, based on the opinion of its legal counsel, at this stage cannot intelligently assess the results of the arbitration proceedings.
 
b)
A letter from Zorlu
 
On December 27, 2015 the Company received a letter from the representatives of Zorlu that is addressed to the Company’s board of directors (hereinafter: “Zorlu’s letter”). Most of Zorlu’s letter refers to the execution of civil engineering work in a project of Dorad by the Amos Luzon  group Ltd. and U. Dori Construction Ltd. (hereinafter and together: “Dori”) whose services were retained by the EPC contractor. According the letter of Zorlu, Dori did not fulfill its commitments regarding execution of the civil engineering work in Dorad’s project which resulted in delays in construction of the power station. Zorlu is requesting that the Company exercise its legal rights against Dori and the representatives, and insofar as its requests do not receive a positive reply, Zorlu plans to file a motion for approval of a derivative claim.
 
On February 3, 2016 the Company replied to Zorlu’s letter and advised that it requires an additional period beyond that prescribed in the law to examine the matters referred to in Zorlu’s letter. Zorlu replied that it agrees to the Company’s request for additional time.
 
This application was added to the arbitration process. See section (d) below.
 
FD-33

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.
Commitments (cont’d)

10.          Claims by Dori Energy, Zorlu and Edelcom (cont’d)

c)
Petition to Approve a Derivative Claim filed by Edelcom
 
On July 25, 2016, Edelcom submitted an application for approval of a derivative claim on behalf of the Company against Amos Luzon group, currently set Amos Luzon Development and Energy Ltd. (hereinafter: the Dori Group”), Dori Energy and Ellomay Clean Energy Ltd. (hereinafter: “Ellomay”). Edelcom’s claim is about an entrepreneurship agreement that was signed on November 25, 2010 between the Company and Dori Group, pursuant to which in consideration for the management and entrepreneurship services of the power station project the Dori Group received from the Company payment in the amount of NIS 49.4 million and it undertook to continue holding, directly or indirectly, at least 10% of the Company’s share capital for a period of 12 months from the date the power station is handed over to the Company by the construction contractor (hereinafter and respectively: “the entrepreneurship agreement” and “the entrepreneurship fee”). According to Edelcom, Dori Group’s holdings in the Company are through Dori Energy, which on November 25, 2010 entered into a triangular investment agreement between Dori Energy, Ellomay and the Dori Group (hereinafter: “the Dori Energy investment agreement”).In addition, according to Edelcom, when the Dori Energy investment agreement was signed Ellomay received management rights in Dori Energy that are equal to those of the Dori Group while at the same time Ellomay formally held only 40% of the issued share capital of Dori Energy and therefore it was expected that the management rights granted to it would correspond to its holding rate in Dori Energy at that time. In view of the aforesaid, according to Edelcom the Dori Group holdings have fallen below 10% and it has therefore breached its commitment according to the entrepreneurship agreement.
 
On January 4 2017, following a signed arbitration agreement between the parties, a request was filed to the court by the parties for cancellation of the claim and the claim will be heard within the arbitration proceedings. In the Company's estimation, based on the opinion of its legal counsel, at this stage cannot intelligently assess the results of the arbitration proceedings.

d)
Statement of Claim filed by Edelcom
 
On July 27, 2016, Edelcom submitted a lawsuit against Dori Group, Dori Energy and Ellumei ("Defendants"), in respect of the transfer of company’s shares in contrary to the provisions of the shareholders' agreement signed between the Company and its shareholders on November 25, 2010 ("Shareholders Agreement"). According to Edelcom, the defendants interpreted unlawfully and in bad faith the provisions of the shareholders' agreement while contracted in investment agreement followed by an allocation of shares made in contrary to the provisions of the shareholders agreement.
 
Edelcom claims for a various of declaratory remedies and an operative remedy which will enforce of the sanctions set forth in the shareholders agreement, an order directed to the company and ordered her to withhold any payment due to Dori Energy by virtue of its status as a shareholder in the company, including dividends or repayment of shareholders' loan, and an order addressed to the company and ordered her to suspend Mr. Menachem Refael role as a director of the Company from Dori energy and prohibit Mr. Rephael be present or vote in meetings of the Board.
 
The parties agreed that this claim will be transferred to the arbitration proceedings. In the Company's estimation, based on the opinion of its legal counsel, at this stage cannot intelligently assess the results of the arbitration proceedings.
 
FD-34

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.
Commitments (cont’d)

11.          Faults in production units
 
In 2016 damages were discovered in two of the 12 gas turbines of the Company's power plant in a manner that these turbines were temporarily got out of service. In 2017 damages were discovered in additional three gas turbines. Until the turbines are repaired, the Company leases, as necessary, alternative turbines in a manner that to the Company's estimation, the operating activity is not expected to be a materially affected. In 2016 the Company recognized an indemnification property in the amount of USD 4.4 million regarding the damaged turbines and in 2017 the Company recognized an additional indemnification property in the amount of USD 20.9 million. In 2017 the company received from the insurance company an amount of USD 12.2 million regarding these indemnification properties. The Company estimates that it has an adequate insurance coverage for the consequences of the mentioned damages and it is expected that the company will receive the full balance amount of USD 13.1 million.
 
After the date of the report, in January 2018, the Company received an additional USD 5.4 million from the insurance company in respect of the indemnification property.

12.          Petition of the Forum of Private Electricity Producers
 
On June 21, 2017, the Forum of Private Electricity Producers from Natural Gas and the State of Israel petitioned the High Court of Justice in two separate petitions against the National Labor Court, inter alia, in light of the approval by the National Labor Court allows the workers committee of IEC to take organizational measures including actions affecting the private electricity producers. On the same day the Supreme Court decided that the petitions would be heard on a consolidated basis. On July 10, 2017, the Company filed its response, in support of the Forum's petition, and joined its arguments and the requested remedies.
 
On July 20, 2017, a hearing was held in the Supreme Court, in which the workers committee of IEC announced that it was suspending the sanctions unilaterally for a period of 60 days in which it requested that the State and the Israel Electric Company conduct negotiations and consultations with it.
 
On January 4, 2018, the State submitted a notice stating that the state consultation with the IEC and the workers representatives regarding the reform in the outline of the IEC, and regarding the guidelines of the planned outline of workers’ rights, has progressed significantly but has not yet reached collective agreements. Therefore, the State requested that the dates for the filing of arguments in the case be extended for one month. On January 17, 2008 it was determined that a hearing on the petitions would be held on March 12, 2018.
 
At this stage of the proceedings, in which no hearing has yet been held against the conditional orders, it is not possible to assess the chances of the petitions.
 
13.          Memorandum of Understanding for a possible acquisition of natural gas
 
On October 30, 2017, the Company signed an agreement with Energian Israel Ltd. regarding the possible acquisition of natural gas, in a cumulative volume of approximately 6 BCM over a period of 14 years, from the Karish and Tanin reserves held by them and whose completion is expected to be by the end of 2020. The agreement is subject to certain suspending conditions which as of the report date, have not yet been fulfilled.
 
FD-35

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)

A.
Commitments (cont’d)
 
14.          PUA decision on regulating the use of fuels in the electricity sector
 
On June 12, 2017, the Electricity Authority reached a decision on regulating the use of fuels in the electricity sector, and within the framework of this decision it was determined that the Electricity Authority will recognize the full price of natural gas for private electricity producers with interruptible gas agreements with the gas supplier retroactively from March 2016. This decision updates the Electricity Authority's previous decision from November 5, 2012, in which the Electricity Authority decided that it would recognize only 90% of the price of natural gas for private electricity producers who purchase natural gas from the gas supplier under an interruptible agreement.
 
In addition, in the framework of that decision, an arrangement was set for the use of fuels for the implementation of a general loading plan whereby the system administrator should semi-annually plan the total quantity of diesel and liquid natural gas required for the electricity sector so that liquid natural gas (if required) will be allocated to the producer with the most expensive gas agreement, and diesel will be allocated according to the relative share of that facility out of the total production of dual-fuel facilities in the electricity sector in the previous calendar year. The aforesaid regulation also defines the required availability of producers for the use of diesel fuel and states that the sale of gas by the IEC to gas consumers outside of the electricity sector will not take place at times when there is a shortage of gas in the electricity sector. The Company estimates that no more extensive operation of diesel fuel is expected than in previous periods
 
15.          Promote turbines maintenance

In 2017, the Company decided to Promote the maintenance of the gas turbines, some of which were carried out in 2017 and some were advanced and will be carried out during 2018. Accordingly, the Company updated the useful life of the fixed assets in respect of the maintenance components of these turbines and recorded additional depreciation expenses in the accounting books Of NIS 20.1 million.
 
B.            Bank guarantees
 
As at the date of the report, the Company provided, through its shareholders, based on their proportionate holdings in the Company and pursuant by the financing agreements bank guarantees to INGL, the Public Utilities Authority (“PUA”), for purposes of compliance with the terms of the licenses granted to the Company, and in favor of the System Management Unit in the Electric Company, as required under the Company’s agreement with the Electric Company, and in accordance with the guidelines published by the PUA. The total amount of the guarantees given, as detailed above, is approximately NIS 160 million. Subsequent to the date of the report, on January 2017, there was an update to the amount of the guarantee provided to system manager whereas the total updated amount is NIS 163 million. In January 2018, the amount of the guarantee provided in favor of the system management unit was updated the guarantees amount to NIS 172 million. The total guarantee in favor of the system management unit is affected by sales to customers during the months of July and August.
 
FD-36

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 11 - Contingent Liabilities, Commitments and Guarantees (cont’d)
 
C.            Liens
 
During the month of January 2011, the Company placed liens on its assets as collateral for the obligations of the Company and its shareholders as follows:

1.
Fixed lien – A fixed lien and first priority mortgage and an assignment by way of lien on all the assets and rights with respect to the power plant in Ashkelon (“the Project”) and all as detailed in the mortgage deed and its appendices.

2.
Floating lien - An unlimited first priority floating lien on all of the rights and assets of the borrower, any object and/or equipment and any other tangible or intangible asset of any type as specified in the financing agreements.

3.
Lien on account of guarantees to third parties – a fixed lien, mortgage and assignment by way of a first priority lien, and a second priority lien on all assets and rights with respect to the account of guarantees including the funds, the securities, the documents and the notes of others of any type that will be deposited in the account from time to time, as detailed in the mortgage deed and all of its appendices. In addition, during 2015, deposited NIS 70 million to guarantees to third parties account. During 2016, following the cancellation of the guarantee the lien was removed and the deposit was released.

4.
Lien on the land of the project – A fixed lien and first priority mortgage and an assignment by way of lien on all of the rights, existing and future, of the pledger with no exceptions, per the development agreement that was signed between the pledger and the Israel Lands Administration (“ILA”) with respect to the land.
 
Note 12 - Share Capital

Composition of the share capital in nominal values:
 
    Number of shares  
   
December 31
 
         
Issued and
   
Issued and
 
   
Authorized
   
paid-in
   
paid-in
 
         
2017
   
2016
 
                   
Ordinary shares of NIS 1 par value
   
500,000
     
10,640
     
10,640
 

See Note 11A(1)(a) regarding an issuance of shares against a conversion of loans into equity.
 

FD-37

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 13 - General and Administrative Expenses
 
   
For the year ended December 31
 
   
2017
   
2016
   
2015
 
   
NIS thousands
 
       
Wages and related expenses
   
9,562
     
9,407
     
13,347
 
Rental and office maintenance
   
2,805
     
2,233
     
2,553
 
Profession services
   
5,800
     
6,592
     
8,927
 
Depreciation
   
420
     
755
     
712
 
Other
   
125
     
191
     
142
 
                         
     
18,712
     
19,178
     
25,681
 

Note 14 - Financing Income and Expenses, Net

   
Year ended December 31
 
   
2017
   
2016
   
2015
 
   
NIS thousands
 
       
Financing income
                 
Net foreign exchange gain
   
-
     
3,944
     
124
 
Other
   
3,195
     
3,081
     
352
 
                         
     
3,195
     
7,025
     
476
 
                         
Financing expenses                        
Revaluation of derivatives
   
11,788
     
2,663
     
835
 
Interest expense on bank loans
   
200,883
     
186,139
     
168,887
 
Interest expense on loans from related parties
   
18,676
     
35,267
     
40,791
 
Net foreign exchange loss
   
12,452
     
-
     
-
 
Bank commissions
   
785
     
1,455
     
2,858
 
Other financing expenses
   
538
     
530
     
3,437
 
                         
     
245,122
     
226,054
     
216,808
 
                         
Net financing expenses
   
241,927
     
219,029
     
216,332
 

For further information regarding financial expenses due to transactions with related parties, see Note 15 - Related and Interested Parties.
 
FD-38

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 15 - Financial Instruments

A.
Overview

The Company 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 Company’s exposure to each of the above risks, and the Company’s objectives, policies and processes for measuring and managing risk.

In order to manage these risks and as described hereunder, the Company executes transactions in derivative financial instruments. Presented hereunder is the composition of the derivatives:

   
December 31
 
   
2017
   
2016
 
   
NIS thousands
 
       
Derivatives presented under current liability
           
Forward exchange contracts used for economic hedge
   
(1,191
)
   
-
 

B.
Risk management framework

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board has established the Financial Committee, which is responsible for defining a risk management policy. The committee reports regularly to the Board of Directors on its activities.

C.
Credit Risk

Credit Risk is a risk for a financial loss caused to the company if the counterparty of the financial instrument fails to meet his contractual obligations.

Cash and cash equivalents
As at December 31, 2017, the Company has cash and cash equivalents in the amount of NIS 184,182 thousand (December 31, 2016 - NIS 80,967 thousand). The Company’s cash and cash equivalents are deposited with a financial institution having a high credit rating (international rating scale).

Restricted deposits
As at December 31, 2017 the Company has deposits in the amount of NIS 405,306 thousand that are restricted according to the financing agreements (December 31, 2016 – NIS 411,574 thousand). The Company’s restricted deposits are held with a financial institution having a high credit rating (international rating scale).
 
 

FD-39

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017

Note 15 - Financial Instruments (cont’d)

C.
Credit Risk (cont’d)

Trade and other receivables (Current assets)
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The Company has established a credit policy under which each new customer is analyzed individually for credit worthiness. The Company’s review includes external ratings, when available.

As at December 31, 2017 no impairment was recorded.

Bodies that provided financing for the project’s construction
Credit risk from bodies that provided financing to the Company for the project’s construction in respect of the financing agreements as described in Note 11A(1). These bodies have a high credit rating.
 
D.
Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company’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 Company’s reputation.

The Company has contractual commitments due to financing agreements, O&M agreement, the Gas Purchase agreement and the Gas Pipeline agreement. For further information see Note 11.
 
FD-40

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 15 - Financial Instruments (cont’d)

D.
Liquidity risk (cont’d)

The following are the contractual maturities of financial liabilities at undiscounted amounts and based on the rates at the reporting date, including estimated interest payments.

   
December 31, 2017
 
   
Carrying
   
Contractual
   
6 months
                     
More than
 
   
amount
   
cash flows
   
or less
   
6-12 months
   
1-2 years
   
2-5 years
   
5 years
 
   
NIS thousands
 
Non-derivative financial liabilities
                                         
                                           
Trade payables
   
415,798
     
415,798
     
415,798
     
-
     
-
     
-
     
-
 
                                                         
Other payables
   
2,264
     
2,264
     
2,264
     
-
     
-
     
-
     
-
 
                                                         
Loans from banks
   
3,391,692
     
4,690,040
     
189,589
     
176,932
     
371,251
     
1,126,690
     
2,825,578
 
                                                         
Loans from related parties
   
195,228
     
225,275
     
140,464
     
-
     
84,811
     
-
     
-
 
                                                         
     
4,004,982
     
5,333,377
     
748,115
     
176,932
     
456,062
     
1,126,690
     
2,825,578
 
 
FD-41

Dorad Energy Ltd.

Notes to the Financial Statements as at December 31, 2017
 
Note 15 - Financial Instruments (cont’d)

D.
Liquidity risk (cont’d)

   
December 31, 2016
 
   
Carrying
   
Contractual
   
6 months
                     
More than
 
   
amount
   
cash flows
   
or less
   
6-12 months
   
1-2 years
   
2-5 years
   
5 years
 
   
NIS thousands
 
Non-derivative financial liabilities
                                         
                                           
Trade payables
   
293,613
     
293,613
     
293,613
     
-
     
-
     
-
     
-
 
                                                         
Other payables
   
6,410
     
6,410
     
6,410
     
-
     
-
     
-
     
-
 
                                                         
Loans from banks
   
3,565,221
     
5,054,106
     
188,000
     
176,066
     
366,521
     
1,106,546
     
3,216,973
 
                                                         
Loans from related parties
   
231,638
     
278,237
     
50,000
     
30,000
     
80,000
     
118,237
     
-