project barak teaser · participation in the sale process are invited to submit their details to...

July 2018 - Confidential 1

Project BarakTeaser

July 2018

PLEASE NOTE: This information may include "Inside Information" in accordance with Israel's Securities Law, 1968, and making use of this information may constitute a criminal offence pursuant to that Law. Therefor Please treat this information as CONFIDENTIAL


Executive Summary

• In the last decade, substantial natural gas reserves were discovered in Israel’s economic water. Combined with government policy, this paved the way for substantial activity of independent power producers (‘IPPs’). IPPs accounted for approximately 26% of Israel’s actual electricity generation in 2017, and are expected to account for 31.6% of electricity generation by the end of 2018 (excluding renewables).

• Following these developments and the recent structural reform in both the electricity sector and Israel Electric Corporation Ltd. (‘IEC’), IEC will be selling Alon Tavor power generation site (the ‘Site’).

• Relevant entities interested in the sale of the power generation site and in receiving additional information regarding the conditions of participation in the sale process are invited to submit their details to IEC by way of e-mail to: [email protected]

220

363

2 Gas Turbines E CC Class F

Installed Capacity By Turbine Type (MW) Site Actual Generation (GWh)

710

2 Gas Turbines E

2016 2017

CC Class F

1,713

1,947

• The site’s capacity is approximately 583MW, composed of a combined cycle unit (units 3-4, unit 3 being a gas turbine and unit 4 a steam turbine) with capacity of 363MW, and two diesel oil gas turbines (units 1 and 2) with capacity of 110MW each, operated as a “Peaker”

• Units 1 and 2 began commercial operation in December 1991 and February 1992 respectively. Units 3 and 4 began commercial operation in May 2004 and December 2008 respectively.

• plans for approving construction of additional generation units (in the Site’s area or in the additional area transferred to the State of Israel) – still under review


Section 1


Generation Capacity Development in Israel

Generation Capacity and Demand (MW)

Source: IEC’s financial statements, Electricity Sector Status Report for 2016

11,297 11,649 11,664 12,769 12,759 13,248 13,483 13,617 13,617 13,617 13,617

71174 228

278 518516

734

1,9562,980 3,060 3,199

359

596

754 917 1,021

10,070 10,200 10,280

11,53011,110

11,89011,640

11,335

12,905

12,62312,741

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

RenewableEnergy IPPs

IPPs (Gas Fired)Installed Capacity

IEC InstalledCapacity

National PeakDemand (MWh)

Trends

▪ The demand for electricity in Israel is growing at a fast and steady pace, from approximately 4,000 MW in 1990 to 12,741 in 2017

▪ Demand is driven by population growth, the increase in electricity use per household and growth of the business sector

70% 65% 65%59% 59% 61%

52% 49% 45%36% 32%

20% 26%33%

39% 35%

17%44% 50% 53%

62%63%

10% 9% 2% 2% 6% 22% 4% 1% 2% 2% 5%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Others

Natural Gas

Coal

Electricity Generation Fuel Mix Development

The temporarily decrease in natural gas usage for electricity generation In 2012 was due to multiple outages of the gas supply from EMG.


Israel Electric Corp. at a Glance

Source: IEC’s financial statements for Dec 2017 and Q1 20181. As of December 20172. 51 substations are privately owned3. A State of Israel guarantee for the existing securities of IEC are negligible compared to the company’s overall financial debt

Denotes USD figures USD/NIS exchange rate of 3.51 as of March 29, 2018

• Established in 1923, 95 years of operation, the Israel Electric Corporation Limited (“IEC”) is the sole vertically integrated electric utility company in Israel and generates, transmits, distributes and supplies the majority of the electricity used in Israel

• IEC is 99.846% owned by the State of Israel

• IEC had total assets of NIS 87.5 billion and 11,893 employees as of March 31, 2018

• As of December 31, 2017, IEC serves 2.8 million residential, commercial, agricultural and industrial customers throughout the State of Israel including East Jerusalem and the Palestinian Authority

• Total electricity sales of 11,905 GWh for the period ended March 31, 2018

IEC Power Grid

Gas turbine (internal combustion) / Combined-cycle (internal combustion and steam)

Steam (dual purpose)

400 kV lines

161 kV lines

13.6 GWInstalled capacity

17Power stations

Generation (1)

5,569 kmHigh and ultra-high voltage

transmission grid

211(2)

Switching stations &sub-stations

Transmission (1)

63,179 kmMedium and low

voltage lines

2.8 mnCustomers

Distribution (1)

3M-2018 Key Financials Credit Ratings as of March 31, 2018

IEC GlobalBaa2 / BBB(Moody’s / S&P)(Stable / Stable)

State of IsraelA1 / A+ / A+

(Moody’s / S&P / Fitch)(Stable / Positive /

Stable)

IEC Local (3)

Aa2.il / ilAA+(Midroog / Maalot S&P)

(Stable / Stable)

Revenues

NIS 5.5 billion

$1.6

EBITDA

NIS 1.7 billion

$0.5

Profit fromcurrent operations

NIS 0.5 billion

$0.1


Electricity Sector - Overview

Transmission

Source: IEC’s financial statements 31/12/2017

DistributionGeneration

total installed capacity - 17,837 MW

total energy generated – 68,309 TWh

11 switching

stations

5,569 Km high

and ultra-high

voltage lines

200

Substations

63,179 km

medium and low

voltage lines

2.8 million

customers

2017

MW % TWh %

IEC 13,617 76% 48,788 71%

IPPs (Gas fired) 3,199 18% 17,735 26%

Renewables 1,021 6% 1,786 3%

Total 17,837 100% 68,309 100%

Energy GeneratedInstalled Capacity

IPP’s


Energy Sector in Israel – Future Outlook

Source: BDO - Israel Natural Gas Demand Forecast 2017-2040, Ministry of Energy, Delek drilling financial reports for 31/12/2017, Electricity Authority’s Roadmap for the Development of the Generation Segment, June 2018, Review of Natural Gas Market in Israel 2017, April 2018 - Natural Gas Authority

Natural Gas Sector Recent Developments

▪ Until the early 2000s, natural gas use in Israel was minimal. Since then, substantial natural gas reserves have been discovered in Israel’s economic water (‘Yam Tetis’ ‘Tamar’, ‘Karish and Tanin’ and ‘Leviathan’). Israel’s gas reserves are estimated at 980 BCM.

▪ During 2017, the growing demand for natural gas consumption continued, reaching a total of 10.4 BCM - an increase of 8.3% from 2016. The trend is expected to continue in 2018.

▪ The 2017 growth in natural gas consumption was led by the electricity sector which consumed 8.5 BCM which accounted for 63% (42.8 TWh) of electricity generation. Natural gas consumption for electricity generation is expected to reach 12.4 BCM in 2030 which will account for 70% (67 TWh) of expected generation.

▪ The rapid development in natural gas supply enables IPPs to compete in the electricity generation segment by investing in more efficient generation technologies such as combined cycle power plants.

▪ According to The Electricity Authority, the future electricity generation for the Israeli economy is expected to reach 97 TWh in 2030, with a peak demand expected to reach 19,622 MW in 2030.

▪ According to The Electricity Authority, in order to support the electricity consumption forecasts, the installed capacity in 2030 should reach 23,350 MW.

Electricity Consumption and Generation Forecast

Electricity Sector Natural Gas Consumption Forecast (BCM)

8.5 8.3 8.3 8.3 8.6

10.310.7 11 11.3 11.5 11.7 12 12.2 12.4

2017A 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

68 71 72 74 76 78 81 83 85 87 90 92 95 97

13,735

14,072

14,420

14,802

15,197

15,609

16,072

16,524

16,966

17,497

17,999

18,512

19,051

19,622

2017A 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Total production (TWh) National Peak demand (MW)


Regulatory Environment

*with the exception of a production facility of less than 16MW for self-useSource: Ministry of Energy, ‘Natural gas sector developments during 2016’, http://energy.gov.il/Subjects/NG/Documents/Publication/NGPublication2016.pdf, EA reports

The Electricity Sector Law 1996

▪ The Electricity Sector Law 1996 (‘ESL’) and the regulations promulgated thereunder provide the legal and regulatory framework for both public and private activities in the electricity sector. Any entity interested in engaging in any activity in the Electricity Sector must obtain a license under the ESL.*

▪ It is the government's declared policy to encourage the entry of private producers and suppliers into the Electricity Sector and the entire regulatory scheme is constantly being adapted with the view of enhancing the fulfillment of this policy.

Ministry of Energy

▪ The Ministry of Energy is responsible for the energy economies and national resources of the State of Israel including: electricity, fuel, LP gas, natural gas, etc. The Ministry of Energy supervises the public and private entities involved in these fields and acts to ensure an adequate solution to the changing energy and infrastructure needs of the national economy, while regulating the market and protecting both the consumer and the environment.

The Electricity Authority

▪ In 2016, the Public Utility Authority of Electricity and the Electricity Administration were consolidated to form theElectricity Authority (‘EA’). One of the purposes of the EA is to create a balance between the maintenance of a fair rate framework to be imposed upon electricity consumers while simultaneously supporting private entrepreneurs in the field and promoting electricity production in a competitive and equitable manner.

▪ The EA has been granted the authority to set electricity tariffs for all segments of the market, to conduct cost control measures, to set tariff arrangements and to issue operation licenses to entrepreneurs and IPPs. In addition to these tasks, the EA is also in charged of determining standards for the quality of the service to which electricity consumers are entitled, monitoring the quality of the service provided to electricity consumers, securing reliable electricity supply, formulating development policies for the generation, transmission and distribution segments and handling legislation for the execution of electricity and electrical safety work.

Existing IPP’s Tariff arrangements

▪ In accordance with the Ministry of Energy policy to incentivize the private sector to join the electricity generation sector, tariff arrangements which include availability, as well as financing supporting arrangements, were provided to the IPPs in order to mitigate certain risks, inter alia, force majeure.

http://energy.gov.il/Subjects/NG/Documents/Publication/NGPublication2016.pdf


IEC Structural Reform Highlights

Source: IEC’s financial statements, financial media, Israeli government’s decision: https://www.gov.il/he/Departments/policies/dec3859_2018

Electricity Generation Segment

By 2023, 5 gas fired generation sites with total installed capacity of 4,500MW (including the Site) will be sold. In addition, IEC will build and operate two new gas-fired combined cycle turbines in ‘Orot Rabin’ site with a total installed capacity of 1,200MW.

Transmission & Distribution Segment

IEC will retain a natural monopoly in the transmission and distribution segments while the supply segment will be incrementally opened to competition.

System Operator ActivityThe system operator and planer (part of IEC today) will be transferred to a new government-owned corporation and will be totally separate from IEC.

Operational Efficiency Measures

The reform includes IEC retrenching approximately 1,800 permanent employees and implementing a more flexible working relationship between IEC’s management and the workers’ labor union.

▪ As part of a comprehensive structural reforms in the Israeli Electricity Sector, On May 10th 2018 IEC’s Board of Directors approved a layout for a vast reform in IEC’s activity.

TotalEshkolOld Hagit SitesReadingRamat HovavAlon TavorSite

20232022202120202019Expected Sale Year

4,491MW1,683MW660MW428MW1,137MW583MWInstalled Capacity

Electricity Generation Sites Sale Planned Schedule

https://www.gov.il/he/Departments/policies/dec3859_2018


Section 2


The Alon Tavor Site Location

Alon Tavor

Industrial

Park


The Alon Tavor Site Location – Cont.

▪ In addition, Alon Tavor’s drainage reservoir and water treatment center, a part of the cooling system of the CCGT, will be sold as part of the site.

Area not to be sold (Transmission facility)

Area under assets settlement with the state (the ‘Additional Area’)*

Site border

19,700 Sqm

To be

transferred

to the StateAlon Tavor

drainage pool

Alon

Tavor Site

99,700 Sqm

22,500 Sqm

93,700 Sqm

CCGT F

GT

(plans for approving construction of additional generation units –still under review)

*The possibility for selling the Additional Area as part of the Site’s sale process is still under review


Installed

Capcity (MW)

Year of

Inception

Gas turbine (1) 110 1991

Gas turbine (1) 110 1992

CC turbine F-Class (3) 363 2008

Total 583

The Alon Tavor Site - Overview

Generation Units Installed Capacity (Total 583 MW)

220

363

2 Gas Turbines E CC Class F

Actual Generation (GWh)

710

2 Gas Turbines E

2016 2017

CC Class F

1,713

1,947


Section 3


Key Terms and Prerequisites1

Key General TermsKey Prerequisites

• The assets are being sold for the sole purpose of generating electricity, as permitted under a new electricity generation license to be granted to the buyer by the EA, subject to compliance with the conditions required under the relevant regulations and the Electricity Sector Law, and the criteria of the EA and subject to the buyer obtaining all required approvals for the purchase of the assets and their operation.

• The assets are being sold AS IS, WHERE IS and WITH ALL FAULTS. No representations or warranties will be made by IEC regarding the assets except as expressly set forth in the final sale agreement.

• The operation and maintenance of the assets after the execution of the final sale agreement, will be at the sole responsibility of the buyer.

• The site will be sold without a GSPA (Gas Supply Purchase Agreement).

• The Site is operated by 40-502 employees that will be “lent” to the Buyer by IEC for a period of 5 years after the completion of the sale process. The buyer will bear all employment costs regarding the employees for the above period.

• Buyer must have a strong financial position and the financial capability of operating the assets as required by the Electricity Sector Law regulation and EA criteria.

• Buyer must have a proven experience operating gas powered power plants as required by the Electricity Sector Law regulation and EA criteria.

• Buyer must meet all other terms and criteria as will be defined by the EA in the new electricity generation license to be granted to buyer.

• The transaction will be subject to approval by the Anti-Trust Authority and other regulatory approvals.

• The transaction will be conducted by IEC and will be subject to the Israeli Tender Law and regulations.

• Buyer will have to secure additional permits/approvals inter alia, Israel Land Authority approval, environmental permits, business licensing etc.

1. Terms and prerequisites presented in this document are not final. Final transaction terms and prerequisites are under formulation2. Detailed information regarding the exact number of employees to be “lent” by IEC to Buyer will be provided in the process documents


Site Sale Process – Key Milestones

TeaserA teaser for the sale process sent to a broad base of potential participants for the purpose of initiatingthe process

PQ / Non-Binding Offers Submission of indicative, non-binding offers by participants

ClosingExecuting all transaction documents, transferring the responsibility on all operation & maintenance ofthe Site to the buyer, including finalizing all legal and regulatory issues

/20187

9/2018-1/2019

Binding Offers

3-4 Months

Signing

PQ / Non-Binding Offers Evaluation Process

Following the receipt and evaluation of the non-binding offers and participants and the tentativeevaluation by respective regulators, Selected participants will be invited to participate in Phase II of thesale process – the submission of binding offers

2-3/2019

4-6/2019

Phase I

Phase II

Preferred bidder is to be declared shortly after submission, subject to an additional competitive biddingprocess or “Best and Final” stage. SPA to be signed following final negotiations

Selected participants will gain access to a VDR, and will be given the opportunity to conduct further duediligence after which binding offers will be submitted

*The above schedule and process are tentative and subject to approvals and other developments

As part of the sale process, tariff arrangements for the Site’s post-sale operation will be determined and published


Disclaimer

➢ IEC shall be under no obligation to issue a procurement procedure in connection with the sale of Alon Tavor site, or any other site, whether pursuant to this Teaser or otherwise.

➢ IEC shall be under no obligation to enter into any transaction with any party whomsoever who responds to or participates in this Teaser, whether in connection with the sale of Alon Tavor site, or otherwise.

➢ IEC shall be entitled to use the information obtained from the process as well as any data, solution, process, technique or suggestion contained in any of the responses or documents/response material submitted to IEC in relation thereto. IEC shall be permitted to use such information in order to facilitate and progress the sale process and/or in order to secure any permits and approvals which may be required during the process

➢ A response to the Teaser shall not bestow upon any person or entity responding thereto any advantage in any procurement procedure, if such procedure should be issued at all, and IEC shall not be obliged to include any respondent to this Teaser in any procurement process.

➢ Any exceptions, changes or additions to these above instructions (whether contained in any response to the Teaser or otherwise) shall be devoid of validity and legal effect and shall not obligate IEC.

➢ The schedule presented in the Teaser is preliminary , non-binding, and is both subject to any change and the granting of appropriate permissions by the regulator. IEC makes no representations or warranties with regard to any of the information contained therein and accordingly, shall assume no risk or responsibility for any damages which any third party may incur as a result of the information contained herein.

➢ The stages of the procedure are subject to change at the discretion of IEC as well as in accordance with the requirements of the competent authorities, should the circumstances dictate.

➢ IEC does not undertake to contact any of the entities which express interest in the procurement process, nor will it be obliged to respond to details addressed to the IEC following the publication of this Teaser.

➢ PLEASE NOTE: This information may include "Inside Information" in accordance with Israel's Securities Law, 1968, and making use of this information may constitute a criminal offence pursuant to that Law. Therefor Please treat this information as CONFIDENTIAL


Contact Details

The dedicated mail address for the project:[email protected]

Amir Livne, Head of strategy and restructure process, VPIsrael Electric Co.Phone: +972-76-8630003 Fax: +972-72-3459367

Myriam Guez, CEOGoren Capital GroupTel: +972- 3- 6938000Fax: +972-3-6914000


Section 4


The Israeli Economy at a Glance – Appendix A

Source: The Central Bureau of Statistics, Bank of Israel.1. Denotes USD figures USD/NIS exchange rate of 3.51 as of March 29, 20182. Credit rating refers to long-term foreign currency debt only.3. The Israeli Ministry of Finance and Bank of Israel.

Key Figures

0

1

2

3

2005 2007 2009 2011 2013 2015 2017

Moody's S&P Fitch

Nov 2016

Fitch upgrade

Israel to A+

Nov 2007

S&P upgrade

Israel to A

Apr 2008

Moody’s upgrade

Israel to A1

Sep 2011

S&P upgrade

Israel to A+

Feb 2008

Fitch upgrade

Israel to A

Baa1 / BBB+

A3 / A-

A2 / A

A1 / A+

Aa3 / AA-

68.567.2

66.164.0

62.461.1

50

55

60

65

70

75

80

2012 2013 2014 2015 2016 2017

(% of GDP)

Area 22,072 km2

Population (March 2018) 8.8 million

GDP (2017)1 NIS 1.24 trillion

GDP per Capita (2017) 1 NIS 140,705

Avg. GDP Growth (2011-2017) 3.3%

Unemployment (March 2018) 3.6%

Foreign Currency LT Debt Ratings

(Moody’s / S&P / Fitch) (1)A1 / A+ / A+

1.6% 1.8%

-0.2%-1.0%

-0.2%

0.4%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2012 2013 2014 2015 2016 2017

(YoY Inflation %)

1%-3%

Government

Inflation Target

1.7%

Average inflation in

the last decade

$353 bn

$40,087

Israel Rating History(2)

Inflation EnvironmentIsrael Public Debt to GDP(3)