Energix Renewable Energies LTD אנרג'יקס אנרגיות מתחדשות בע"מ דוח תקופתי לשנת 4102

Transcription

1 Energix Renewable Energies LTD אנרג'יקס אנרגיות מתחדשות בע"מ Financial Statements Report דוח תקופתי לשנת 4102

2 Chapter A Convenience Translation of report originally issued in Hebrew

3 Chapter A A description of the business affairs of the entity A description of the general development of the business affairs of the Company 1. Company activity and a description of the development of its business affairs Energix Renewable Energies Ltd. 1 was incorporated on December 7, 2006 as a private company, limited by shares. In May 2011, the company was converted into a public company. As of December 31, 2013 (hereinafter the reporting date or the date of the report ) and as of the date of approval of the financial statements, the Company is a subsidiary under the control of Alony Hetz Properties and Investments Ltd., also a public company (hereinafter Alony Hetz ). As of the reporting date, the Company, through itself and through wholly-owned or jointlyowned subsidiaries and partnerships (hereinafter jointly, the Company or the Group ), is engaged in the field of renewable energy and focuses mainly on the following two operating segments: 1.1 Production of electricity using photovoltaic technology (hereinafter the Photovoltaic Segment ) The Company is engaged in the initiation, development, planning, construction, management and operation of photovoltaic systems owned by the Company and the sale of electivity produced by these systems. At present, the Company wholly owns thirty small systems and two mid-sized systems, and jointly owns four systems under the joint control of the Company (50%). The total output of these systems, connected to the electrical grid is 6MWp, of which the Company's share amounts to 4.6MWp. The electricity produced by the systems is sold to the Israel Electric Corporation (hereinafter IEC ). In addition, the Company owns a large system being constructed in Neot Hovav, with a capacity of 37.5MWp and a number of systems in various stages of initiation. As of the date of approval of the financial statements, the Company is active in this field solely in Israel and is concurrently assessing the feasibility of investing in the photovoltaic field in additional markets. For details of the activity of the Company in the photovoltaic field, see section 5.10 below. 1.2 Production of electricity using wind turbines (hereinafter the Wind Energy Segment ) The Company is taking steps to develop and initiate projects in the wind energy segment in Israel and in Poland, either wholly-owned endeavors or jointly together with partners, commencing with the initial stages of the project. The Company has agreements with third parties pertaining to transactions involving the establishment and cooperation on projects in the wind field in Israel and Poland at aggregate volumes of 400MW. All of the Company's projects in the wind segment are currently in the initiation and development stages. For details of the initiation activity of the Company in the wind field, see section 5.2 below. 1 The Company was incorporated in 2006 under the name Amot Mikbatzim Ltd., changed in 2009 to Amot Energy Ltd. and in 2011 to Energix Renewable Energies Ltd.

4 Upon the going into effect of the Securities Regulations (Periodic and Immediate Reports) (Amendment) 2014 (hereinafter the Regulations ) on March 10, 2014, we provide herein notification that the Company is considered a "small entity" as the term is defined in Regulation 5C of the Regulations. The Company decided not to implement the provisions of the Regulations in connection with The chapter on the description of the business affairs of the entity, involving a description of the Company, its development and its field of activity, also includes forward-looking information. Forward-looking information is uncertain information regarding the future, based on information that exists in the company as of the date of approval of the financial statements and includes estimates or intentions of the Company as of the reporting date. The actual results may be materially different than the estimated or implied results from this information.

5 2. Holding Structure The following is a chart of the major holdings of the Company as of the reporting date: * Including controlling shareholders in Alony Hetz. ** Some of the partnerships are in the process of being established.

6 3. Investments in the equity of the Company and transactions in shares Investments made in the equity of the entity in the past three years: Date Details Par value Proceeds in thousands Price per share May 2, 2011 Initial public offering 119,775, ,342(*) 1.22 April 4, 2013 Exercise of Series 1 options 31,349,860 47, (*) Net of issuance costs. During the reporting period, the Company issued a shelf prospectus under which the Company may recruit additional equity to finance its operations for a period of up to three years from the date of issuance of the prospectus Distribution of dividends Since the date on which the Company commenced its activity, it has not distributed dividends to its shareholders. The Company has no dividend distribution policy. 2 Regarding the third year subject to the Company's compliance with the requirements of the Israel Securities Authority.

7 Financial data pertaining to the activity of the Company The following is a tabulation of financial data pertaining to the activity of the Company (in NIS thousands) Revenues from the sale of electricity,89,8 784,4,8797 Other income 984, Total revenues 017,30 673,5 279,, Operating costs, net of depreciation and amortization 97880, 484,0 9898, Loss before finance, taxes, depreciation and amortization Provisions and losses (gains) on impairment of financial assets )27,,,( )3760,( )076,9( ) 998( 78,77 - Depreciation and amortization 8849,, Loss before finance and taxes )675,,( )017511( )376,5( Loss for the year ),898,( )9899,( )98908( Cash flows from current operations )998,99( )989,9(,99 Depreciated costs of connected systems 7089,, 7,80, Total assets 3197,,1 0627,51 0,,7,,6 For additional information on the statement of financial position (balance sheet) and results of operations of the Company, see Chapter C of the report the financial statements. At present, the Company has revenues only from the photovoltaic segment. The expenses reflect amounts relating to the photovoltaic and wind energy segments. For a breakdown by operating segment, see Note 19 of Chapter C of the report the financial statements. For quantity data on the existing systems, the Company's initiation activity and forecast estimates, see section 1 of Chapter B of the report the Report of the Board of Directors. 5. The photovoltaic segment and the wind energy segment 5.1 General the photovoltaic segment The Company is engaged in the sale of electricity produced by photovoltaic systems it owns in Israel, as well as in initiation, construction, management and operation of photovoltaic systems and facilities it owns for the production of electricity in Israel. The size of the systems is measured in peak kilowatt / megawatt units (MWp / KWp) (hereinafter the installed output ). According to data publicized by the Ministry of

8 Energy and Water 3, the average annual output produced from every 1KWp installed in Israel by a small photovoltaic system is estimated at 1,650KWh (kilowatt hour) a year and by a mid-sized photovoltaic system is estimated at 1,700KWh a year (as of the reporting date, the Company estimates that the cost involved in constructing a photovoltaic system (including all of its components) is approximately NIS 5 to 7 million per 1MWp, based on the type of equipment and the complexity of the project a General environment and the impact of external factors on the activity of the Company in the photovoltaic sector in Israel General: As part of the global trend of adopting a policy regarding the reduction of greenhouse gas emissions, many countries, including Israel, encourage investment in the construction of facilities to produce renewable energy-based electricity through government incentives to entrepreneurs. In 2010, the Ministry of Energy and Water publicized its policy regarding the achievement of government targets for the production of electricity in renewable energy-based facilities by 2020, whereby 10% of Israel's electricity needs in that year will be produced from renewable energy-based facilities. In recent years, there has been a significant decline in the prices of equipment of photovoltaic facilities, which has facilitated a gradual reduction in the incentives for initiators of electricity rates. As a result of these reductions, in the coming years, photovoltaic facilities can be expected to operate in a rate environment that reflects an ever-declining dependence on government incentives, until the economic break-even point is reached with regard to photovoltaic energy; A significant decrease in the prices of panels and in the cost of installing systems A lowering of rates by the Public Utilities Authority Electricity Maintenance of economic feasibility through adequate returns for entrepreneurs An increase in the market potential due to the approaching of grid parity During August 2013, the Israeli government approved the setting up of a ministerial committee for the promotion, development and implementation of renewable energies, which will act as the government's execution arm in implementing its decisions in the area of developing the renewable energy market in Israel. To the best of the Company's knowledge, the committee has been weighing the movement of caps between the various areas of renewable energy. In the opinion of the Company, in view of the aforementioned global trend, and in view of the regulatory arrangements in this matter, there exists a trend of increasing 3 "The policy of the Ministry of National Infrastructures (the name of which was changed to the Ministry of Energy and Water) to incorporate renewable energies in the Israeli electricity production framework", dated February 14, 2010.

9 demand for the production of electricity by renewable energy sources, including the services offered by the Company. Notwithstanding, by its very nature, there is no guarantee regarding the Company's growth potential and its competitive capabilities against its competition. In addition, the above estimate is forward-looking information that is not under the control of the Company. Raw materials and suppliers Photovoltaic systems are comprised of panels and converters, mechanical aluminum frames in which the panels are installed, cables, connectors and electrical cabinets. The Company's system at Neot Hovav also consists of a substation. The Company is meticulous about purchasing components for its photovoltaic systems from leading global suppliers with experience and good reputations in the photovoltaic sector. In the opinion of the Company, in view of the large quantity of companies around the world that manufacture the components used in the photovoltaic systems, with technical capabilities that are similar to the vendors from which the Company purchases these components, it has no dependency on any given vendor. Notwithstanding the above, in the Neot Hovav project, the Company elected to purchase panels using "thin film" technology which is unique to First Solar, Inc., known for the quality of its panels and for the service it renders to its customers. For more information on additional external factors that may have an impact on the activity of the Company, including the regulatory arrangements that apply to the market, see sections below. 5.1.b Company activity in the photovoltaic sector in Israel 5.1.b.1 The Neot Hovav Project Purchase transaction, costs and forecasted cash flows During the reporting period, the Company concluded its purchase of the photovoltaic project with an output of 37.5MWp at Neot Hovav. The consideration that the Company has to pay for all of the shares in the project company amounts to 7.5 million (NIS 35 million), approximately equivalent to the shareholders' equity of the project company. In addition, the Company undertook to pay to the entrepreneurs an additional consideration of NIS 25 million, in respect of services that they rendered to the project company. Proximate to the date of transfer of ownership over the project company, the entrepreneurs were paid an amount of 3.75 million (NIS 17.5 million). The balance of the consideration in respect of the shares and the additional amounts due to the entrepreneurs in respect of services that they rendered to the project company, in an amount of NIS 42.5 million (hereinafter the balance of the consideration ), will be paid to the entrepreneurs proximate to the receipt of the permanent license of the system (but no later than December 31, 2015). The Company furnished a loan to the entrepreneurs on account of the balance of the consideration, in an amount of NIS 21 million. The loan bears annual interest at a rate of 6%, linked to the Index (payable

10 quarterly), and it will be paid out of the balance of the consideration to the aforementioned payment. The total cost of the project to the Group in respect of the purchase, construction, financing costs, reserve funds and management and initiation fees is estimated at NIS 350 million, of which, during the reporting period, payments were made in connection with the purchase of the project and the development activity for purposes of advancing the project, in an amount of NIS 84 million. The forecasted flow of revenues is estimated at NIS 42 million per annum, and the forecasted operating expenses are estimated at NIS 5 6 million per annum. Construction of the Project: The project will be constructed by a dedicated EPC contractor (engineering, procurement and construction) (a German company, one of the leading firms in this sector) under a turnkey format and the Company is making preparations to render services to the EPC contractor through various contractors (including the Israel Electric Corporation), in connection with the construction of the substation that is required to operate and connect the project to the electric grid. As part of the above, the construction contractor undertakes full responsibility for the planning and setting up of the project, for the output of the facility and for its proper functioning for a three-year period following delivery of the system. In addition, the Company entered into an agreement with the construction contractor to render operating services to the system for a period of up to 20 years. Immediately after the signing of the construction and operating agreements, the contractor was given notice that the construction work at the site had commenced and such work actually commenced in January Project financing: For details regarding the financing of the project in an amount of up to 50 million, which is secured by the assets and revenues of the project (nonrecourse) and negotiations regarding refinancing during the period of operation, see section 16 below and Note 12A(4) of the consolidated financial statements of the Company. As of the date of approval of the financial statements, the project company has not yet tapped into the financing framework and to date, all of its investments have been financed by the Company. For additional information on the project, including in connection with property rights, see Note 12A(4) in Chapter C of this report the financial statements. 5.1.b.2 In addition to the large system under construction as described in 5.1.b.1, as of the date of approval of the statements, the Company is involved in the sale of electricity, produced by the small and mid-sized photovoltaic systems, with a total output of 6MWp (the share of the Company is 4.6MWp) and in the

11 Connected systems initiation of additional mid and large-sized systems in various stages of development. Please note that in view of the surplus of the conditional licenses that have been issued, versus the existing quotas that have not been exhausted, and in relation to the quota in Judea and Samaria, in view of the complexity of the regulatory and statutory processes versus the Civil Administration of Judea and Samaria, the Company cannot be sure that it will obtain conditional tariff approvals in respect of additional projects. 5.1.b.3 the following table summarizes all of the connected systems of the Company, under construction and under development: Number of systems Installed output Share of the Company in the system Representative annual revenue* (Company share, NIS'000) Actual revenue in 2013 (Company share, NIS'000) Cost (Company share, NIS'000) Small connected systems MWp 100% 1.5MEWP 4,600 4,769 22,218 Mid-sized connected systems 2 1.7MWp 100% 1.7MWp 4,300 4,214 23,542 Mid-sized connected systems 4 2.8MWp 50% 1.4MWp 3,400 1,196 15,433 Total connected systems 36 6MWp 4.6MWp 12,300 10,179 61,193 Systems under construction / development Large ground-mounted system Neot Hovav Mid-sized land system under development Mid-sized system under development Total systems under construction / development Total systems connected and under development No. of systems Installed output Share of the Company in the system Forecasted annual revenue (Company share, NIS'000) Status MWp 100% 37.5MWp 42,000 Construction phase in the field (commenced January MWp 50.1% 2.5MWp 2,500 Contingent license, waiting for tariff approval as part of regulation in Judea and Samaria 1 0.6MWp 50% 0.3MWp 290 Financial closing for project obtained Forecasted cost (Company share, NIS'000) 350,000 22,600 2, MWp 40.3MWp 44, , MWp 44.9MWp 57, ,793 * Representative annual revenue was calculated on the basis of the assumption that the annual output of electricity production is 1,650KWh per annum, per 1KWp in connection with a small system, 1,700 KWh per annum, per 1KWp for a mid-sized system and 1,750 KWh per annum, per 1KWp for the Neot Hovav system. 4 4 The calculation is based primarily on information publicized by the Ministry of Energy and Water in the "Policy of the Ministry of National Infrastructures to Integrate Renewable Energy in the Israeli Electricity Production Framework".

12 5.1.c The Activity of the Company in the photovoltaic sector abroad 5.2 Wind energy sector As of the date of this report, the Company has not been developing or been engaged in the sale of electricity generated through photovoltaic facilities abroad. However, it intends on assessing the initiation, construction and investment in such projects abroad, subject to economic feasibility and stability, feasibility to obtain financing and the existence of a reliable regulatory environment that supports investors. All of the information appearing in section 5.1 above, in connection with the business environment and future information in connection with systems that are currently in the process of initiation, various stages of construction or operation, including the Company's preparations in connection with the forecasted cost of construction or forecasted annual revenues is forward-looking information pursuant to article 32A of the Securities Law 1968, based on information currently in the possession of the Company (under the assumption that the systems that have not yet been completed will be completed, will be connected to the electrical grid at tariffs currently known to the Company as of today, and continuous and proper functioning of the systems pursuant to their installed output). Forward-looking information is a forecast, assumption, estimate or other information relating to a future event or matter, the fruition of which is not certain and is not solely under the control of the Company. 5.2.a General environment and the impact of external factors on the activity of the Company in the wind energy sector in Israel 5 The wind energy sector is the leading global sector in producing electricity through the use of renewable energy, with a global installed output of more than 300GW. In recent years, the global wind market has increased at an annual rate of 40GW. The dependency of renewable energies on government incentives, against the backdrop of the global financial crisis, has led many countries to reassess and change their policies regarding these incentives. The change in policy and in the incentive mechanisms has caused, in certain circumstances, a lack of stability and economic uncertainty for manufacturers of turbines, and entrepreneurs and investors in the wind sector. Notwithstanding, at present, there is an expansion of the global wind energy market. At present, a typical wind turbine has an output of 2-3MW, the diameter of its rotors ranges between meters and the height of its mast is between meters. For the most part, the type of turbine that will be installed at the site will be determined on the basis of the wind characteristics at the given site. Among the large turbine manufacturers can be found companies such as Siemens (Germany), GE (the U.S.), Vestas (Denmark), Gold Win (China) and Enercon (Germany). The major challenge facing the turbine manufacturers is the need to 5 Based on information publicized on the website.

13 increase the utilization of the turbine, so that the turbines produce more energy from the existing wind regime. Increasing the utilization of the turbine brings the costs of producing energy from wind closer to the economic breakeven point when compared to the cost of production from conventional sources, and allows manufacturers to expand their market share into areas in which government incentives are low or to sites at which the wind velocity is low. In order to properly operate a wind farm, the operator requires ongoing maintenance which, for the most part, is supplied by the manufacturer of the turbine as part of a long-term service and maintenance package. The manner in which a large wind turbine is operated and the major components thereof: Electricity production from wind energy is the result of kinetic energy that derives from the flow of air hitting the rotors of the turbine causing the rotation of the rotors. This rotating motion is converted into electrical energy through the use of an electric generator that is located at the top of the mast on which the turbine is placed. The stronger the velocity of the wind, the higher the output produced by the generator, up to a point at which the generator reaches the limit of its capacity. Since the wind direction changes frequently, based on the wind regime at the site, the turbine has sensors that turn the body of the turbine such that the rotors always face the direction of the wind. At a farm that has a number of turbines, the turbines are usually connected to one another through an underground cable which eventually is connected to the electrical grid. The following is a description of the major components of a large wind turbine:

14 A lack of regulatory clarity in Poland in connection with the regulation of wind energy In the past two years, the Polish regulator has been preparing a proposed amendment to the existing energy law by way of legislation dealing with renewable energy. During 2013, a number of drafts were issued that resulted in uncertainty in the market and in addition, the prices of green certificates and the price of electricity on the Polish exchange have dropped to a low point that has had a direct influence on the ability to finance wind projects using bank financing. 5.2.b For information pertaining to additional external factors that may have an impact on the activity of the Company, including regulatory arrangements applying to the market, see sections below. The activity of the Company in the wind energy sector in Israel The Company has been taking steps, by itself or with partners, to initiate and develop a number of projects for the production of electricity through the use of wind energy. As of the reporting date and the date of approval of the financial statements, all of the activity of the Company in the wind energy sector is in the initiation and development phases and the Company has been taking steps to achieve the necessary milestones for purposes of obtaining conditional licenses and advancing the necessary planning aspects for purposes of promoting the projects it desires to establish. Based on the data available to the Company at present, the Company estimates that the forecasted cost per 1MW installed in the wind project is between NIS 6 7 million. Accordingly, the Company's activity in the wind sector is equity-intensive activity and the construction of the systems is subject to the ability of the Company to obtain longterm external financing to construct each project. The financing is expected to be at a rate of 80% of the total cost of the project, in the form of project financing on a nonrecourse basis. 5.2.b.1 ARN Project For information pertaining to the signing of an agreement to invest in a private company that holds the rights to initiate and develop a project for the construction of a wind farm in the Golan Heights with an estimated output of 155MW, see Note 12B(1)a of Chapter C of the report the financial statements. Subsequent to the reporting date, the Company notified the project company of its intention to take steps to advance the milestones required to complete the transaction and, at the same time, it started making preparations to advance the ARN Project (ARN Hebrew acronym for Clean Wind Energy). As part of the above, the Company is conducting negotiations with various parties, including the Defense Ministry, in connection with possibilities for development of the project. At this stage, it is not possible to estimate the feasibility of the establishment of the ARN Project. 5.2.b.2 The following table summarizes the systems in which the Company is involved in Israel, in the initial initiation stages:

15 Projects under initiation No. of farms Total output Company share of farm Total expected investment in project (NIS'000) Total expected annual income * (NIS'000) Golan Heights 1 155MWp 75% 116MWp 1,000, ,900 Galilee 2 35MWp 100% 35MWp 250,000 35,500 Menashe Heights 1 35MWp 74% 25.9MWp 210,000 35,500 Kibbutzim (Lower Galilee) 3 70MWp 74% 51.8MWp 450,000 71, MWp 228.7MWp 1,910, ,900 * The expected annual income was calculated on the basis of a forecasted annual output of electricity production of 3,000KWh per annum, of 1KW installed for the projects to be constructed in the Golan Heights and 2,400KWh per annum, of 1KW installed for projects to be constructed in all other areas, and based on the existing rate in the arrangement of the Electricity Authority in an amount of NIS per KWh. For additional information on the systems the Company wants to advance, see Note 12C(1) of Chapter C of the report the financial statements. Please note that all the projects the Company is developing in Israel are in the initial initiation stages and are subject to feasibility studies, economic feasibility and completion of the regulatory process, which may change from time to time. Therefore, there is no certainty whatsoever that they will be actually constructed and/or connected to the electrical grid. Subject to the above, in connection with projects to be advanced by the Company and which will comply with the milestone of tariff approval, the Company estimates that these projects may come to a financial closing during the period c The activity of the Company in the wind sector in Poland The following table summarizes the systems in which the Company is involved in Poland, in the initiation stages: Projects under initiation No. of farms Total output Company share of farm Forecasted construction cost (NIS'000) Expected annual income (NIS'000) Poland 2 100MW 100% 100MW 750, ,000 As of the reporting date, the Company decided not to invest material amounts in advancing projects in Poland until it is certain of the regulatory and legal regulation that will apply to wind facilities in Poland. For additional information, see section 5.9.f below. For additional information pertaining to the systems in which the Company is involved in Poland and which are in the development stages, see Note 12C(2) of Chapter 3 of the report the financial statements. It is hereby clarified that anything appearing in section 5.2 above (including by way of referral to notes in the financial statements) in

16 relation to the business environment, to the completion of the licensing phases and to readiness to construct and/or to future information in connection with systems in the process of initiating construction phases, including the estimates of the Company in connection with the output of the systems and/or the forecasted annual income and the forecasted costs of construction, is forward-looking information in accordance with article 32A of the Securities Law 1968, based on information in the possession of the Company or its estimates as of the date of approval of the financial statements (under the assumption that systems that have not been completed will be completed and connected to the electrical grid at tariffs known to the Company as of today, and compliance with the expected output). Forward-looking information is a forecast, assumption, estimate or other information that relates to future events or matters, the realization of which is uncertain and which is not under the sole control of the Company. 5.3 Environmental quality The Company may be exposed to environmental quality concerns in the Neot Hovav facility being constructed on rehabilitated pools, on land that was polluted in the past. To the best of the knowledge of the Company, it is possible that there is pollution in the ground in the area (the existence of poisonous and hazardous wastes in the ground), poisonous gases that exit breather valves in the ground, air pollution in the area deriving from factories in the area and from chemical evaporation ponds located relatively close to the project site, as well as from pollutants from other land in the area, borne by the wind. The Company enforces high standards and work procedures with a goal of complying with environmental quality standards and preserving the health of the employees at the project site and taking all steps to prevent bad health and illnesses that may be caused to employees as a result of the danger of exposure to poisonous materials in the air. For information pertaining to consequences of the going into effect of the Electronic Waste Law, see section 18 below. 5.4 The global financial crisis In the opinion of Company Management, the retreat of global economic activity and the debt crisis in the Euro block are not expected to have a negative impact on the revenues of the Company from its activity in Israel, due to the fact that all of the revenues of the Company are from the sale of electricity to a single customer the Israel Electric Corporation. On the other hand, a retreat in global economic activity or a worsening of the Euroblock debt crisis may have a negative impact on the business environment in which the Company operates and on the feasibility and savings in investment in various projects, including and with an emphasis on the activity of the Company in Poland. For additional information, see Part B of Chapter B of the report the Report of the Board of Directors.

17 5.5 Changes in interest rates For information pertaining to changes in interest rates, see section 3.3 of Part B of the Board of Directors report and Note 21(3)b of Chapter C of the report the financial statements. 5.6 Changes in the volume of activity in the sector and its profitability During the reporting period, the increase in revenues from the sale of electricity during 2013 is attributed to the fact that in 2013, the Company generated revenues from 30 small systems and two mid-sized systems that worked at full production all year (while the mid-sized systems in 2012 were attached only during the fourth quarter of 2012 and, therefore, they did not work all year). The results of the operations of the Granot Energy partnership, accounted for on the equity method, in connection with the four mid-sized systems it owns, were included in the item entitled "Share of the Company in the results of equity-accounted investee companies". For information, see section 2.2 of Chapter B of the report the Report of the Board of Directors. The breakdown of revenues in 2013 (segmented by quarter) is in line with the forecasts that were made by the Company on the basis of seasonal data that was forecasted in connection with the systems that operated in each of the years 2010, 2011 and In 2013, there was no change in the operating profit margin (revenues from the sale of electricity, net of rental and maintenance expenses), which on the average was about 85%. During 2013, the Company significantly expanded its investments in the construction of photovoltaic systems (first and foremost, its investment in the Neot Hovav project with a total output of 37.5 MWp, as well as the completion of the construction of four projects that were established in the Granot Energy partnership). In addition, the initiation of projects in the wind sector was expanded and, as part of this expansion, agreements were signed for the development of a wind farm of material size. For information on the agreements and investments in 2013, see Note 12 of Chapter C of the report the financial statements. 5.7 Changes in the framework of suppliers and raw materials in the operating segment During 2013, there was no change in the framework of suppliers and raw materials involving the photovoltaic segment. During 2013, the initiation activity in the wind segment did not include procurement of raw materials or a binding agreement with suppliers of turbines. 5.8 Segmenting product revenues and profits As of December 31, 2013, the Company has revenues from sales of electricity produced by photovoltaic systems in Israel only.

18 5.9 Restrictions, legislation and standards that apply to the operating segment 5.9.a The operations of the Company in Israel General: The regulatory framework which covers the activity of the Company in Israel is the relevant legislation for the electricity market through the Electricity Economy Law 1996 (hereinafter the Law ), the Electricity Law 1954 (hereinafter the Electricity Law ) and the regulations enacted thereunder, as well as decisions of the Public Utilities Authority Electricity (hereinafter the Electricity Authority ). In addition, the Company's operations in Israel are significantly affected by decisions of the Israeli government and the Ministry of Energy and Water. Moreover, the activity of the Company is dependent on the approvals of other entities, such as local councils, the Israel Electric Corporation, planning and construction entities, and various government ministries such as the Ministries of Agriculture, Interior, and Defense. In general, to the best of the knowledge of the Company, the Company is in compliance with the legislation and regulations that apply to its field of activity. I. Threshold conditions for the completion of the regulatory process for purposes of constructing photovoltaic systems or a wind farm in Israel

19 An entrepreneur who wants to set up a mid-sized or large system to produce electricity using photovoltaic technology or an entrepreneur who wants to set up a large wind farm has to meet the conditions set out by the regulations of the Electricity Authority. The significant milestones of such regulations (from the initial phase through the most advanced stage) that have to be met by the entrepreneur are: obtaining a conditional license, obtaining a tariff approval, meeting the financial closing milestone and furnishing shareholders' equity of 20% of the normative cost of the project 6, complying with the timetable for the construction and connection of the facility to the national electrical grid and obtaining a permanent license. The conditional license stipulates that the party that meets the milestone of the conditional license through the tariff approval will be entitled to a rate as set out in the license, as long as at that time, there is still an available quota. In other words, the quota is allotted on the basis of the "first-come-first-served" principle. II. The photovoltaic sector: The regulation of the photovoltaic sector addresses three types of systems for the production of electricity using photovoltaic technology: small systems, mid-sized systems and large systems. The following is a review of the types of systems and their characteristics: 5.9.a.1 Photovoltaic electricity production systems for self-consumption, with an output of up to 50KWp (hereinafter small systems ) or business systems The Electricity Authority publicized a number of regulations for small systems in which it set quotas and tariffs. The base rate was set in accordance with the date of the systems initial operation, and it is fixed for 20 years and linked to the Cost of Living Index. As of the date of the report, the Company is not active in initiating small systems. For details regarding the Company's small systems, see section 5.1.b.2 above. 5.9.a.2 Photovoltaic electricity production systems, with an output of more than 51KWp and connected to the distribution grid (hereinafter mid-sized systems ) The decision passed by the Electricity Authority at meeting 284 in December 2009 (hereinafter Decision 284 ) regulated tariffs and quotas for private electricity producers using photovoltaic technology for systems larger than 51KWp and which are connected to the distribution grid. The tariffs in this regulation were reduced in 2011 and in The base rate is set at the date the tariff approval is received from the Electricity Authority (prior to the completion of the financial closing) and it is fixed for 20 years from the date 6 As set from time to time by the Electricity Authority.

20 of receipt of the permanent license and is linked to the Consumer Price Index. As of the date of the report, there is no available quote in the regulation of mid-sized systems (except for the regulation of Judea and Samaria, as set out below). For information on the Company's mid-sized systems, see section 5.1.b.3 above. Regulation in favor of systems in Judea and Samaria In July 2011, a quota of 30MWp was deducted from the quota for mid-sized systems (which amounted to 300MWp) in favor of setting up mid-sized systems in Judea and Samaria. After the reduction in tariffs in 2013, a number of entrepreneurs appealed to the High Court of Justice against this reduction, claiming that a distortion was caused as part of the updating of the rate for electricity production from renewable energy in Judea and Samaria. At this stage, on the recommendation of the High Court of Justice, the parties are conducting negotiations to find a compromise. To the best of the knowledge of the Company, further to the appeal to the High Court of Justice, the Electricity Commissioner froze the granting of tariff approvals until the High Court of Justice renders its decision on this issue. For details of the Company's mid-sized systems in Judea and Samaria, see section 5.1.b.2 above. 5.9.a.3 Photovoltaic electricity production systems connected to the transmission grid (hereinafter large systems ) 5.9.b Future quotas The Electricity Authority issued a regulation dealing with the setting up of large systems, with a total quota of 200MWp. The regulation set a rate of NIS 0.98 per KWh produced. In October 2012, after a hearing was held, the Electricity Authority reduced the rate for large systems to a rate of NIS per KWh produced, subject to an adjustment mechanism. As of the date of the report, the quota was exhausted. Out of the quota, 37.5MWp relates to the Neot Hovav project which is wholly-owned by the Company. For additional information regarding the large system owned by the Company which is in the construction stages, see section 5.1.b.1 above. To the best of the Company's knowledge, the Ministry of Energy and Water, together with the Electricity Authority, is exploring the allotment of additional quotas in the photovoltaic sector. III. The wind energy sector

21 5.9.c Regulation of the wind sector in Israel regulating systems in excess of 50KW (hereinafter large systems ) 5.9.c.1 The quota and rate in Israel 5.9.c.1.1 In July 2011, the Israeli government allotted a quota of 800MW in favor of the production of electricity using wind energy. Subsequent to the date of the report, as part of the deliberations of the ministerial committee for the development and implementation of renewable energies that took place in February 2014, it was decided to divert 70MW from the quota of systems for the production of electricity using wind energies, in favor of the setting up of facilities in the photovoltaic sector. As of the date of approval of the report, an appeal was filed against this decision. 5.9.c.1.2 In October 2011, the Electricity Authority stipulated that the rate for this regulation should amount to NIS 0.53 per KWh produced, linked to the Index, for plants that receive a tariff approval by the earlier of December 31, 2014 or until the quota of 440MW is exhausted. Afterwards, the rate will be NIS 0.49 per KWh produced until the earlier of December 31, 2017 or the filling of the full quota (linked to the Index). As of the date of approval of the financial statements, the rate, after linkage, is NIS and NIS 0.432, respectively. 5.9.c.1.3 The rate table for wind farms with conditional licenses that have not yet received tariff approval will be updated once a year based on a mechanism of linkage to the dollar (30%), to the rate of the Euro (50%) and to the Consumer Price Index (20%). 5.9.c.1.4 The rate will be guaranteed for a period of 20 years. After 20 years, the provider of the critical service will pay the producer, in accordance with the regulations to be set by the Electricity Authority at that time, taking into consideration the fact that the rate obtained by the producer for the 20-year period covered the cost of construction and on condition that the producer has a valid license and pursuant to the conditions. 5.9.c.1.5 To the best of the Company s knowledge, as of the date of approval of the financial statements, no tariff approval was granted pursuant to the abovementioned regulations. 5.9.d Planning and construction aspects National Zoning Plan for wind facilities At its meeting on April 3, 2012, the National Planning and Construction Council (hereinafter the National Council ) decided to adopt the principles of a policy paper that was compiled by the Planning Administration regarding the setting up of wind turbines for the production of electricity. In addition, the National Council decided to prepare a national zoning plan (TAMA 12/D/10) that would set out the planning rules and guidelines for approval of wind turbines as part of construction plans and permits. In October 2013, a draft of the national zoning plan was publicized for public comment and in February 2014, it was presented to the members of the National Council. The zoning plan is expected to go into effect in the coming months.

22 The National Council also decided to set up an inter-ministry committee for the identification and assessment of land with potential for construction of large wind farms across the country and to determine preferential areas for the said construction. In February 2014, the inter-ministry committee presented its conclusions to the members of the National Council and immediately thereafter, publicized its conclusions to the public. Out of a total of 160 compounds that were submitted by all of the entrepreneurs, the committee recommended 31 compounds as having planning potential for the construction of wind turbines. The Company submitted four compounds to the inter-ministry committee and they were recommended by the committee as having planning potential for the construction of wind turbines. 5.9.e Additional provisions of law: 5.9.e.1 The Company may be impacted by the directives of the Commissioner of Banks regarding an industry-wide restriction and other restrictions on borrower debts in borrower groups which may limit the ability of the Company to obtain additional financing for projects it is constructing. 5.9.f The activity of the Company in the Polish wind sector: The Polish electricity regime and the existing law The per capita level of carbon emissions in Poland is high and it is considered one of the most polluted countries in Europe (more than 80% of its electricity is produced using coal). In addition, the vast majority of the installed output in Poland is produced by plants constructed in the period , using coal as a source of fuel. The life span of coal-based plants ranges between years. Therefore, it can be expected that in the coming years, Poland will require vast investments in new infrastructure or in updating the existing infrastructure. In addition, Poland, as a member of the European Union, must meet targets for the production of electricity using renewable energies that were set by the EU, whereby 15% of the total Polish electricity production must use renewable energies by The Green Certificates Mechanism In order to achieve these goals and to provide incentives to the Polish renewable energy industry, the Polish government adopted a Tradable Green Certificates (TGC) mechanism. Pursuant to the mechanism, Green Certificates are issued to electricity producers using renewable energies and they can sell the certificates to other producers of electricity in lieu of payment of a levy in respect of pollution. The amount of the levy set by the Polish regulator is presently zlotys per 1MWh, linked to the Index. According to the existing regulations in Poland, a producer of electricity from renewable energy, including from wind technology, sells the electricity it produces on the Electricity Exchange or to local marketers. According to the arrangement, the local marketer (the owner of a transmission grid in the location in which the electricity is

23 produced) must purchase the electricity produced at the wind farm at a price set and publicized by the regulator. This price is set annually on the basis of the average price of electricity in the previous year. The price for 2013 amounted to zlotys per 1MW. In addition to the right to sell the electricity, with a goal of encouraging entrepreneurs to invest in renewable energy projects in Poland, Poland adopted a Tradable Green Certificates (TGC) mechanism. According to this mechanism, green certificates are issued to producers of electricity using renewable energies. The green certificates are transferable to producers of electricity who do not use renewable energy and to entities that sell electricity to end users and commodity brokers (hereinafter electricity traders ) and are tradable on commodity exchanges. Electricity traders are required by law to obtain and submit to the Polish Energy Authority green certificates of a certain percentage of their total electricity sales or, alternatively, to pay a levy (hereinafter the Substitute Fee ). The fee that was set by the Polish regulator currently amounts to zlotys per 1MWh, linked to the Index. Updating the legislation In the past two years, the Polish regulator has been working on a draft amendment to the existing Energy Law by way of legislation on renewable energies. The objective of the draft legislation is to regulate the renewable energy market in the country, with a goal of meeting its commitments to the EU and declared government policies. During 2013, a number of draft pieces of legislation were publicized, causing uncertainty in the market and causing the prices of green certificates and electricity on the Polish exchange to fall to new lows, directly impacting on the ability to finance wind projects using bank financing Technological changes that have a material impact on the operating segment To date, there are a number of different technologies being developed. In the photovoltaic sector, some of the technologies place an emphasis on increasing the ability to utilize photovoltaic energy and some of them place an emphasis on lowering production costs of photovoltaic systems. In the wind sector, technologies place an emphasis on increasing the utilization and output of the turbines (which are reflected mainly in the size of the turbines) and on increasing the utilization of turbines at low wind speeds. Please note that technological development, should it come to fruition, will have an impact on the economic feasibility of the construction of future projects, but not of existing projects that are currently in operation The critical success factors in the operating segment and the changes applicable thereto Areas of activity are impacted mainly by changes that may occur in respect of climatic data (e.g., solar radiation and wind strength), regulatory changes (including changes in the tariffs of electricity purchase), ability to procure financing, the cost of the equity needed for purposes of investment in projects and the costs of producing energy from other sources.

24 5.12 The major entry and exist barriers of the operating segment In the opinion of the Company, the factors set out below constitute the major entry barriers into the Company's operating segment: (1) The existence of the equity needed to finance the initiation phase and the furnishing of the shareholders' equity needed for the setting-up phase. (2) Affinity to land the opportunity to enter into rental / leasing agreements in connection with the land / space on which the company wants to install the photovoltaic systems or the wind facilities. (3) Knowledge of the various regulatory provisions applicable to the operating segment, compliance with such regulations and receipt of a quota for a preferred rate and/or the signing of contracts for the sale of electricity. (4) Professional experience in planning, initiation, construction and connecting the electricity facilities. (5) Access to sources of financing. In the opinion of the Company, the major exit barriers of the operating segment (i.e., the realization of projects and the sale thereof to third parties) are as follows: (1) Compliance with the conditions that the regulator requires of the owners of the project or of the company holding the project. (2) The existence of fair economic conditions that will facilitate the realization of the project. For additional information on the competition in the operating segment of the Company and a summary of the risk factors involved in the activity of the Company, see sections 8 and 27 below Substitutes for the products produced by the operating segment and changes that occur therein 6. Customers Renewable energy includes, among other things, thermo-solar energy, bio-mass, bio-gas, hydroelectric energy and geothermal energy. Except for photovoltaic energy and wind energy, all types of renewable energy as well as natural gas, constitute substitutes to the activity of the Company. For additional information regarding technological changes, see section 5.10 above. 6.1 Sale of electricity As of the date of this report, the sole customer of the Company in Israel is a supplier of the critical service, the Israel Electric Corporation, which is committed to enter into longterm agreements with the Company for 20 years, on the basis of the tariffs set by the Electricity Authority (for additional information on the regulations applying to this issue, see section 5.1.a of the report). Therefore, notwithstanding the dependence on this

25 customer, the Company does not believe that this dependence will have a material impact on the operations of the Company. As of the date of this report, the future customers of the Company in Poland are the electricity brokers in Poland which customarily enter into agreements for periods of between 1 to 15 years. For a general description of the Polish electricity market and the relevant regulations, see section 5.9.f above. 6.2 Rendering operating services under operating agreements with partnerships The Company renders management and operating services to photovoltaic systems, in the construction of which it was involved. For details, see Note 15(H) of Chapter C of the report the financial statements. 7. Marketing and distribution As of the date of approval of the financial statements, the operations of the Company do not require marketing and distribution, due to the fact that the sole customer of the Company is the Israel Electric Corporation which is committed to enter into long-term agreements with the Company and to purchase the energy that is or that will be produced by the Company on the basis of tariffs set by the Electricity Authority. 8. Competition In the photovoltaic field and in the wind energy field in Israel, the possibility of participating in the quotas publicized by the Electricity Authority (thereby benefiting from the various tariffs publicized in connection with each quota), experience and professionalism, the ability to provide inexpensive capital in favor of investment in projects, identifying properties that are suitable for the installation of photovoltaic systems and the manner of engaging owners of roofs and properties all have an impact on success in these fields, taking into consideration the forecasted income flow which as long as a permanent license has not been obtained, is affected by regulatory changes. As of the reporting date, many companies in Israel are active in the field of renewable energy in Israel in general and in the photovoltaic field and the wind energy field in particular. Since the activity of entrepreneurs in the field of renewable energy is dependent on quotas publicized by the Electricity Authority, a limitation may apply to the ability of the Company to realize projects being promoted by it, to the extent that such quota is fully utilized by the competition. As of the reporting date, in the opinion of the Company, the share of the Company in the Israeli renewable energy market is insignificant. In the Polish wind field, the possibility of setting up a wind farm is dependent to a great extent on the ability of the initiator to participate in the existing infrastructure of the electricity grid and to obtain the approvals needed to obtain a construction permit, to sign agreements for the sale of electricity and green certificates and to reach financial closure. As of the reporting date, many companies are active in the Polish wind energy field and, in the opinion of the Company, the share of the Company in the Polish renewable energy market is negligible.

26 9. Seasonality By its very nature, solar radiation in different seasons of the year has an impact on the output of the photovoltaic systems. Therefore, in the spring and summer months in which radiation is high, the output of the facilities increases while in the fall and winter months in which the quantity of radiation is relatively low, output decreases. As of the reporting date, the Company has not yet begun to produce electricity through the use of wind turbines. However, in general, the production of electricity using wind energy is also affected by changes in the wind regime over the seasons of the year, in accordance with the specific region in which the turbines are installed, and by the wind regime variance between years. 10. Production capacity For information pertaining to the electrical production capacity of the Company, see section 5.1.b.2 above. 11. Fixed assets The facilities of the Company are constructed on properties and roofs that are not owned by the Company, rather they are leased for periods of up to 25 years. The assets of the facility are owned by the Company and they include mainly the panels, converters and infrastructure of the installation. The Company has no fixed assets aside from the electricity production facilities it owns. For additional information, see Note 7 and 7A of Chapter C of the report the financial statements. For information pertaining to the rental of roofs and other areas for purposes of constructing the projects, see Note 12A(7) and Note 15B of Chapter C of the report the financial statements. 12. Human resources 12.1 Organizational structure The following is a chart describing the organizational structure of the Company as of the date of this report: CEO Business Development Business Development Legal Counsel Legal Department Initiation and Regularization Manager Solar Segment Manager Operations Department Project Managers Wind Segment Manager Wind Project Managers in Israel CFO Bookkeeping Budgetary Control Controller