FINANCIAL STATEMENTS

Transcription

1 FINANCIAL STATEMENTS UNAUDITED AS OF JUNE 30, 2017

2 Important This document is an unofficial translation for convenience only of the Hebrew original of the June 30, 2017 financial report of Delek Group Ltd., that was submitted to the Tel-Aviv Stock Exchange and the Israeli Securities Authority on August 30, The Hebrew version submitted to the TASE and the Israeli Securities Authority shall be the sole binding legal version

3 FINANCIAL STATEMENTS UNAUDITED AS OF JUNE 30, 2017 Table of Contents Chapter A Corporate Description Chapter B Board of Directors Report on the State of the Company s Affairs Chapter C Financial Statements Chapter D Report on the Effectiveness of Internal Controls for Financial Reporting and Disclosure

4 Chapter A Corporate Description

5 Update of Chapter A (Description of the Corporation s Business) to the Board of Directors Report of the Delek Group Ltd. ( The Company ) for Part One Description of the General Development of the Company's Business: Referring to Section 1.3 to the Periodic Report - Investments in Company Equity On July 24, 2017, the Company's general meeting approved the increase of the Company's authorized capital to NIS 18,000,000, split into 16,000,000 ordinary shares of NIS 1 par value each, and 2,000,000 preference shares of NIS 1 par value each. For more information, see the Company s immediate reports of June 29, 2017 (ref. no ) and July 24, 2017 (ref. no ), included herein by way of reference. On August 2, 2017, the Company announced that it was conducting a strictly preliminary and general examination of a possible public offer of preference shares and the listing of such shares for trading on the Tel Aviv Stock Exchange Ltd. The Company does not plan to issue preference shares in 2017, and should any such issue be made, it shall not undermine the voting rights of the Company's shareholders. For more information, see the Company s immediate report of August 2, 2017 (ref. no ) and its supplementary report (ref. no ), included herein by way of reference. Referring to Section 1.4 to the Periodic Report - Distribution of Dividends On May 28, 2017, the Company s Board of Directors decided to distribute a total of NIS 200 million in dividends. This dividend was paid on June 27, For more information, see the Company s immediate report of May 29, 2017 (ref. no ), included herein by way of reference. Part Three Description of the Company s Business by Operating Segment: 1. Energy A. Referring to Section to the Periodic Report - Ithaca 1. Referring to Section (b) to the Periodic Report - On June 5, 2017, the forced purchase of the remaining ordinary shares in Ithaca Energy Inc. ("Ithaca") was completed, and the Company's wholly-owned subsidiary DKL Investments Ltd. now holds 100% of Ithaca's shares. On June 7, 2017, Ithaca's shares were delisted from the stock exchanges in Toronto (TSX) and London (AIM). On July 18, 2017, the Company published proforma consolidated interim financial statements as of March 31, 2017, in connection with its acquisition of control of Ithaca and pursuant to Regulation 38B to the Securities Regulations (Periodic and Immediate Reports), For more information, see the Company s immediate report of June 6, 2017 (ref. no ) and July 18, 2017 (ref. no ), included herein by way of reference. Also see Note 3B to the financial statements as of June 30, 2017, attached below. 2. Referring to Section (g)(1) to the Periodic Report - On July 4, 2017, the Company published a reserves report and updated discounted cash flow data for Ithaca's oil assets. For more information, see the Company's immediate report of July 4, 2017 (ref. no ), included herein by way of reference. 1 The update contains material changes or developments in the Company s business in the second quarter of 2017 and up to immediately prior to the date of this report, in any matter which must be disclosed in the periodic report. The updated refers to the section numbers in Chapter A (Description of the Company s Business) of the periodic report for 2016 (ref. no ), and supplements the content disclosed therein. A-1

6 B. Referring to Section 1.7.4(d) to the Periodic Report - Planned Work Plan for the Tamar Project In September - October 2017, the operator of the Tamar Project is expected to perform upgrade works, including upgrades and improvements to the Tamar platform and the receiving facility, including the addition of buildings and replacement of the main cut-off valves on the Tamar platform with new and different valves in order to improve performance. Works is to be carried out over an estimated period of 20 days, in two sessions. In each of these sessions, natural gas will flow from the Tamar field to the Tamar production platform through only one of the two pipelines, at a rate of half of the maximum production capacity. Based on the assessments of Delek Drilling Limited Partnership ("the Partnership"), the Company estimates that these upgrade works will not materially affect the Company's revenues in the third and fourth quarters of Disclaimer concerning forward-looking information: The Company's and the Partnership's assessments concerning the schedule for the upgrade works and their actual performance and concerning the effect of these upgrade works on the Partnership's and the Company's revenues in the third and fourth quarter of 2017, constitute forward-looking information as defined in the Securities Law, 1968, based, among other things, on assessments received by the Partnership from the operator and the Partnership's assessments concerning natural gas sales expected in the third and fourth quarters of Actual performance of the upgrade works, including their schedule, and the Company's and the Partnership's assessment concerning the expected impact of the upgrade works on their revenues, may be materially different than the above assessments, including as a result of operational and technical conditions and/or the project's actual performance and/or actual natural gas sales data. C. Referring to Section 1.7.4(i) to the Periodic Report - Reserves Report and Discounted Cash Flow Data for the Tamar Project For information concerning a reserves report and updated discounted cash flow data for the Tamar Project, after receiving data from the Tamar-8 development and production well, see the Company's immediate report of July 2, 2017 (ref. no ), included herein by way of reference. D. Referring to Section 1.7.5(d) to the Periodic Report - Actual and Planned Work Plan for the Leviathan Project For information concerning the Leviathan Partners' decision to terminate the contract with the Atwood Advantage rig and pursue a contract with another rig, and the expected drilling plan for the Leviathan reservoir which will be carried out by such other rig, see the Company's immediate report of July 19, 2017 (ref. no ), included herein by way of reference. It is noted, that on July 30, 2017, drilling of the Leviathan-5 appraisal and production well was completed ("Leviathan-5 Well"). For information concerning the cost of the Leviathan- 5 Well and drilling of the upper part of the Leviathan 7 development and production well, see Note 5A(2) to the financial statements as of June 30, 2017, attached below. A-2

7 E. Referring to Section to the Periodic Report - License 399/Roy ("the Roy License") On June 18, 2017, Ratio Oil Exploration (1992) Limited Partnership ("Ratio") announced that the Ministry of National Infrastructures, Energy and Water's Oil Commissioner ("the Commissioner"), had approved the updated work plan for the Roy License, as follows: Term Key Milestones in the Work Plan 2017 onwards The binding work plan for the Roy License requires the following actions be carried out: By November 15, signing a contract with a drilling contractor and submitting such contract to the Commissioner. By March 1, start of drilling in the Roy License. Three months from completion of drilling - submitting a summary report of drilling results. It is clarified, that in light of the fact that the Partnership is only granted an option in the Roy License, and it and/or the Company does not have access to information concerning the joint endeavor, the description of the work plan and schedule for the above activities is based solely on Ratio's publications. Warning concerning forward-looking information - The above description concerning planned activities in the Roy License, including corresponding schedules, constitutes forwardlooking information as defined in the Securities Law, 1968, and is based solely on publications made by Ratio. Actual implementation of the work plan, including its associated timeframes, may differ materially from the above and depends, among other things, on applicable regulation, technical ability, and economic viability. F. Referring to Section to the Periodic Report - License 351/Hannah ("the Hannah License") For information concerning the June 12, 2017 decision by the Minister of National Infrastructures, Energy and Water ("Energy Minister") to deny an appeal files by the partners in the Hannah License against the Commissioner's decision not to recognize the Dolphin natural gas reservoir located in the Hannah License (which expired on December 14, 2015) as a discovery as defined in the Oil Law, 1952, see the Company's immediate report of June 13, 2017 (ref. no ), included herein by way of reference. For information concerning accounting treatment of the drilling costs of the Dolphin 1 well, in light of the Energy Minister's aforesaid decision, see Note 5E(2) to the financial statements as of June 30, 2017, attached below. G. Referring to Section to the Periodic Report - Alon D License For information concerning the Energy Minister's decision concerning the extension of the Alon D license, see the Company's immediate report of August 22, 2017 (ref. no ), included herein by way of reference. H. Referring to Section to the Periodic Report - License 353/Eran ("the Eran License") In accordance with the decision of the Supreme Court of Israel ("the Supreme Court') in the petition filed by the partners in the Eran License with the Supreme Court against the Energy Minister and the Commissioner, concerning the Energy Minister's decision to deny an appeal filed by the partners in the Eran License against the Commissioner's decision not to extend the A-3

8 Eran License, the parties have pursued mediation. At the parties' request, the Court has permitted them to update on the results of such mediation no later than October 3, I. Referring to Section (d) to the Periodic Report - Agreements for Domestic Sales of Natural Gas 1. Agreements for the sale of natural gas by the Tamar Partners to the domestic market - Following on Section (d)(1) to the Periodic Report, concerning the Tamar Partners' review of their planned steps with OPC Mishor Rotem Ltd. in a dispute that has arisen concerning volumes supplied between May 2013 and February 2015, in connection with the Electricity Authority's decision of July 22, 2013 to split the uniform electricity rate that was prevalent until such date into several different rates - in June 2017, the Tamar Partners pursued international arbitration. For information concerning accounting treatment related to the said dispute, see Note 5I to the financial statements as of June 30, 2017, attached below. 2. Agreements for the sale of natural gas from the Leviathan Project to the domestic market - As of the date of this report, the Leviathan Partners are still in various stages of negotiations to sign binding agreements for domestic supply of natural gas from the Leviathan Project. J. Referring to Section to the Periodic Report - Merger Agreement between the Partnership (as the Recipient Partnership) and Avner Oil Exploration Limited Partnership (as the Target Partnership) On July 27, 2017, responses were filed on the motion to approve a class action ("the Approval Motion") in connection with the partnerships' merger, filed against the Avner Partnership, the general partner in the Avner Partnership and its board members, the Company as the controlling shareholder in the Avner Partnership (indirectly), and against PricewaterhouseCoopers Advisory Ltd. PWC as economic advisor to the independent board committee established by the Avner Partnership. It is noted, that on June 28, 2017, a motion was filed by the Partnership to include it as a respondent to the Approval Motion. On July 5, 2017, responses were submitted to the said Motion, and on July 6, 2017, the Court ordered that the Partnership be added as a respondent and ordered that it submit its response by October 4, An additional pre-trial hearing on the Approval Motion will be held on January 31, The Company and the Partnership estimate, based on the opinion of their legal counsel, that the likelihood that the Approval Motion will be approved as a class action is less than 50%. K. Referring to Section (a) to the Periodic Report - Gas Outline Plan As part of the Company's efforts to dispose of the overriding royalty to which it is entitled from the Partnership on oil assets in which the Partnership holds an interest, by way of transferring the right to overriding royalties from the Company to a Company-owned subsidiary, and the listing of such subsidiary on the Tel Aviv Stock Exchange, the Company considered whether the provisions of the Gas Outline Plan, 2 concerning the Partnership s obligation to dispose of its rights in the Tamar reservoir, also require the Company and the companies under its control to dispose of their rights to overriding royalties from the Tamar reservoir, within the timeframe specified in the Tamar disposal outline plan, i.e. - by December 17, 2021 (in about 4.5 years). The Company's principle position, as also reflected in the Gas Outline Plan, is that the Gas Outline Plan refers to the Partnership s rights in Tamar, and does not regulate the disposal period for the right to overriding royalties from the Tamar reservoir, to which the Company and 2 Government Decision No. 476 of August 16, 2015, as amended in Decision No of May 22, 2016 ("the Gas Outline Plan"). A-4

9 the companies under its control are entitled. The Company is not aware of the State's official position on the matter. L. Referring to Section a to the Periodic Report - Goals and Business Strategy in the Tamar Project 1. For information concerning data and updates on the I/12 Tamar and I/13 Dalit leases ("the Tamar and Dalit Leases") included in the draft prospectus issued by Tamar Petroleum Ltd. ("Tamar Petroleum"), including a market report containing an expert assessment of the natural gas market in Israel in , see the Company's immediate report of June 21, 2017 (ref. no ), included herein by way of reference. 2. A. For information concerning a contingent sales agreement to transfer a 9.25% rights interest (out of 100%) in the Tamar and Dalit Leases, between the Partnership as seller in the first party, and Tamar Petroleum as buyer in the second party, signed on July 2, 2017 ("the Sales Agreement"), see the Company's immediate report of July 4, 2017 (ref. no ), included herein by way of reference. B. For information concerning the Partnerships' announcement that the preconditions of the Sales Agreement had been met, and the Company's assessment on recognition of gains in its financial statements as of September 30, 2017, see the Company's immediate report of July 19, 2017 (ref. no ), included herein by way of reference. C. For information concerning compliance with all preconditions set in the Sales Agreement, completion of the transaction set out in the Sales Agreement, and partial early repayment of debentures issued by Tamar Bond, see the Company's immediate report of July 23, 2017 (ref. no ), included herein by way of reference. For additional information concerning accounting treatment, see Note 5B(3) to the financial statements as of June 30, 2017, attached below. A-5

10 M. Natural Gas and condensate production data from the Tamar Project for the first quarter and second quarter of 2017: 3 Total output (attributable to equity holders of the Company) for the period (in MMCF for natural gas and MBBL for condensate) Average price per output unit (attributable to equity holders of the Company) (USD per MCF and BBL) Average royalties (each payment derived from the output of the producing asset, including the gross income from the oil asset) paid per output unit (attributable to equity holders of the Company) (USD per MCF and BBL) Natural gas Condensate Q1 Q2 Q1 Q2 14,970 15, The State Third parties Principal shareholders Proceeds for average royalties (each payment derived from the output of the producing asset, including the gross income from the oil asset) received per output unit (attributable to the Company s share) (USD per MCF and BBL) Average production costs per output unit (attributable to equity holders of the Company) (USD per MCF and BBL)4 Average net proceeds per output unit (attributable to equity holders of the Company) (USD per MCF and BBL) Fuel operations Referring to Section (f) to the Periodic Report: On July 9, 2017, the Antitrust Authority issued a draft report entitled Geographic Competition in Gas Stations: Connections between Market Structure and Gasoline Prices ( the Report ). The Report paints a general picture of a lack of competition among the major fuel companies, which may be due to coordinated influences between the companies. In light of this picture, the Antitrust Authority proposes adopting recommendations, among other things, concerning the creation of a gradual framework for the entry of smaller, newer gas companies instead of existing gas stations, and applying uniform policies concerning vertical gas station agreements in connection with gas stations. Delek Israel is studying this report and its impact on its operations, so as to formulate its position and proposal to the Antitrust Commissioner. 3. Insurance and finance Referring to Section 1.9 to the Periodic Report: On June 26, 2017, the Company announced that, in light of protracted efforts to secure approval for transferring control of The Phoenix Holdings Ltd. ("The Phoenix") to Yango Investments PTE Ltd., the parties had agreed to cancel the agreement according to the agreed mechanism, and each party irrevocably and unconditionally waived any argument, claim or damages in connection with the agreement. For information concerning the agreement, see the Company s immediate report of June 26, 2017 (ref. no ), included herein by way of reference. It is noted, that the Company has received new offers from Israeli and foreign entities for selling its holdings in The Phoenix, and the Company is continuing to work towards, and conducting negotiations for selling its holdings as 3 Percentage of output, royalties, production costs and net proceeds attributable to holders of the Company's equity rights rounded to two decimal digits. 4 It is emphasized that the average production costs per output unit only include current production costs and do not include reservoir exploration and development costs. A-6

11 required by law. For more information on the accounting treatment, see Note 3A to the financial statements as of June 30, 2017, attached below. 4. Additional Operations Referring to Section to the Periodic Report - Power Plants Soreq Power Plant On August 24, 2017, the Soreq power plant, built by IPP Delek Soreq Ltd. ( Delek Soreq ), was granted a generation license and a supply license, and Delek Soreq started working to bring the power plant online. The Electricity Authority noted in an accompanying letter that failure to comply with Regulation 14(A) to the Electricity Market Regulations (Conventional Private Electricity Producer), 2005, whereby the transfer of electricity from the facility will be carried out over the electricity grid of the transmission or distribution license holder, would constitute a violation of the law and grounds for revoking the licenses. The Electricity Authority further clarified that issue of the licenses does not exempt Delek Soreq or any of its consumers from payment of utility infrastructure rates or any other rate as specified by the Authority. It is noted, that the power plant was planned to provide power to the adjacent desalination facility through a direct connection and not over the electrical grid. The Company is studying the Electricity Authority s letter and at this time the Company estimates, based on its legal counsel, that it has strong defense arguments against the Electricity Authority s position. Delek Group Ltd. Date: August 29, 2017 Names and titles of signatories: Gabriel Last, Chairman of the Board Asaf Bartfeld, CEO A-7

12 Chapter B Board of Directors Report on the State of the Company s Affairs

13 Board of Directors Report Delek Group Ltd. August 29, 2017 Delek Group Ltd. Board of Directors' report on the state of the Company's affairs For the six and three month periods ended June 30, 2017 The Board of Directors of the Delek Group Ltd. ("the Company"), hereby presents the Company's Directors' Report for the six and three month periods ended June 30, A) The Board of Directors explanations on the state of the Company's affairs 1. Description of the Company and its business environment The Company engages in oil and gas exploration and production in Israel and abroad through investee companies and an investee partnership, and markets fuel products in Israel. In addition, the Company maintains holdings in several other operations, some of which are in various stages of disposal. The main operations which the Company intends to sell off comprise its Insurance and Finance in Israel segment. In 2015, the Company, through a wholly-owned foreign subsidiary, invested in the international energy company Ithaca Energy Inc. ("Ithaca") with proven operator experience, and is continuing to study options for acquiring additional gas and oil assets and/or companies abroad which are synergistic and complementary to the Group's current core operations. In the second quarter of 2017, the Group bought an additional 80% of Ithaca's share capital. Following these purchases, Ithaca is wholly-owned by the Group. For more information, see Note 3B to the financial statements. The Group's financial data and its operating results are affected, among other things, by the financial data and operating results of its investee companies, and by its sale or acquisition of holdings. The Company's cash flow is affected, among other things, by dividends and management fees received from its investees, by inflows originating from the disposal of its holdings therein, by its ability to raise financing in Israel and abroad which depends, among other things, on the value of its holdings, financial market conditions in Israel and abroad, and by investments made by the Group and the dividends it distributes to its shareholders. 2. Principal Operations Oil and gas operations in Israel and its surrounding areas Contribution to operating results Oil and gas exploration and production in the first half of 2017 yielded a profit of NIS 202 million, as compared to a profit of NIS 187 million in the same period last year. 1 This year-on-year increase in profit for the reporting period was mainly due to greater volumes of natural gas and condensate sold in the Tamar Project. The Partnerships' merger On May 17, 2017, Delek Drilling Limited Partnership ("Delek Drilling" or "the Partnership") and Avner Oil Exploration Limited Partnership ("Avner") announced that all the contractual preconditions (as 1 In this translation of the Board of Directors' Report, all amounts should be understood by the reader to be rounded to the nearest billion, million, or thousand, as the case may be. B-1

14 Board of Directors Report Delek Group Ltd. amended) had been met, for Avner's merger with and into Delek Drilling. For more information on the completion of this merger, see Note 5 to the financial statements. Gas Outline Plan On May 22, 2016, the government re-affirmed its decision of August 16, 2015 concerning the Gas Outline Plan, and established an alternative arrangement for a 'stable regulatory regime' to guarantee a regulatory regime that would encourage investment in the natural gas exploration and production segment. Delek Drilling, together with its partners in the various projects, is working to implement the Gas Outline Plan (as amended), according to its respective terms and the terms of the leases. According to the terms of the said Gas Outline Plan, in 2016 Delek Drilling disposed of its holdings in the Karish and Tanin leases, and adopted an investment decision to develop Leviathan. Furthermore, subsequent to the financial position statement date, in July 2017, Delek Drilling sold 9.25% of its rights in the Tamar and Dalit reservoirs by selling the stake to Tamar Petroleum Ltd. and listing Tamar Petroleum Ltd. on the Tel Aviv Stock Exchange. For more information and details on the expected accounting impact of this sale, see Note 5B(3) to the financial statements. In this regard, it is noted that Delek Drilling continues to study additional ways to further dispose of its rights in the Tamar and Dalit reservoirs. Leviathan Project On February 20, 2017, Delek Drilling signed financing agreements with a consortium of local and foreign banks, headed by HSBC Bank Plc and J.P. Morgan Limited. Under these agreements, Delek Drilling would receive a limited-recourse loan of USD 1.75 billion, to finance its share in the remaining investment needed to develop the Leviathan Project. As of the financial position statement date, Delek Drilling had utilized USD 168 million of the loan facility. For more information, see Note 5F to the financial statements. On February 23, 2017, the Leviathan Partners adopted a final investment decision (FID) to develop Phase 1A of the Leviathan reservoir development plan, with an annual capacity of 12 BCM, at a total budget (100%) of USD 3.75 billion, so as to allow the supply of natural gas from the Leviathan reservoir to start by the end of For more information, see Note 5A to the financial statements. Additional financial investments In the reporting period, the Company held a 17% stake in the equity of Ratio Petroleum Energy Limited Partnership ("Ratio Petroleum"), which began trading on the Tel Aviv Stock Exchange in January The total consideration paid for buying participation units totaled NIS 21 million. In addition to issuing participation units, Ratio Petroleum allocated, without consideration, to investors including the Company warrants exercisable into participation units in Ratio Petroleum. For more information, see Note 4 to the financial statements. In the reporting period, the Company invested an additional NIS 33 million in Faroe Petroleum PLC ( Faroe ) shares. Following this investment, the Company holds 15.37% of Faroe's share capital. Oil and gas operations in the North Sea Investment in Ithaca On March 14, 2017, DKL Investments Limited (a wholly-owned foreign subsidiary of the Company - "DKL") submitted documents offering to buy all of Ithaca's share capital held by other parties (80%), at a price of CAD 1.95 per share ("the Offer"), following an agreement signed with Ithaca in February 2017 for issuing the Offer as aforesaid. The Offer was open for subscription until April 20, After securing majority acceptance, the Offer was automatically extended for another period until May 3, The Offer was accepted by the holders of 318,833,909 ordinary shares, and DKL bought these shares for a total consideration of CAD 622 million (NIS 1,685 million). Following this purchase, DKL holds 400,699,334 ordinary shares in Ithaca, accounting for 94.2% of its ordinary share capital. On May 12, 2017, DKL announced that, under the terms of the Offer, it plans to perform a forced purchase of Ithaca's remaining ordinary shares not held by DKL, so that after such purchase DKL will hold all of Ithaca's share capital. The forced purchase will be made at the share price specified in the Offer and for a total consideration of CAD 48 million (NIS 126 million). On June 5, 2017, the forced purchase was completed, after which Ithaca's shares were delisted from the AIM exchange in London, and from the Toronto stock exchange. After assuming control of Ithaca, the Group has started to consolidate Ithaca's financial statements, starting from these financial statements. Furthermore, in the B-2

15 Board of Directors Report Delek Group Ltd. reporting period the Group recognized gains of NIS 137 million due to measuring its investment in Ithaca at fair value prior to assuming control. For more information, see Note 3B to the financial statements. It is noted that the Group has reached the conclusion that assumption of control in Ithaca constitutes a proforma event as defined in the Securities Regulations (Periodic and Immediate Reports), Thus, the Group is including proforma financial statements in its financial statements, which have been prepared to reflect the Group's results had Ithaca's financial statements been consolidated in the Group's financial statements in the periods prior to assuming control, based on the proforma assumptions detailed in the proforma statement. Other Operations On August 21, 2016, the Company signed a binding agreement for selling all of its holdings (52.3%) in The Phoenix Holdings Ltd. ("The Phoenix"). The buyer in the agreement was Yango Investment PTE. Ltd. ("Yango"), a privately-held company incorporated in Singapore. The consideration under the agreement was set at NIS 1.95 billion, bearing 4.75% annual interest from January 1, 2017 and until the closing date. The agreement included various preconditions, including regulatory approvals such as: control permit from the Ministry of Finance Commissioner of the Capital Market, Insurance and Savings; approval from the Israel Securities Authority; approval from the Tel Aviv Stock Exchange Ltd.; and the lack of any event having a material adverse effect (MAE) on The Phoenix's business as of the transaction completion date. On February 16, 2017, the parties signed an amendment to the agreement extending the period until March 31, On April 5, 2017, the parties signed an amendment to the agreement specifying, among other things, that the consideration for all of the Company's holdings in The Phoenix's shares will total NIS 2,152 million. A sum of NIS 1,987 million out of the total consideration will be payable in cash on the closing date, with the remainder being paid in three installments, the first of which will be made no later than 30 days from the closing date, and the last no later than April 30, The last date for meeting the preconditions was set for June 4, 2017, after which date either party may notify the other of cancellation. On June 26, 2017, in light of the protracted efforts to secure approval for transferring control of The Phoenix to the Yango Group, the parties had agreed to cancel the agreement according to the agreed mechanism, and each party irrevocably and unconditionally waived any argument, claim or damages in connection with the agreement. As of the financial statements' approval date, the Company has received offers from Israeli and foreign entities for buying control of The Phoenix, and the Company is negotiating towards selling control of The Phoenix. It is noted that The Phoenix's contribution to the net profit attributable to Company shareholders totaled NIS 205 million in the reporting period. For more information, see Note 3A to the financial statements. In February 2017, the Company issued debentures through an expansion of Series B31. Overall consideration (after issuance costs) received for the debentures totaled NIS 1 billion. For more information on these debentures, see Note 6 to the financial statements. Subsequent to the financial position statement date, on August 24, 2017, a generation license and supply license were granted to IPP Delek Soreq Ltd. ("IPP Soreq"), which built the Soreq power plant. IPP Soreq has started working towards bringing the power plant online. See also Note 7 to the financial statements. Dividend distributions On March 29, 2017, the Company s Board of Directors resolved to distribute a dividend of NIS 200 million. The dividend was distributed in May On May 28, 2017, the Company s Board of Directors resolved to distribute a dividend of NIS 200 million. The dividend was distributed in June Subsequent to the financial position statement date, on August 29, 2017, the Company s Board of Directors resolved to distribute a dividend of NIS 260 million. The dividend will be distributed in September B-3

16 Board of Directors Report Delek Group Ltd. 3. Results of Operations A) Contribution to net profit attributable to Company shareholders from principal operations (NIS millions): Q Q Q Q Oil and gas exploration and production operations *) Fuel operations in Israel Automotive operations Contribution of continuing operations before discontinued operations and capital and other gains Gains on oil and gas asset sales Finance, tax, and other expenses **) (66) 4 (62) (142) Net profit attributable to equity holders of the parent *) Also includes the Company's share in the results of development and production operations in oil and gas assets in the North Sea. **) In the reporting period, NIS 137 million in gains were recognized on the revaluation of the balance of the Delek Group's investment in Ithaca prior to acquiring control of Ithaca. For information concerning each operating segment's contribution to profits, see this report below. B) Revenues from operating activities (NIS millions) The Group s revenues in the first half of 2017 totaled NIS 3.2 billion, as compared to NIS 2.7 billion in the same period last year, as detailed in the table below (NIS millions): 1-6/ / / / Oil and gas exploration and production in and around Israel Oil and gas asset development and production in the North Sea , Fuel operations in Israel 1,979 1, ,588 Other segments including adjustments Total revenues 3,160 2,726 1,618 1,437 5,778 See also Note 10 to the financial statements - Information Regarding Operating Segments. B-4

17 Board of Directors Report Delek Group Ltd. C) Operating profit (NIS millions): 1-6/ / / / Oil and gas exploration and production in and around Israel Oil and gas asset development and production in the North Sea , Fuel operations in Israel Other segments including adjustments (46) (2) (29) 7 (163) Total operating profit ,486 See also Note 10 to the financial statements - Information Regarding Operating Segments. D) The Group s share in the profits of associate companies and partnerships, net (NIS millions) The following table details the Group's share in the results of its principal associates: 1-6/ / / / Delek Automotive Ithaca *) 9 (4) 1 (13) (3) IDE Other - (1) (3) 1 1 Total (3) 50 *) Reflects the Group s share in Ithaca s results (20%) prior to Ithaca becoming a wholly-owned Group company. B-5

18 Board of Directors Report Delek Group Ltd. E) Highlights from the Company's consolidated income statements (NIS millions): 1-6/ / / / Revenues 3,160 2,726 1,618 1,437 5,778 Cost of revenues 2,163 1,756 1, ,744 Gross profit ,034 Sales, marketing and gas station operating expenses General and administrative expenses Other income (expenses), net (10) (32) (12) (23) 201 Operating profit ,486 Finance income Finance expenses (571) (488) (330) (209) (828) Profit after finance expenses, net ,049 Gains from disposal of investments in investees and others, net Group's share in earnings (loss) of associate companies, net (3) 50 Profit before income tax ,099 Income tax (tax benefit) 57 (97) 8 25 (118) Profit from continuing operations Profit from discontinued operations, net , Net profit ,560 Attributable to - Company shareholders Non-controlling interest ,560 B-6

19 Board of Directors Report Delek Group Ltd. F) Movement in comprehensive income (loss) (in NIS millions): 1-6/ / / / Net profit ,560 Other comprehensive income (loss) from operating activities (post-tax) Actuarial gain on defined benefit plans, net Gain (loss) from available-for-sale financial assets, net Transfer to profit or loss from disposal of available-for-sale financial assets Transfer to profit or loss for impairment of available-for-sale financial assets Transfer to profit or loss of adjustments from translation of overseas operations (129) 21 (85) (3) (21) (3) (18) (58) Gain (loss) from cash flow hedges (28) (2) (5) 1 26 Attribution to the hedged asset from the results of cash flow hedges Adjustments from translation of overseas operations (*) Group's share of other comprehensive income (loss) of associates, net (955) (147) (414) 200 (107) (32) (6) (12) 6 (9) Total other comprehensive income (loss) from continuing operations Total other comprehensive income from discontinued operations, net (1,097) (114) (470) 254 (8) (2) Total comprehensive income (loss) (261) 402 (107) 489 1,622 Attributable to: Company shareholders (310) 147 (160) Non-controlling interests (261) 402 (107) 489 1,622 (*) The Group has material investments in investee companies and an investee partnership whose functional currency is not NIS (mainly USD). Thus, changes in currency exchange rates materially affect the Group's other comprehensive income or loss and the equity attributable to Company shareholders. In the reporting period, the USD lost 9% against the NIS (as compared to a decrease of 1.4% in the same period last year, and a decrease of 1.5% in all of 2016). B-7

20 Board of Directors Report Delek Group Ltd. 4. Financial Position The Group's total assets as of June 30, 2017, amounted to NIS billion, compared with NIS billion as of December 31, It is noted that, in light of Company's intentions and actions to sell the Company's holdings in The Phoenix's shares, The Phoenix's assets and liabilities are presented in the financial position statement as of June 30, 2017, and 2016, and as of December 31, 2016, under separate items - held-for-sale assets and corresponding liabilities. After acquiring control of Ithaca in April 2017 as aforesaid, the Group has consolidated Ithaca's financial statements for the first time from the date of assuming control. Principal changes in assets and liabilities as of June 30, 2017, compared with December 31, 2016: Cash and cash equivalents and short-term investments As of June 30, 2017, the Group had cash and short-term investment balances of NIS 2.2 billion, consisting mainly of balances of NIS 0.9 billion in the headquarters companies, and NIS 1.2 billion in Delek Energy and Delek Drilling. Total current and non-current assets (excluding held-for-sale assets) Assuming control of Ithaca and consolidation of Ithaca's financial statements as aforesaid, has mainly increased the following items: inventory; trade receivables; investments in oil and gas exploration and production, net; investments in associates; goodwill; and deferred tax assets. For more information, see also Note 3B to the financial statements. Short- and long-term financial liabilities (excluding liabilities for The Phoenix assets) Financial liabilities (to banks and others and debenture-holders), as of June 30, 2017, amounted to NIS 20.9 billion, as compared to NIS 17.8 billion as of December 31, This NIS 3 billion increase is due to the raising of debentures in the reporting period (see Note 6 to the financial statements), and due to the first-time consolidation of Ithaca, whose liabilities total NIS 2.1 billion. The other liabilities item also grew by NIS 1 billion, following Ithaca's first-time consolidation, mainly due to asset settlement liabilities. For more information, see also Note 3B to the financial statements. Contingent claims In their review, the Company's auditors draw attention to legal actions brought against Group companies. For details, see Note 7 to the financial statements. Additional information For additional information regarding repayments of principal and interest on the debts of headquarter companies, see Appendix A to the Board of Directors' Report. B-8

21 Board of Directors Report Delek Group Ltd. 5. Sources of Finance and Liquidity The net financial debt of the Company and the headquarters companies as of June 30, 2017: (2 ) NIS millions Liabilities Debentures 8,395 Bank and other loans 577 Other liabilities 297 Total liabilities 9,269 Assets Cash and deposits 453 Financial investments 708 Loans (*) 1,083 Treasury shares (**) 486 Total assets 2,730 Net financial debt - headquarters companies 6,539 (*) Composition of loans extended as of June 30, 2017: Borrower Loan balance as of June 30, 2017 (NIS millions) Seller loans - Barak Capital 20 Power Plants 481 Seller loan - Republic 182 Other 400 Total 1,083 (**) As of June 30, 2017, there were a total of 637,045 shares. As of the financial statements approval date, the Company and the headquarters companies have liquid balances of NIS 0.7 billion (furthermore and in addition to these liquid balances, the Company has guaranteed, unutilized credit facilities of NIS 1 billion). (2) Headquarters companies: Delek Group, Delek Petroleum, Delek Financial Investments Limited Partnership, Delek Power Plants Limited Partnership, DKL, and Delek Hungary. B-9

22 Board of Directors Report Delek Group Ltd. 6. Analysis of Operations by Segment A) Oil and gas exploration and production operations As of the financial statements' approval date, operations are carried out mainly through the Delek Drilling partnership (following its merger with Avner; see also Note 5 to the financial statements), which mainly engages in the production and sale of natural gas and condensate from the Tamar Project, in promoting and planning the commercialization of gas and development of the Leviathan Reservoir located in the Leviathan South and Leviathan North leases and the Aphrodite Reservoir (in Cyprus), and in exploration activities in oil assets held by the Partnership. Results of the Limited Partnership's oil and gas exploration and production operations as included in the Group's results (NIS millions): 1-6/ / / / Revenues from gas sales net of royalties ,821 Operating profit ,581 EBITDA ,602 Finance expenses, net Net profit attributable to Company shareholders Gas sales in BCM (*) Condensate sales - thousands of barrels (**) (*) The data relate to sales of natural gas (100%) from the Tamar Project, rounded to one tenth of one BCM. (**) The data relate to condensate sales (100%) from the Tamar Project, rounded to thousands of barrels. Analysis of segment results: NIS-based results in this segment were affected, among other things, by a 5% decrease in the average exchange rate for the USD, which is used in translating Delek Drilling's financial statements, as compared to the same period last year. Net profit attributable to Company shareholders In the reporting period, oil and gas exploration and production operations yielded a profit of NIS 202 million, as compared to a profit of NIS 187 million in the corresponding period last year. This year-on-year increase in profit for the reporting period was mainly due to an increase in revenues from natural gas and condensate sales in the Tamar Project and an increase in finance income, offset by a write-down of drilling costs in Dolphin whose effect on net profit attributable to Company shareholders totaled NIS 40 million. Oil and gas exploration and production in the second quarter of 2017 yielded a profit of NIS 83 million, as compared to a profit of NIS 85 million in the same quarter last year. Revenues Data for the reporting period includes revenues from oil and gas sales net of royalties to the amount of NIS 935 million, as compared to NIS 865 million in the same period last year. Revenues were up in the present period, mainly due to an increase in the volumes of natural gas and condensate sold from the Tamar Project. B-10

23 Board of Directors Report Delek Group Ltd. Operating profit Operating profit in the reporting period amounted to NIS 553 million, compared to NIS 545 million in the same period last year. Operating profit was up mainly due to an increase in revenues from the Tamar Project, offset by a write-down of drilling costs in Dolphin, totaling NIS 90 million, as aforesaid. Finance expenses, net Net finance expenses in the reporting period amounted to NIS 92 million, compared to NIS 136 million in the same period last year. The decrease was mainly due to recognition of income from the revaluation of contingent considerations on the sale of the Karish and Tanin reservoirs, to the amount of NIS 33 million. Adjustment of Delek Drilling's post-merger results to the Group's share in oil and gas exploration and production operations (NIS millions), for the six and three month periods in 2017: 1-6/ /2017 Net profit from Delek Drilling's statements Indirect holdings 56.2% 56.2% Group's share Tax expenses (43) (15) Revenues from overriding royalty and management fees Results of direct holdings in Yam Tethys (4.44%) (1) - Write-down of surplus acquisition costs (*) (31) (14) General and administrative expenses (8) (8) Finance expenses (26) (15) Contribution to net profit from oil and gas exploration and production (*) Current write-down of the revaluation attributed to the Tamar Project for the Avner Partnership's holdings in the project prior to the merger (previously recognized as part of the Cohen Development deal). B-11

24 Board of Directors Report Delek Group Ltd. B) Oil and gas exploration and production in the North Sea Ithaca Energy ("Ithaca") is an independent oil and gas operator operating in the North Sea, and holding both production and development oil assets. In the second quarter of 2017, the Group bought additional shares in Ithaca. Following these purchases, the Group's interest in Ithaca grew from 19.7% to 100%. After assuming control of Ithaca as aforesaid, the Group is consolidating Ithaca's financial statements starting from the second quarter of (For more information, see Note 3B to the financial statements). Data from Ithaca's financial statements (USD millions): 1-6/ / / / Revenues from oil and gas sales Cost of sales (68) (69) (38) (25) (146) Gross profit (loss) 7 (11) - - (2) Finance income (expenses) from hedges Impairment of oil and assets and goodwill 11 (28) 5 (33) (40) (5) Other expenses (9) (4) (9) (2) (1) Finance expenses (15) (18) (6) (9) (36) Share in the profits of associates Loss before taxes (3) (61) (7) (44) (84) Tax benefit Net profit (loss) attributable to Company shareholders (12) (54) Average output (Kboepd) The main reasons for the changes in Ithaca's revenues and profits are changes in oil and gas prices and changes in production volumes (including the timing of final development and start of production from the reservoirs). Ithaca hedges oil prices and currency exchange rates to leverage preferential rates and to minimize risk from changes in these factors. In the first half of 2017, Ithaca's revenues totaled USD 75 million, as compared to USD 58 million in the same period last year (an increase of 29%). This growth is due to an increase in sales volumes and higher oil prices, plus positive impact from hedging transactions. It is also noted that production volumes grew by 24% in the first half of 2017, from 9.4 kbpd in the first half of 2016 to 11.6 kbpd in the present period. This increase was mainly due to the start of production in the Stella reservoir. However, this growth is not fully reflected in Ithaca's revenues due to supply timing under existing contracts with customers. Furthermore, in 2016, Ithaca's net profit was affected by the cancellation of taxes on oil revenues, which led to recognition of a one-time tax benefit in the first quarter of As aforesaid, the Company started consolidating Ithaca's financial statements from the date of assuming control. Ithaca's total contribution to the net profit attributable to the Company's shareholders, including the Company's share in Ithaca's results through its investment in Ithaca (19.7%) for the period prior to assuming control, totaled NIS 55 million in the first half of 2017 (considering temporary assignment of excess acquisition costs). Furthermore, in the second quarter of 2017, the Company recognized NIS 137 million in gains upon assuming control (after assignment to profit or loss of capital reserves balances from translation differences, accrued prior to assuming control). In the same period last year, the Group's share in Ithaca's results totaled a loss of NIS 4 million. B-12

25 Board of Directors Report Delek Group Ltd. For proforma results reflecting (under certain assumptions) the Group's results had Ithaca's financial statements been consolidated (100%) in the periods prior to assuming control, see the proforma interim consolidated financial statements attached to these financial statements. Additional information For more information on oil and gas exploration operations, see Notes 3, 5 and 7 to the financial statements. C) Fuel operations in Israel Data from the financial statements of Delek Israel, a wholly-owned (100%) Group subsidiary (NIS millions): Statement of Financial Position June 30, 2017 June 30, Cash and cash equivalents Current assets (excluding cash and cash equivalents) 1,339 1,273 1,416 Property, plant and equipment 1,322 1,383 1,337 Other long-term assets Total assets 3,228 3,262 3,347 Short-term credit from banks and others Current liabilities (excluding credit) Long-term loans from banks and others Other long-term liabilities Equity attributable to Company shareholders 1, Total liabilities and equity 3,228 3,262 3,347 Statement of Income 1-6/ / / / Revenues 1,979 1, ,588 Gross profit Operating profit before other income (expenses), net Other income (expenses), net 2 (32) 2 (31) (83) Operating profit EBITDA Finance expenses, net Net profit attributable to Company shareholders B-13

26 Board of Directors Report Delek Group Ltd. Analysis of the results of fuel operations in Israel Revenues Sales net of government fees ("Net Sales") totaled NIS 1,979 million in the first half of 2017, as compared to NIS 1,662 million in the same period last year, an increase of 19%. Net Sales in the second quarter of 2017 totaled NIS 989 million, as compared to NIS 905 million in the same quarter last year, an increase of 9%. This increase was due to a global increase in distillate prices and greater sales volumes. Sales turnover in self- and franchise-operated Menta convenience stores totaled NIS 217 million in the first half of 2017, as compared to NIS 211 million in the same period last year, an increase of 3%. Sales in Delek Israel-operated convenience stores totaled NIS 196 million in the first half of 2017, as compared to NIS 194 million in the same period last year, an increase of 1%. Gross profit Gross profit for the first half of 2017 totaled NIS 381 million, similar to the figure for the same period last year. Gross profit adjusted for inventory gains/losses amounted to NIS 383 million in the first half of 2017, as compared to NIS 384 million in the same period last year. Gross profit for the second quarter of 2017 totaled NIS 193 million, as compared to NIS 209 million in the same quarter last year, a decrease of 7%. This year-on-year decrease in gross profit adjusted for inventory gains/losses in the present quarter was mainly due to lower margins in direct marketing operations. EBITDA EBITDA in the first half of 2017 totaled NIS 117 million, as compared to NIS 116 million in the same period last year. In the first half and second quarter of 2017, EBITDA adjusted for inventory gains/losses and other income/expenses totaled NIS 114 million and NIS 64 million, respectively, as compared to NIS 119 million and NIS 67 million, in the respective periods last year. EBITDA was down, mainly due to lower gains on fuel trades and lower equity gains in operating companies as a result of taxes on previous years. Other income (expenses), net In the reporting period, Delek Israel recorded NIS 2 million in other income, as compared to other expenses of NIS 32 million in the same period last year. In the second quarter of 2017, the Company recorded NIS 2 million in other income, as compared to other expenses of NIS 31 million in the same quarter last year. This change was mainly due to capital losses and a onetime expense recognized in the last-year quarter, as compared to capital gains on a station sale in the second quarter of Finance expenses, net Net finance expenses in the first half of 2017 amounted to NIS 9 million, compared with NIS 27 million in the same period last year, a decrease of 67%. In the second quarter of 2017, finance expenses totaled NIS 5 million, as compared to NIS 16 million in the same period last year. Net finance expenses were down mainly due to lower financing costs on fuel trades. B-14

27 Board of Directors Report Delek Group Ltd. D) Insurance and finance operations in Israel As of June 30, 2017, the Group holds 52.26% of the shares of The Phoenix Holdings Ltd. For information concerning the sale of control in The Phoenix, see Note 3A to the financial statements. Highlights from The Phoenix's consolidated income statements (NIS millions): 1-6/ / / / Gross premiums earned 4,889 4,265 2,446 2,177 8,856 Premiums earned in retention 4,489 3,897 2,237 1,995 8,105 Net gains on investments, and finance income 1, , ,171 Income from management fees Payments and changes in liabilities for insurance contracts and investment contracts in retention Commission, marketing, and other purchasing expenses General and administrative expenses 5,144 4,151 2,660 2,385 9, , ,135 Other expenses Finance expenses Share in the profits of investees accounted for as per the equity method Net profit for the period Net profit for the period attributable The Phoenix shareholders A significant part of The Phoenix's asset portfolio is invested on the capital market. Therefore, capital market returns for the various investment channels have a material effect on the yields achieved for The Phoenix's customers and on The Phoenix's profits. Gains and losses on investments reflect capital market performance in Israel and abroad, as well as changes in the Consumer Price Index and the NIS exchange rates against the main currencies. The aggregate effect of these factors materially affects the reported results. Revenues from management fees were up NIS 69 million in the reporting period, as compared to the same period last year. The bulk of this increase was due to growth in variable management fees in the present period. These fees totaled NIS 107 million in the reporting period, as compared to NIS 50 million in the same period last year. The increase was due to higher real yields achieved by The Phoenix as compared to the same period last year. Results for the reporting period and for the corresponding period last year were affected by changes in the market interest rates. In the reporting period, higher interest rates reduced insurance liabilities by NIS 78 million, pre-tax (NIS 51 million, post-tax). This, compared to the same period last year, where insurance liabilities grew by NIS 289 million, pre-tax (NIS 185 million, post-tax). Furthermore, results for the last-year period were materially affected by an increase in insurance obligations in the compulsory auto and liabilities and other insurance segments of general insurance operations, to a total amount of NIS 131 million pre-tax, and NIS 84 million post-tax, following the publication of the Winograd Commission. Results for the last-year period were also affected by a reduction in the corporate tax rate starting January 1, 2016, which caused a NIS 23 million reduction in tax reserves. B-15

28 Board of Directors Report Delek Group Ltd. Key data according to The Phoenix s operating segments (NIS millions): 1-6/ / / / Profit from life insurance and long term savings segment 211 (124) 89 (52) 189 Profit from health insurance segment 77 (12) Profit from general insurance segment Profit from financial services segment Total comprehensive income (loss) from operating segments Profit not attributed to reporting segments Company s share in the net results of investees not included in the reported segments 537 (41) (4) 28 Profit before income tax Income tax 232 (10) Profit for the period Net profit for the period attributable The Phoenix shareholders For more information on The Phoenix s operations, see Notes 3 and 7 to the financial statements. E) Automotive operations As of the financial position statement date, the Group holds 22.5% of Delek Automotive Systems Ltd. ("Delek Automotive") (Delek Automotive is a public company which publishes its financial statements). The investment in Delek Automotive is presented as per the equity method. The results of Delek Automotive s operations are included under the Group s share in the profits of associates, net item. The results of Delek Automotive's operations (NIS millions): 1-6/ / / / Revenues 2,025 2, ,428 Gross profit Sales, marketing, and general and administrative expenses Operating profit EBITDA Finance income (expenses), net (*) 4 (117) 6 (96) (12) Net profit attributable to Company shareholders B-16

29 Board of Directors Report Delek Group Ltd. Breakdown of Delek Automotive's sales by number of cars sold: 1-6/ / / / MAZDA vehicles 8,374 9,663 3,896 3,621 14,321 FORD vehicles 1,977 2, ,371 BMW vehicles 2,395 2,227 1, ,684 Total vehicles sold 12,746 14,359 6,015 5,586 22,376 Delek Automotive's share of all new vehicles sold in Israel (based on Licensing Bureau data) 7% 9% 8% 7% 8% Below is an analysis of the results of automotive operations. Delek Automotive's net profit for the first half of 2017 totaled NIS 195 million, as compared to NIS 164 million in the same period last year. Changes were mainly attributable to financing items and gross profit. In the first half of 2017, Delek Automotive recorded NIS 4 million in net finance income, as compared to net finance expenses of NIS 117 million in the first half of last year. Gross profit was down from NIS 411 million in the first half of 2016, to NIS 327 million in the first half of This decrease was due to weaker vehicle sales and lower profitability on both vehicles and spare parts. Sales turnover in the first six months of 2017 amounted to NIS 2,025 million, as compared to NIS 2,121 million in the same period last year (in all of NIS 3,428 million). In the second quarter of 2017, sales totaled NIS 950 million, as compared to NIS 885 million in the same quarter last year. In the first half of 2017, a total of 12,746 vehicles were sold, as compared to 14,359 vehicles sold in the same period last year. In the second quarter of 2017, 6,015 vehicles were sold, as compared to 5,586 vehicles in the same quarter last year ( ,376 vehicles). Gross profit in the second quarter of 2017 totaled NIS 150 million, as compared to NIS 157 million in the same quarter last year. In the second quarter of 2017, the gross margin was 15.8%, down from 17.7% in the same quarter last year. This decrease in gross profit and gross margin was due to a change in the vehicle sales mix, as well as the fact that sales in the present quarter consisted of vehicles whose cost in Delek Automotive's books was higher due to stronger import currency rates at the time of their purchase. Operating profit in the second quarter of 2017 was similar to that for the second quarter last year, totaling NIS 118 million, with the aforesaid changes in finance items leading to a change in net profit between the two periods. Net profit in the second quarter of 2017 totaled NIS 95 million, as compared to NIS 15 million in the same quarter last year. For more information on Delek Automotive's operations, see Note 3C(1) to the financial statements. F) Additional Operations Infrastructures The Group s infrastructures operations are carried out through Delek Power Plants Limited Partnership ("Delek Power Plants"), which coordinates the development and operation of two power plants in Israel (in Ashkelon and Soreq) through its subsidiaries. The Group also holds 50% of IDE Technologies Ltd. ("IDE"). In the reporting period, the infrastructures segment yielded a loss of NIS 17 million, as compared to a profit of NIS 14 million in the same period last year. For more information concerning additional operations, see Note 7 to the financial statements. B-17

30 Board of Directors Report Delek Group Ltd. B) Market Risk Exposure and Management 1. A) Company operations focus mainly on holding and managing shares in its subsidiaries. These are long-term investments and therefore these holdings are not hedged. Risk management in subsidiary and associate companies is determined and carried out directly by the investees. Some of these companies are public companies and are listed on the stock exchange, and therefore proper disclosure of this subject is made in their financial statements. B) The currency risk management officer in the Company is Mr. Ido Adar, MBA. In recent years, Mr. Adar has serve as Company Treasurer. 2. Description of market risks A) As stated above, the Group is mainly a holdings and management company, and its principal exposure results from the market risks of its subsidiaries and associates ("Investees"). B) In the reporting period, no material changes occurred in the Company's policy mitigating managing exposure to market risks, including the effects of sensitivity tests on the Group's reports in this matter in the year ended December 31, The following table details Israeli CPI data and exchange rates for the primary currencies used by the Company: USD representative exchange rate Known CPI As of NIS Points June 30, June 30, December 31, % Change % % June 30, 2017 (6 months) (9.1) (0.0) June 30, 2017 (3 months) (3.7) 0.9 June 30, 2016 (6 months) (1.4) (0.4) June 30, 2016 (3 months) (1.5) (0.3) B-18

31 Board of Directors Report Delek Group Ltd. 3. Linkage bases report June 30, 2017 Israeli currency Unlinked CPI-linked USD Foreign currency Other currency Fair value NIS millions Monetary items in overseas operations (USD) Held-forsale assets Nonmonetary item Total Assets Current assets 1, , ,900 Insurance business assets , ,249 Non-current assets ,676-24,922 27,965 Total assets 2, , ,249 25, ,114 Liabilities Current liabilities 2, , ,976 Insurance business liabilities , ,956 Non-current liabilities 5,821 3, ,739-2,337 22,141 Total liabilities 7,921 4, , ,956 2, ,073 Assets less liabilities, net (5,913) (3,913) (8,590) 4,293 22,927 10,041 B - 19

32 Board of Directors Report Delek Group Ltd. C) Disclosure relating to the Company's financial reporting 1. Critical accounting estimates No changes have occurred in the reporting period as compared to the 2016 annual report. 2. Events after the financial position statement date For details of material events after the financial position statement date, see Chapter A to the Board of Directors' Report. D) Dedicated disclosure for debenture holders B - 20

33 Board of Directors Report Delek Group Ltd. Series Issue date Original par value NIS millions Par value balance as of Jun. 30, 2017 NIS millions Nominal interest rate Linkage Carrying amount Jun. 30, 2017 NIS millions Interest accrued in the books as of Jun. 30, 2017 NIS millions Repayment years B11 7/ % Israeli CPI B12 11/2006 1, % Israeli CPI B13 3/ B14 B15 B18 7/2009 6/2010 7/2009 7/ / / /2009 6/2010 7/2015 Until listing %, after listing - 4.6% Israeli CPI Stock exchange value as of Jun. 30, 2017 Trustee Nonmarketable Nonmarketable % Un-linked , % Un-linked , % Israeli CPI ,099 B19 11/ % Israeli CPI B22 6/ % Israeli CPI B31 2/2015 6/ /2015 2/2017 3,276 3, % Un-linked 3, ,392 B32 7/ % B33 7/ % Convertible and non-linked Convertible and non-linked Hermetic Trust (1975) Ltd. 113 Hayarkon St. Tel Aviv Tel: Dan Avnon Reznik Paz Nevo RPN Trusts 2007 Ltd., 14 Yad Harutzim St., Tel Aviv Tel: , Elad Sirkis Hermetic Trust (1975) Ltd. 113 Hayarkon St. Tel Aviv Tel: Dan Avnon Reznik Paz Nevo RPN Trusts 2007 Ltd., 14 Yad Harutzim St., Tel Aviv Tel: , Elad Sirkis Reznik Paz Nevo RPN Trusts 2007 Ltd., 14 Yad Harutzim St., Tel Aviv Tel: , Elad Sirkis Reznik Paz Nevo RPN Trusts 2007 Ltd., 14 Yad Harutzim St., Tel Aviv Tel: , Elad Sirkis Gafni Trusts Ltd. 4 Hataas St., Ramat Gan Tel: Tzuri Galili Mishmeret - Trusts Services Company Ltd., 48 Menahem Begin St., Tel Aviv, Tel: /4, Atty. Rami Katzav, CPA. Hermetic Trust (1975) Ltd. 113 Hayarkon St. Tel Aviv Tel: Dan Avnon Hermetic Trust (1975) Ltd. 113 Hayarkon St. Tel Aviv Tel: Dan Avnon Hermetic Trust (1975) Ltd. 113 Hayarkon St. Tel Aviv Tel: Dan Avnon B-21

34 Board of Directors Report Delek Group Ltd. Notes: 1. The Company meets all the terms of the debentures. Furthermore, the Company meets all the terms of its obligations under the deed of trust. 2. Debenture ratings as of the financial statements' approval date: Series Rating company Current rating Rating upon issue Rating company Current rating Rating upon issue B11 Midroog A2 - S&P Maalot A AA B12 Midroog A2 - S&P Maalot A AA B13 Midroog A2 - S&P Maalot A AA B14 Midroog A2 A1 S&P Maalot - - B15 Midroog A2 A1 S&P Maalot - - B18 Midroog A2 A1 S&P Maalot - - B19 Midroog A2 A1 S&P Maalot - - B22 Midroog A2 - S&P Maalot A AA B31 Midroog A2 A1 S&P Maalot A A B32 B33 Midroog Midroog A2 A2 S&P Maalot A A A2 A2 S&P Maalot A A Financial covenants The deed of trust for Debentures (Series B31) issued in 2015, and the deeds of trust for Series B32 and B33 issued in July 2016, specified the following financial covenants: A) Minimum equity: The Company's minimum equity will not fall below NIS 2,400 million according to its audited or reviewed consolidated financial statements, as applicable, for three consecutive quarters. B) Ratio of equity to balance sheet total: The Company's equity will not fall below 15% of its balance sheet total according to the Company's audited or reviewed separate financial statements, as applicable, for three consecutive quarters. Equity, meaning the Company's total equity attributable to Company shareholders, excluding minority interests, as defined in GAAP. As of June 30, 2017, and the financial statements' approval date, the Company is in compliance with these financial covenants. B-22

35 Board of Directors Report Delek Group Ltd. E) Additional information 1. Buyback of securities As of June 30, 2017 and the financial statements' publication date, the subsidiary partnership, Delek Financial Investments Limited Partnership, holds 637,045 shares in the Company. 2. Company employees The Board of Directors would like to thank the Company's management, the management of the Company's investees, and to all the employees for their dedicated work and their contribution to the advancement of the Company. Sincerely Gabriel Last Chairman of the Board Asaf Bartfeld CEO Signature date: August 29, 2017 B-23

36 Board of Directors Report Delek Group Ltd. Appendix A to the Board of Directors' Report Breakdown of principal and interest payments on the debentures and bank loans of the headquarters companies as of June 30, 2017 (NIS millions): Delek Group - Headquarters Term 7-12/ onwards Total Debentures Principal , ,993 8,404 Interest ,534 Principal Bank loans Interest Total 908 1,317 1,424 1,130 1,102 4,362 10,243 The Delek Group also has guaranteed, unutilized bank credit facilities of NIS 725 million (as of June 30, 2017). As of the financial statements' approval date, the Delek Group had unutilized credit facilities amounted to NIS 1 billion. B-24

37 Chapter C Financial Statements

38 Consolidated Interim Financial Statements as of June 30, 2017 Unaudited Contents Page Consolidated Balance Sheets 2-3 Consolidated Statements of Income 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Changes in Equity 6-10 Consolidated Statements of Cash Flows Notes to the Consolidated Interim Financial Statements 16-39

39 Consolidated Balance Sheets Current assets June 30 December Unaudited Audited NIS million Cash and cash equivalents 1, ,730 Short-term investments 1,100 2,104 1,113 Trade receivables 1,634 1,310 1,419 Other receivables Current tax assets Financial derivatives Inventories ,900 4,908 6,060 Assets held for sale 105,249 99, ,739 Non-current assets 110, , ,799 Long-term loans, deposits and receivables 2,292 2,152 2,254 Other financial assets Investments in associates 2,369 1,603 1,603 Investment property Investments in oil and gas exploration and production, net 17,241 15,867 15,877 Fixed assets, net 2,509 2,426 2,487 Goodwill Other intangible assets, net Deferred taxes 2, ,965 23,290 23, , , ,442 The accompanying notes are an integral part of the consolidated interim financial statements

40 Consolidated Balance Sheets Current liabilities June 30 December Unaudited Audited NIS million Interest bearing loans and borrowings 2,263 3,878 1,966 Trade payables Other payables 1, ,044 Current tax liabilities Financial derivatives ,976 5,484 3,771 Liabilities attributable to assets classified as held for sale 100,956 94,933 97, , , ,657 Non-current liabilities Loans from banks and others 3,904 1,095 1,567 Debentures 13,621 12,579 13,271 Debentures convertible into Company shares 1,084-1,080 Liabilities for employee benefits Provisions and other liabilities (mainly for disposal of assets) 1, Deferred taxes 2,033 2,291 2,215 Capital 22,141 16,329 18,508 Share capital Share premium 1,917 1,917 1,917 Proceeds for conversion options Retained earnings 2,665 2,431 2,644 Exchange differences on translation of foreign operations (526) Capital reserve from transactions with holders of non-controlling interests Other reserves Treasury shares (433) (433) (433) Total equity attributable to equity holders of the Company 3,902 4,313 4,612 Non-controlling interests 6,139 6,241 6,665 Total capital 10,041 10,554 11, , , ,442 The accompanying notes are an integral part of the consolidated interim financial statements. August 29, 2017 Date of approval of the financial statements Gabriel Last Asi Bartfeld Barak Mashraki Chairman of the CEO CFO Board of Directors - 3 -

41 Consolidated Statements of Income Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million (Other than net earnings per share) Audited Revenue 3,160 2,726 1,618 1,437 5,778 Cost of revenues 2,163 1,756 1, ,744 Gross profit ,034 Selling, marketing and gas station operating expenses General and administrative expenses Other revenues (expenses), net (10) (32) (12) (23) 201 Operating profit ,486 Financial income Finance expenses (571) (488) (330) (209) (828) ,049 Profit from disposal of investments in partnerships and investees, net Group s share in earnings (losses) of associates, net (3) 50 Income before taxes on income ,099 Taxes on income (tax benefit) 57 (97) 8 25 (118) Profit from continuing operations ,217 Income from discontinued operations, net Net profit ,560 Attributable to: Equity holders of the Company Non-controlling interests Net earnings per share attributable to equity holders of the Company ,560 Basic earnings from continuing operations Basic earnings from discontinued operations Basic earnings Diluted earnings from continuing operations Diluted earnings from discontinued operations Diluted earnings The accompanying notes are an integral part of the consolidated interim financial statements

42 Consolidated Statements of Comprehensive Income Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Net profit ,560 Other comprehensive income (loss) (net of tax effect): Amounts classified or reclassified to profit or loss under specific conditions: Profit (loss) for available-for-sale financial assets (129) 21 (85) Transfer to statement of income for disposal of available-for-sale financial assets (3) (21) (3) (18) (58) Transfer to statement of income for impairment of available-for-sale financial assets Transfer to statement of income for exchange differences on translation of foreign operations Profit (loss) for cash flow hedges (28) (2) (5) 1 26 Recognition of the hedged asset of cash flow hedging results Exchange differences on translation of foreign operations (955) (147) (414) 200 (107) Other comprehensive income (loss) attributable to associates, net (32) (6) (12) 6 (9) Total other comprehensive income (loss) from continuing operations (1,097) (114) (470) 254 (8) Total other comprehensive income from discontinued operations, net (2) Total other comprehensive income (loss) (1,083) (46) (472) Total comprehensive income (loss) (261) 402 (107) 489 1,622 Attributable to: Equity holders of the Company (310) 147 (160) Non-controlling interests (261) 402 (107) 489 1,622 The accompanying notes are an integral part of the consolidated interim financial statements

43 Consolidated Statements of Changes in Equity Attributable to equity holders of the Company Share capital Share premium Proceeds for conversion options Retained earnings Exchange differences on translation of foreign operations Reserve from transactions with noncontrolling interests Other reserves *) Treasury shares Total Noncontrolling interests Total capital (Unaudited) NIS million Balance as of January 1, 2017 (audited) 13 1, , (433) 4,612 6,665 11,277 Net profit Other comprehensive loss (602) - (108) - (710) (373) (1,083) Total comprehensive income (loss) (602) - (108) (310) 49 **) (261) Dividends (379) (379) - (379) Transaction with holders of non-controlling - interests (21) - - (21) 21 - Dividend to holders of non-controlling interests (596) (596) Balance as of June 30, , ,665 (526) (433) 3,902 6,139 10,041 *) Mainly capital reserve for available-for-sale financial assets; As of June 30, 2017, including a credit balance of NIS 133 million for investments held for sale. **) Composition of comprehensive loss of non-controlling interests: Net profit attributable to non-controlling interests 422 Profit from available-for-sale financial assets, net 11 Loss from cash flow hedges (3) Exchange differences on translation of foreign operations (381) Total comprehensive loss attributable to non-controlling interests 49 The accompanying notes are an integral part of the consolidated interim financial statements

44 Consolidated Statements of Changes in Equity Attributable to equity holders of the Company Share capital Share premium Retained earnings Exchange differences on translation of foreign operations Reserve from transactions with noncontrolling interests Other reserves *) Treasury shares Total Noncontrolling interests Total capital Unaudited NIS million Balance as of January 1, 2016 (audited) 13 1,917 2, (368) 4,486 6,148 10,634 Net profit Total other comprehensive income (loss) (91) (18) (28) (46) Total comprehensive income (loss) (91) **) 402 Dividends - - (171) (171) - (171) Acquisition of treasury shares (65) (65) - (65) Company previously consolidated (2) (2) Acquisition of shares from holders of non-controlling interests (84) - - (84) (78) (162) Dividend to holders of non-controlling interests (82) (82) Balance as of June 30, ,917 2, (433) 4,313 6,241 10,554 *) Mainly capital reserve for available-for-sale financial assets; as of June 30, 2016, including a credit balance of NIS 110 million for investments held for sale. See also Note 3 below. **) Composition of comprehensive income of non-controlling interests: Net profit attributable to non-controlling interests 283 Profit from available-for-sale financial assets, net 37 Exchange differences on translation of foreign operations (65) Total comprehensive income attributable to non-controlling interests 255 The accompanying notes are an integral part of the consolidated interim financial statements

45 Consolidated Statements of Changes in Equity Attributable to equity holders of the Company Share capital Share premium Proceeds for conversion options Retained earnings Exchange differences on translation of foreign operations Reserve from transactions with noncontrolling interests Unaudited NIS million Other reserves *) Treasury shares Total Noncontrolling interests Total capital Balance as of April 1, , ,675 (240) (433) 4,273 6,358 10,631 Net profit Other comprehensive loss (286) - (54) - (340) (132) (472) Total comprehensive income (loss) (286) - (54) (160) 53 **) (107) Dividends (190) (190) - (190) Transaction with holders of non-controlling - interests (21) - - (21) 21 - Dividend to holders of non-controlling interests (293) (293) Balance as of June 30, , ,665 (526) (433) 3,902 6,139 10,041 *) Mainly capital reserve for available-for-sale financial assets; As of June 30, 2017, including a credit balance of NIS 133 million for investments held for sale. **) Composition of comprehensive income of non-controlling interests: Net profit attributable to non-controlling interests 185 Profit from available-for-sale financial assets, net - Loss from cash flow hedges (3) Exchange differences on translation of foreign operations (129) Total comprehensive income attributable to non-controlling interests 53 The accompanying notes are an integral part of the consolidated interim financial statements

46 Consolidated Statements of Changes in Equity Attributable to equity holders of the Company Share capital Share premium Retained earnings Exchange differences on translation of foreign operations Reserve from transactions with noncontrolling interests Other reserves *) Treasury shares Total Noncontrolling interests Total capital Unaudited NIS million Balance as of April 1, ,917 2,427 (34) (417) 4,180 6,085 10,265 Net profit Total other comprehensive income Total comprehensive income **) 489 Dividends - - (76) (76) - (76) Acquisition of treasury shares (16) (16) - (16) Acquisition of shares from holders of non-controlling interests (28) - - (28) (76) (104) Dividend to holders of non-controlling interests (4) (4) Balance as of June 30, ,917 2, (433) 4,313 6,241 10,554 *) Mainly capital reserve for available-for-sale financial assets; as of June 30, 2016, including a credit balance of NIS 110 million for investments held for sale. See also Note 3 below. **) Composition of comprehensive income of non-controlling interests: Net profit attributable to non-controlling interests 131 Profit from available-for-sale financial assets, net 10 Exchange differences on translation of foreign operations 95 Total comprehensive income attributable to non-controlling interests 236 The accompanying notes are an integral part of the consolidated interim financial statements

47 Consolidated Statements of Changes in Equity Attributable to equity holders of the Company Share capital Share premium Proceeds for conversion options Retained earnings Exchange differences on translation of foreign operations Reserve for transactions with holders of noncontrolling interests Other reserves *) Treasury shares Total Noncontrolling interests Total capital Audited NIS million Balance as January 1, ,917-2, (368) 4,504 6,148 10,652 Net profit ,560 Other comprehensive income (loss) (94) Total comprehensive income (loss) (94) **) 1,622 Acquisition of treasury shares (65) (65) - (65) Proceeds for conversion option in the issue of convertible debentures (net of issue expenses) Dividends (436) (436) - (436) Dividend to holders of non-controlling interests (322) (322) Acquisition of shares from holders of noncontrolling interests (87) - - (87) (114) (201) Balance as of December 31, , , (433) 4,612 6,665 11,277 *) Mainly capital reserve for available-for-sale financial assets; As of December 31, 2016, including a credit balance of NIS 120 million for investments held for sale. **) Composition of comprehensive income of non-controlling interests: Net profit attributable to non-controlling interests 935 Profit from available-for-sale financial assets, net 42 Profit from cash flow hedges 4 Exchange differences on translation of foreign operations (28) Total comprehensive income attributable to non-controlling interests 953 The accompanying notes are an integral part of the consolidated interim financial statements

48 Consolidated Statements of Cash Flows Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Cash flows from operating activities Net profit ,560 Adjustments to reconcile cash flows from operating activities (a) 844 1, Net cash from operating activities 1,666 1,590 1, ,590 Cash flows from investment activities Purchase of fixed assets, investment property and intangible assets (195) (381) (70) (87) (641) Proceeds from sale of fixed assets and investment property Proceeds from sale of oil and gas assets Proceeds from sale (acquisition) of financial assets, net (48) 500 (26) Repayment of loans to associates, net Short-term investments, net (91) Investment in long-term bank deposits, net (62) (77) 5 (7) 76 Increase in joint ventures for oil and gas exploration (658) (345) (431) (89) (554) Cash derecognized from disposal of investments in previously consolidated subsidiaries (b) - (13) - (13) (13) Investment in associate companies and partnerships (1) (3) - - (1) Repayment of loans to others, net Acquisition of a company consolidated for the first time (c) (1,829) - (1,829) - - Net cash from (used in) investment activities (2,647) (256) (2,063) 224 1,204 The accompanying notes are an integral part of the consolidated interim financial statements

49 Consolidated Statements of Cash Flows Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Cash flow from finance activities Short-term loans from banks and others, net (71) (231) 187 (275) (634) Acquisition of shares from holders of noncontrolling interests - (104) - (104) (132) Receipt of long-term loans Repayment of long-term loans (270) (180) (135) (70) (558) Proceeds from disposal of hedging transactions Dividends paid (378) (171) (378) (171) (436) Dividend paid to holders of non-controlling interests in subsidiaries (733) (82) (307) (72) (91) Acquisition of treasury shares by a subsidiary partnership - (65) - (16) (65) Payment of contingent liability for a put option to holders of non-controlling interests (1) (14) Advance tax payments as part of distribution of profits for non-controlling interests - (24) - (24) (84) Issue of debentures and debentures convertible into shares (less issuance expenses) 1, ,801 Repayment of debentures (198) (311) - - (2,579) Net cash from (used for) finance activities 454 (793) (221) (357) (965) Exchange differences on cash balances of foreign operations and exchange differences for cash and cash equivalence (103) 25 (21) 11 4 Change in cash and cash equivalents attributable to operations held for sale (999) (985) (666) (786) (112) Increase (decrease) in cash and cash equivalents (1,629) (419) (1,784) (3) 1,721 Cash and cash equivalents at the beginning of the year: 2,730 1,009 2, ,009 Cash and cash equivalents at the end of the period 1, , ,730 The accompanying notes are an integral part of the consolidated interim financial statements

50 Consolidated Statements of Cash Flows (A) Adjustments to reconcile cash flows from operating activities: Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Adjustments to profit or loss Depreciation, depletion, amortization and impairment of assets ,173 Deferred taxes, net 264 (117) Increase (decrease) in employee benefit liabilities, net (67) Increase in the value of loans granted, net (59) (56) (83) (35) (38) Loss (profit) from the sale of fixed assets, real estate and investments, net (158) - (158) - - Group s share of results of associates, net (1) (37) (40) 6 18 (12) Profit from the sale of an oil and gas asset (405) Profit from early repayment of a loan (116) Profit from disposal of available-for-sale financial assets (3) (21) (3) (18) (58) Impairment of available-for-sale financial assets Change in fair value of financial assets and financial derivatives, net (14) Increase in long-term liabilities, net Change in deferred acquisition costs (63) (53) (3) 1 (78) Cost of share-based payment (2) Change in financial investments of insurance companies, net (1,127) (673) 62 (766) (2,472) Investments net of proceeds from the sale of available-for-sale assets in insurance companies, net (1,440) (593) (1,109) (240) (2,722) Increase in reserves and other provisions in insurance companies 3,565 2,647 1,825 1,452 5,454 Acquisition of investment property for performance-based contracts and other investment property in insurance companies (471) (162) (409) (115) (315) Decrease (increase) in reinsurance assets (169) (39) (42) 5 (1) Change in value of investment property, net (3) 2 (3) (10) 6 Exchange differences for cash and cash equivalents, net 7 (3) (3) (3) 16 Revaluation of other long-term assets (37) - (21) - - Changes in operating assets and liabilities: Decrease (increase) in trade receivables 41 (32) (39) (60) (182) Decrease (increase) in other receivables (125) (231) (24) Decrease (increase) in inventory 93 (5) (11) Increase in other assets, net (267) (65) (139) (32) (201) Increase (decrease) in trade payables (11) (9) (24) 48 (27) Increase (decrease) in other payables 31 (20) 20 (102) (17) 844 1, (1) Net of dividends and earnings received The accompanying notes are an integral part of the consolidated interim financial statements

51 Consolidated Statements of Cash Flows Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited (B) Cash derecognized from disposal of investments in previously consolidated subsidiaries Working capital, net - (14) - (14) (14) Fixed assets Non-current assets Deferred taxes Non-controlling interests - (2) - (2) (2) - (13) - (13) (13) (C) Acquisition of a company consolidated for the first time Working capital deficit, net (excluding cash) Investments in oil and gas exploration and production (2,325) - (2,325) - - Investments in associates (717) - (717) - - Deferred taxes (2,140) - (2,140) - - Goodwill (131) - (131) - - Other non-current assets (31) - (31) - - Loans from banks and others 1,167-1, Debentures 1,095-1, Provisions and other liabilities 1,197-1, (1,829) - (1,829) - - (D) Significant non-cash activities Purchase of fixed assets and intangible assets Dividend payable by associates Loans provided to buyers of an investee Investment in oil and gas assets against liability Dividend payable to holders of non-controlling interests in the subsidiary partnership Proceeds from sale of gas and oil assets The accompanying notes are an integral part of the consolidated interim financial statements

52 Consolidated Statements of Cash Flows Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited (D) Additional information on cash flows Cash paid during the period for: Interest Taxes on income Cash received during the period for: Interest Dividends Taxes (E) See Note 3A for information about cash flows from discontinued operations. The accompanying notes are an integral part of the consolidated interim financial statements

53 Notes to the Consolidated Interim Financial Statements NOTE 1: GENERAL These financial statements have been prepared in condensed format as of June 30, 2017 and for the six and three months then ended ( the Consolidated Interim Financial Statements ). The financial statements should be read in the context of the Company s annual financial statements as of December 31, 2016 for the year then ended, and their accompanying notes ( the Annual Financial Statements ). NOTE 2: SIGNIFICANT ACCOUNTING POLICIES A. Preparation format of the Consolidated Interim Financial Statements The Consolidated Interim Financial Statements have been prepared in accordance with generally accepted accounting principles for the preparation of interim financial statements as prescribed in IAS 34, Interim Financial Reporting and in accordance with the disclosure requirements of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970, insofar as the provisions of these standards apply to insurance subsidiaries. The main accounting policy and calculation methods applied in the preparation of these Consolidated Interim Financial Statements are consistent with those applied in the preparation of the Annual Financial Statements. B. Further to Note 2HH(B) to the Annual Financial Statements regarding the possible effect of IFRS 15, Revenue from Contracts with Customers, on the recognition of revenue in the oil and gas sector, the Group continued to review the implications of application of IFRS 15 at the mandatory adoption date (January 1, 2018). Following the review, at this stage, the Group reached the conclusion that the new standard is not expected to have a material effect on its financial statements, for oil and gas revenue as well. The Group will continue to review relevant developments and publications, and if there is a change in this conclusion, the Group will report this in the subsequent financial statements. C. Under the Taxation of Profits from Natural Resources Law, 2011 ( the Tax Law ), some Group companies are subject to an oil profit levy on their profits from their various oil and gas reservoirs in Israel. The rate of the levy is progressive and increases as profits increase (between 0% and 46.8%). In accordance with the accounting treatment applied by the Group to date with respect to the Tax Law, the Group reached the conclusion that the levy is within the scope of IAS 12, Income Taxes ( IAS 12 ), and accordingly, it was taken into account when determining the taxes on the Group s income, if relevant. In the second quarter of 2017, the relevant Group companies rediscussed this issue, including a reexamination of whether the levy is indeed within the scope of IAS 12 or whether it is within the scope of IFRIC 21, Levies, and the required timing for recognition of the levy in the financial statements. At the beginning of August 2017, Delek Drilling - Limited Partnership ( Delek Drilling or the Partnership ), together with the Israeli partners in the Tamar project, applied to the Israel Securities Authority and expressed its position on the subject. As of the approval date of the financial statements, the examination and discussions on this subject have not yet been exhausted. It should be clarified that the Group believes that the accounting treatment of the levy is not expected to have an effect on these financial statements and it believes that, as expressed in the application of Delek Drilling to the Israel Securities Authority, as set out above, a liability for the levy should only be recognized on the date on which the obligation to pay it is established (meaning, only from the date on which it actually commences payment)

54 Notes to the Consolidated Interim Financial Statements NOTE 3: INVESTMENTS IN INVESTEES AND PARTNERSHIPS A. The Phoenix Holdings Ltd. ( The Phoenix ) 1) Further to Note 10F(A) to the Annual Financial Statements, on August 21, 2016, the Company signed a binding agreement for the sale of all the Company's holdings (52.3%) in The Phoenix. Under the agreement, the buyer was Yango Investment PTE Ltd. ( Yango ), a private company incorporated in Singapore and a subsidiary of Fujian Yango Group Co. Ltd. a significant holding group incorporated and operating in China in diverse fields, including finance, education, health, real estate and international trading. The consideration as set out in the agreement amounts to NIS 1,948 million plus annual interest at the rate of 4.75% from January 1, 2017, and until the closing date of the transaction. The agreement stipulates terms for its cancellation by the Company or the buyer in the event of various breaches, and it also stipulates that if the terms for completion of the transaction have not been fulfilled within six months after signing the agreement, either of the parties to the agreement may notify the other party that it is canceling the agreement. The agreement included preconditions, which include a control permit from the Commissioner of the Capital Market, Insurance and Savings at the Ministry of Finance. On February 16, 2017, the parties signed an amendment to the agreement which extended the period for the preconditions to March 31, On April 5, 2017, the parties signed an amendment to the agreement, in which it was determined, among other things, that the consideration for the Company's full holdings in the shares of The Phoenix will amount to NIS 2,152 million. Under the agreement, NIS 1,987 million will be paid in cash at the closing date and the balance will be paid in three payments. The first payment will be paid up to 30 days after the closing date and the last payment will be no later than April 30, The deadline for completion of the terms for closing has been set for June 4, After this date, each of the parties may inform the other party of its cancellation. On June 26, 2017, in view of the prolonged process of obtaining approval to transfer control in The Phoenix to Yango Group, the parties agreed to cancel the agreement in accordance with the mechanism set out in the agreement, and each party irrevocably and unconditionally waives any allegation, claim or loss in connection with the agreement. It should be noted that the Company has received new offers from Israeli and foreign entities in connection with the sale of its holdings in The Phoenix, and it is continuing to take steps and is negotiating to sell its holdings as required by law. 2) Notwithstanding the termination of the agreement and in view of the Company's commitment to sell its holdings in The Phoenix in accordance with the Concentration Law, and in view of the Company s assessment regarding the expected disposal of the Company s investment in The Phoenix shares, the Company believes that it still complies with the criteria set out in IFRS 5, Non-current Assets Held for Sale and Discontinued Operations ( IFRS 5 ) regarding the classification of its investment in The Phoenix as assets and liabilities held for sale. Accordingly, as of June 30, 2016, the investment in shares of The Phoenix is recognized in accordance with the provisions of IFRS 5 as part of a group of assets held for sale and under liabilities attributable to assets held for sale. In addition, the operating results of The Phoenix, including fair value adjustments of the investment, are recognized in the statement of income under profit from discontinued operations, net. As of June 30, 2017, the Company's investment in The Phoenix amounts to NIS 2,076 million, which represents the fair value estimate net of costs to sell of the investment, in accordance with the consideration set out in the amendment to the agreement signed between the parties as set out above, which is within the range of the selling prices with other potential investors. In the reporting period, the Company included its share in the profits of The Phoenix amounting to NIS 249 million and its share in the other comprehensive loss of The Phoenix amounting to NIS 8 million. In addition, in the reporting period, the Company recognized a loss arising from recognition of the provision for impairment amounting to NIS 44 million, due to its estimated fair value less costs to sell of the investment in The Phoenix, as set out above. As of June 30, 2017, the value of the Company's investment in The Phoenix shares at the TASE price of a single share of The Phoenix, ( the Market Value ), amounts to NIS 1,938 million (shortly before the approval date of the financial statements, the Market Value of the Company's investment in the shares of The Phoenix amounts to NIS 2,049 million)

55 Notes to the Consolidated Interim Financial Statements NOTE 3: INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.) 3) Financial information for The Phoenix: A) Group of assets and liabilities relating to the operations of The Phoenix classified as held for sale: June 30 December Unaudited Audited NIS million Current assets Cash and cash equivalents 1, ,040 Performance-based cash and cash equivalents 6,562 6,596 5,839 Short-term investments of the finance sector (mainly exchange-traded funds and deposits) 27,854 28,537 28,752 Short-term investments 1, Short-term investments in insurance companies 1,587 1,925 1,913 Insurance premium receivable Other receivables Current tax assets Reinsurance assets Deferred acquisition costs ,718 40,480 39,821 Non-current assets Financial investments of insurance companies 56,786 50,360 54,252 Long-term loans, deposits and receivables Investments in associates Investment property 3,457 3,173 3,376 Reinsurance assets Fixed assets, net Deferred acquisition costs 1, ,026 Structured bonds Goodwill Other intangible assets, net Deferred taxes ,531 58,056 61,918 Total assets 105,249 98, ,

56 Notes to the Consolidated Interim Financial Statements NOTE 3: INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.) A) Group of assets and liabilities relating to the operations of The Phoenix classified as held for sale (contd.): June 30 December Unaudited Audited NIS million Current liabilities Interest bearing loans and borrowings Trade payables Other payables 2,000 1,946 1,968 Exchange-traded funds and deposit 26,540 27,311 27,387 Current tax liabilities Liabilities for insurance contracts 4,735 4,409 4,480 33,799 34,176 34,412 Non-current liabilities Debentures 2,633 2,367 2,247 Structured bonds Liabilities for employee benefits Liabilities for insurance contracts 63,542 57,331 60,194 Provisions and other liabilities Deferred taxes ,157 60,757 63,474 Total liabilities 100,956 94,933 97,

57 Notes to the Consolidated Interim Financial Statements NOTE 3: INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.) B) The table below presents information on the results of operations attributable to the discontinued operations of The Phoenix: Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Revenue 7,220 5,556 3,720 3,238 12,768 Cost of revenues 5,144 4,151 2,660 2,386 9,230 Gross profit 2,076 1,405 1, ,538 Sales expenses ,527 General and administrative expenses ,143 Other expenses (income), net 3 (3) (1) - 7 Operating profit Finance expenses (net) Share in earnings of associates Income before tax Taxes on income (tax benefit) 233 (9) Impairment of investment in The Phoenix shares (44) (28) (74) (21) (278) Income from operations of The Phoenix Attributable to: Equity holders of the Company Non-controlling interests C) Composition of net cash flows attributable to the discontinued operations of The Phoenix: Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Net cash from operating activities 806 1, Net cash used in investment activities (85) (106) (41) (48) (220) Net cash from (used for) finance activities 279 (71) (22) 103 (112) 1,

58 Notes to the Consolidated Interim Financial Statements NOTE 3: INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.) B. Ithaca Energy Inc. ( Ithaca ) 1. Further to Note 10F(L) to the Annual Financial Statements, on March 14, 2017, DKL Investments Limited (a wholly-owned foreign subsidiary of the Company, hereinafter DKL ) submitted an offer to acquire the entire share capital of Ithaca not held by DKL (80%), for CAD 1.95 per share ( the Offer ), following the agreement with Ithaca in February 2017 to publish the Offer. The Offer was open to acceptance notice until April 20, 2017, and after it was accepted for the most part, it was extended mandatorily until May 3, The Offer was accepted by the holders of 318,833,909 ordinary shares and DKL acquired their shares for a total consideration of CAD 622 million (approximately NIS 1,685 million). Following the sale, DKL held 400,699,334 ordinary shares of Ithaca, representing 94.2% of its ordinary share capital. On May 12, 2017, DKL announced that, in accordance with the terms of the Offer, it intends to carry out a compulsory acquisition of the remaining ordinary shares of Ithaca that are not held by DKL, so that following the acquisition, DKL will hold the entire share capital of Ithaca, at the price per share set out in the Offer and for a total consideration of CAD 48 million (approximately NIS 126 million) On June 5, 2017, the compulsory acquisition was completed, after which Ithaca's shares were delisted from the AIM in London and the Toronto Stock Exchange. It should be noted that following the Offer, Ithaca received waivers from banks and other entities holding short- to medium-term liabilities that include change of control items, according to which these entities will not exercise their right for immediate payment due to the change of control following the Offer. 2. In view of the gain of control in Ithaca, the Group consolidates Ithaca's financial statements as from the date control was gained (April 21, 2017). In addition, in accordance with IFRS 3 regarding a step acquisition, the Group s investment in Ithaca shares prior to gaining control is measured at its fair value, while the difference between the fair value and its carrying amount will be recognized in the statement of income. The difference (profit) (after recognition in the statement of income of capital for translation differences accrued up to the date of gain of control) amounted to NIS 137 million and was included in the Group's statement of income under profit from realization of investments in partnerships and investees, net. 3. On June 28, the Company provided credit in the amount of USD 15 million to Ithaca, bearing interest at the rate of 3%. 4. The Company recognized the fair value of the assets acquired and the liabilities assumed in the business combination on a temporary basis, based on the draft valuation performed by an external appraiser for the fair value of the identifiable assets acquired and the liabilities assumed. The consideration for the acquisition and the fair value of the acquired assets and liabilities are adjustable finally up to twelve months from the acquisition date

59 Notes to the Consolidated Interim Financial Statements NOTE 3: INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.) B. Ithaca Energy Inc. ( Ithaca ) (contd.) Fair value of the identifiable assets acquired and liabilities assumed in the business combination at the date of obtaining control, in accordance with the draft valuation: USD million Unaudited Current assets 182 Investments in oil and gas exploration and production 632 Investments in associates 314 Deferred taxes 581 Other non-current assets 8 1,717 Current liabilities 191 Loans from banks and others 317 Debentures 298 Provisions and other liabilities (mainly for disposal of assets) 325 1,131 Identifiable assets, net 586 Goodwill arising on acquisition 36 Total cost of acquisition 622 The total cost of the acquisition includes the cash consideration of USD 503 million (approximately NIS 1,851 million) and USD 119 million (approximately NIS 436 million), reflecting the fair value of the prior investment on the date of obtaining control, after being revalued to fair value at that date. The costs of the transaction amounted to NIS 17 million, which were recognized in the statement of income. For information about Ithaca's contribution to the Group's revenue and net profit as from the acquisition date, see Note 10, Operating Segments

60 Notes to the Consolidated Interim Financial Statements NOTE 3: INVESTMENTS IN INVESTEES AND PARTNERSHIPS (CONTD.) C. Condensed information for companies accounted for at equity 1) The Group holds 22.5% of the shares of Delek Automotive. The Group s investment in Delek Automotive is accounted for using the equity method. Following is condensed information from the financial statements of Delek Automotive for each reporting period: June 30 December Unaudited Audited NIS million Current assets 1,494 1,629 1,710 Non-current assets 1,020 1,001 1,048 Current liabilities 1,671 1,863 1,885 Non-current liabilities Equity attributable to equity holders of the investee Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Revenue 2,025 2, ,428 Gross profit Operating profit Finance income (expenses), net 4 (117) 6 (96) (12) Net earnings attributable to equity holders of the investee

61 Notes to the Consolidated Interim Financial Statements NOTE 4: INVESTMENTS IN AVAILABLE-FOR-SALE FINANCIAL ASSETS On November 27, 2016, the Company signed an agreement with Ratio Petroleum Energy - Limited Partnership ( Ratio Petroleum ), whereby the Company will invest in the participation units of Ratio Petroleum. The agreement will come into effect after their issue on the Tel Aviv Stock Exchange. On January 23, 2017, the participation units were listed on the TASE. The total consideration for the acquisition of 20,069,392 participation units, representing 17% of the partnership's capital, amounted to NIS 21 million. Concurrently with the issue of the participation units, Ratio Petroleum allotted options exercisable for the participation units of Ratio of Petroleum to investors, including the Company, for no consideration. The Company may appoint one director to serve on the board of directors of the general partner, Ratio Petroleum, so long as it holds 10% of the participation units of Ratio Petroleum. These securities are locked up in accordance with the guidelines of the TASE. Further to Note 9 to the Annual Financial Statements regarding the Company's investment in Faroe Petroleum PLC ( Faroe ), in the second quarter of 2017, the Company invested an additional NIS 33 million. Subsequent to the acquisition, the Company holds 15.37% of the shares of Faroe. NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS The Group operates mainly through Delek Drilling, subsequent to the merger with Avner Oil Exploration - Limited Partnership, as described below, in a number of joint ventures for the exploration, development, and production of oil, natural gas, and condensate in the exclusive economic zone of Israel and Cyprus, and sells natural gas and condensate to a variety of customers (see also Note 12 to the Annual Financial Statements). Further to Note 12(N) to the Annual Financial Statements, regarding the merger of Delek Drilling and Avner, on May 17, 2017, the merger was completed. As part of the merger, Delek Drilling allocated its participation units to all holders of Avner's participation units and all Avner's assets and liabilities were transferred to Delek Drilling. After completion of the merger, the Group holds 56% of Delek Drilling's participation units (linked). The merger did not have a material effect on the Group's financial statements, other than a decrease of NIS 21 million in equity attributable to the equity holders of the Company against a corresponding increase in the balance attributable to non-controlling shareholders. See also Note 7D below regarding the motion for certification as a class action in connection with the merger transaction. The main changes in the reporting period appear below: A. Ratio Yam joint venture 1. Plan for development of the Leviathan reservoir Further to Note 12E to the Annual Financial Statements, on February 23, 2017, the Leviathan partners made a final investment decision (FID) for the development of Stage 1A in the development plan of the Leviathan reservoir, with an annual capacity of 12 BCM, at a budget of USD 3.75 billion, to allow the supply of natural gas from the Leviathan reservoir to start by the end of Appraisal, development and production drillings under the development plan: A) In December 2016, the Leviathan partners made a decision regarding the appraisal and production drilling of Leviathan-5 in the area of the I/15 Leviathan North lease ( the Well ). The Well is also planned to be used as a production well in the future. The Well was completed in July 2017, after reaching its final planned depth and verification of the existence of natural gas in three layers of the Leviathan reservoir (Sands A, B, and C), in accordance with the operator s preliminary estimate of the Well. As of the balance sheet date, the cost of the Well is USD 69 million (100%, the Partnership's share is USD 31.3 million), excluding the cost of its completion and connection to the production system of the Leviathan reservoir

62 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) A. Ratio Yam joint venture (contd.) 2. Appraisal, development and production drillings under the development plan (contd.) B. In March 2017, the Leviathan partners made a decision regarding the development and production drilling of Leviathan 7 in the area of the I/14 Leviathan South lease (below in this section: ( the Well ). The Well is a development well and it will be connected as a production well to the Leviathan project production system at a later stage. Subsequent to the balance sheet date, in July 2017, after the upper part of the Leviathan 7 well was drilled continuously together with the Leviathan 5 well, the drilling operator terminated the agreement with the Atwood Advantage drilling rig and is working to advance an agreement with an alternative drilling rig to redrill the lower part of the Leviathan 7 well as well as the lower part of the Leviathan 3 well, as from the first quarter of As of the balance sheet date, the cost of the Leviathan 7 well is USD 17 million (100%, the Partnership's share is USD 7.7 million). It should be noted that the cost of the wells, as set out above, is included in the budget for development of Stage 1A in the development plan. 3. In the reporting period, the Israeli partners in the Leviathan project provided a company guarantee in favor of the Israeli Tax Authority (Customs) for equipment purchased by the operator for development of the Leviathan project. The Company's share in the guarantee was NIS 172 million. B. Michal Matan joint venture (Tamar and Dalit Leases) 1. Estimated natural gas and condensate reserves in the Tamar gas field: According to a report prepared on July 2, 2017 by NSAI, based on the guidelines of SPE- PRMS, following the information received from the Tamar-8 development and production wells, which indicated a significant increase in the volume of reserves in the Tamar project, the natural gas reserves in the Tamar project (which includes the Tamar and Tamar SW reservoirs) classified as on-production reserves, as of June 30, 2017, and classified as proved reserves, are BCM and the volume of reserves classified as proved + probable reserves is BCM. In accordance with this report, the condensate reserves in the Tamar and Tamar SW reservoir, classified as approved for production, as of June 30, 2017, which are classified as proved reserves, amount to 10.4 million barrels and the reserves classified as proved + probable reserves amount to 14.6 million barrels. The above reserves do not include the reserves migrating to the Eran license. The estimates of the natural gas and condensate reserves in the leases are partially based on geological, geophysical, engineering and other information received from the drillings and from the operator in these rights. These estimates are the professional estimates and assumptions only of NSAI and there can be no certainty in respect of them. Actual quantities of natural gas and condensate consumed may be different from these estimates and assumptions, partly due to technical and operational conditions and/or regulatory changes and/or the supply and demand conditions in the natural gas and/or condensate market and/or commercial conditions and/or as a result of actual performance of the reservoirs. The estimates and assumptions may be revised if additional information becomes available and/or as the result of a range of factors related to oil and natural gas exploration and production projects

63 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) B. Michal Matan joint venture (Tamar and Dalit Leases) (contd.) 2. In October 2016, development and production drilling began at Tamar-8, which is designed, among other things, to increase the redundancy in the production system and allow maximum supply from the Tamar reservoir during peak demand. The drilling was completed (including completion and connection to the production system) in April 2017 and natural gas started to flow from the well. The total cost of the drilling, including the completion and development of the subsea system and connection of the well to the existing infrastructure of the Tamar project, is USD 241 million (100%, the Partnership s share is USD 75.3 million). 3. Sale of the Partnership's rights at a rate of 9.25% of the rights in the Tamar and Dalit reservoirs A) Subsequent to the balance sheet date, on July 2, 2017, the Partnership signed a sale agreement ( the Sale Agreement or the Agreement ) with Tamar Petroleum Ltd. ( Tamar Petroleum ) for the transfer of 9.25% of the rights in the Tamar and Dalit leases to Tamar Petroleum. The sale of the rights in the leases was carried out through the raising of debt and capital. The transaction underlying the Sale Agreement was completed on July 20, 2017, in a cumulative amount of NIS 3 billion ( the Consideration of the Issuance ). The Consideration of the Issuance was used by Tamar Petroleum for the purchase of the Object of the Sale (as defined below) from the Partnership. The main points of the Sale Agreement are as follows: a. The Partnership undertook to sell and transfer to Tamar Petroleum the participation rights at a rate of 9.25% (out of 100%) in the Tamar and Dalit leases, subject to the existing commitments to pay overriding royalties to the Group and its subsidiaries and to third parties, as well the proportionate share (9.25%) of the rights and undertaking under the joint operating agreement, the agreements for the sale of gas from the Tamar lease, the agreement for the use of the Yam Tethys facilities, shares of Tamar 10 Inch Ltd., approval for the operation of the Tamar platform and the export approvals from Tamar (above and below: the Object of the Sale ). b. The consideration of the Object of the Sale paid to the Partnership included an amount of NIS 3 billion in cash and shares at a rate of 40% of the capital of Tamar Petroleum. c. Tamar Petroleum has undertaken to take steps to allow the Partnership to perform a shelf (sale) offering, subject to certain qualifications and restrictions, including a lockup period that will apply to the shares as set out below. d. Of the amount of the cash consideration due to the Partnership, Tamar Petroleum was provided a loan bearing annual interest at the rate of 3%. As of the approval date of the financial statements, the balance of the loan amounted to USD 14 million

64 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) B. Michal Matan joint venture (Tamar and Dalit Leases) (contd.) 3. Sale of the Partnership's rights at a rate of 9.25% of the rights in the Tamar and Dalit reservoirs (contd.) A) (contd.) e. The record date for calculation of the amount of the consideration and transfer of the rights and obligations for the Object of the Sale to Tamar Petroleum is July 1, 2017 ( the Record Date ). f. The agreement stipulates that the Partnership will continue to be responsible for the following issues, also after the closing date of the transaction: the arbitration for the production component tariff (see section J below), the appeal regarding the royalties for the sale of gas from the Tamar project to customers of the Yam Tethys project, including for any liability in connection with these proceedings incurred subsequent to the Record Date; the motion for certification of a class action filed by a consumer of the IEC against the Tamar partners (see Note 4N below), for amounts received by the Partnership in the period prior to the Record Date; the liability for taxes and royalties to the State for the period prior to the Record Date, or for any profit, income or receipt of the Partnership in connection with the Object of the Sale (including if such tax assessment was made subsequent to the Record Date), with the exception of taxes relating to reports submitted prior to the Record Date to the tax authorities in connection with the Taxation of Profits from Natural Resources Law, 2011; taxes applicable to the Partnership in connection with the transfer of the Object of the Sale to Tamar Petroleum, liabilities to the Partnership s suppliers or customers for the Object of the Sale relating to the period up to the Record Date, unless provisions were made for such liabilities in the financial statements of Tamar Petroleum; and any liabilities in connection with Delek and Avner (Tamar Bond) Ltd. g. Tamar Petroleum paid all the payments, expenses and fees to the State (with the exception of taxes as aforesaid) for the transfer of the Object of the Sale to Tamar Petroleum and receipt of the approvals. Tamar Petroleum also paid all the expenses and costs related to the issuance of the debentures. The Partnership paid all the expenses and costs of consultants and experts in connection with the prospectus and all expenses in connection with the issue of the shares of Tamar Petroleum. h. In the agreement for the Object of the Sale, various representations were made by the Partnership, as is customary in transactions of this type, including an undertaking for indemnification for breach of representations. Additional provisions were also prescribed, as is standard in agreements of this type, including for resolution of disputes, interpretation and delivery of notices

65 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) B. Michal Matan joint venture (Tamar and Dalit Leases) (contd.) 3. Sale of the Partnership's rights at a rate of 9.25% of the rights in the Tamar and Dalit reservoirs (contd.) A) (contd.) i. The Sale Agreement also stipulates that if the Partnership holds shares of Tamar Petroleum subsequent to completion of the share issuance, the Partnership unilaterally waives all the voting rights attached to all the shares that it holds over and above shares in a number equaling 12% of the shares of Tamar Petroleum after completion of the issuance. To remove all doubt, it was clarified that all the equity rights attached to the shares held by the Partnership will remain in full force, including: the right to receive dividends, bonus shares, rights and the right to receive surplus assets upon dissolution of Tamar Petroleum. The surplus shares above 12% ( the Surplus Shares ) will be deposited with a trustee who will act in accordance with an irrevocable letter of instructions, which will determine, among other things, that: the Surplus Shares will also include bonus shares or rights, or shares deriving from such rights, which will be allotted to the Partnership for the Surplus Shares as part of the issuance of bonus shares and/or rights to all of the shareholders of Tamar Petroleum. In terms of any future issuance of rights, the Partnership will instruct the trustee whether to exercise or sell the right. The trustee will transfer to the Partnership any dividend it receives for the Surplus Shares. At any time when the Partnership wishes to sell the Surplus Shares, in whole or in part, to a third party, the trustee will transfer the shares to whoever the Partnership so instructs in writing, against receipt of the full consideration (unless the Partnership instructs transfer of the shares prior to receiving the consideration), provided that the Partnership submits written notification to the trustee of the details of the transferee and signs any document required for such transfer. Upon the sale or transfer of the Surplus Shares from the Partnership to a third party as aforesaid, they will be entitled to all rights attached to ordinary shares in Tamar Petroleum. The Partnership has undertaken to first sell the Surplus Shares (the sale of which will confer on the buyer all of the rights attached to them, including voting and equity rights, as set out above) and has further undertaken that as long as it did has not sold the Surplus Shares, it will not acquire additional shares of Tamar Petroleum. It is clarified for this purpose that shares to be allotted to the Partnership as part of an issue of bonus shares or a rights issue will not be considered a purchase for the purpose of this undertaking. It should be noted that the TASE lock-up provisions will apply to the shares of Tamar Petroleum to be allotted to the Partnership. In addition, in accordance with the distribution agreement of the Partnership and Tamar Petroleum with HSBC and JP Morgan dated July 18, 2017, in the period ending 180 days after trading in the shares of Tamar Petroleum begins, the Partnership undertook (A) not to offer, sell, pledge or make any other disposition in shares or in securities convertible to the shares of Tamar Petroleum; (B) not to carry out swap transactions or other similar arrangements whose economic nature is the performance of such a disposition; or (C) not to propose a resolution at a general meeting or to convene a general meeting in which the agenda includes the approval of an allotment of shares or securities convertible to shares; other than in the following cases: (1) receipt of the written consent of the international distributors; (2) allotment of the shares in accordance with the distribution agreement; (3) a disposition in response to a merger proposal; (4) a disposition as part of a general buyback plan of Tamar Petroleum; (5) a disposition by virtue of the law or under a court order; (6) a disposition of shares as part of a private sale, provided that the transferee assumed the restrictions in sections (1) to (5) above. The sale of these rights was contingent upon fulfillment of preconditions, which were met in full

66 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) B. Michal Matan joint venture (Tamar and Dalit Leases) (contd.) 3. Sale of the Partnership's rights at a rate of 9.25% of the rights in the Tamar and Dalit reservoirs (contd.) A) (contd.) i. (contd.) The Partnership also undertook not to propose more than one director at the general meetings convening for the purpose of appointing directors. The articles of association of Tamar Petroleum set out provisions establishing the Partnership s waiver of voting rights attached to shares to be held at a rate exceeding 12% of the issued share capital and several provisions that will apply as long as the Partnership holds 25% or more of the issued and paid-up share capital of Tamar Petroleum, including: provisions regarding an appointments committee to be set up if the Company wishes to propose candidates for the appointment of directors in Tamar Petroleum at a general meeting of shareholders; restrictions on the eligibility of directors according to which all but one of the directors will not have an interest in the Partnership; and a restriction on the manner of approving transactions with the Group or a corporation under its control. On July 20, 2017, all the preconditions set out in the Sale Agreement were fulfilled, including receipt of approval from the Commissioner of Petroleum Affairs for the transfer of rights in the Tamar and Dalit leases and their listing in the Oil Register, following which the rights were transferred at a rate of 9.25% (out of 100%) in the Tamar and Dalit leases for a cash consideration of NIS 3 billion (approximately USD 850 million) (not including expenses related to the issuance of the shares of Tamar Petroleum) in return for the allocation of 19,990,000 ordinary shares of NIS 0.1 par value each of Tamar Petroleum ( the Cash Consideration ). Of the total Cash Consideration, the Partnership repaid USD 320 million for partial early repayment of four series of debentures issued in the past (Series 2018, 2020, 2023 and 2025), representing 20% of the unpaid balance of each of the debenture series (meaning, USD 80 million in each of the series), plus accrued interest of USD 1.1 million, all in accordance with the provisions of the deed of trust of the debentures. B) Subsequent to the balance sheet date, on July 20, 2017, a tax decision was received from the Tax Authority, determining, among other things, the date of the tax payment for the Consideration in Shares, according to which, subject to the terms and instructions set out therein: a. The Partnership will pay advance tax payments according to the law for the capital gain that the Partnership will derive from the Cash Consideration. b. The payment date of the tax for the capital gain arising from the Consideration in Shares will be deferred until the occurrence of one of the following ( the Deferred Tax ): 1) On the exercise date of the shares of Tamar Petroleum, the Deferred Tax will be paid for the portion of the exercised shares out of the total shares held prior to the exercise; on the date on which the rate of the Partnership's holding in the shares of Tamar Petroleum falls to 5% or less, the full balance of the Deferred Tax will be paid. 2) If the Partnership declares the distribution of a dividend after August 1, 2017, in an amount exceeding the amount of the capital gain from the sold rights, net of the tax paid for it, an amount equal to 25% of the declared distribution will be paid out of the Deferred Tax, and no more than the balance of the Deferred Tax (distribution of profits declared prior to that date will not bring forward payment of the Deferred Tax)

67 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) B. Michal Matan joint venture (Tamar and Dalit Leases) (contd.) 3. Sale of the Partnership's rights at a rate of 9.25% of the rights in the Tamar and Dalit reservoirs (contd.) B) (contd.) 3) When Tamar Petroleum distributes a dividend to its shareholders, the Deferred Tax will be paid in an amount equal to 25% of the dividend received by the Partnership and no more than the balance of the Deferred Tax that has not yet been paid. c. The Partnership is entitled to bring forward the payment date of the Deferred Tax, at its sole discretion. d. To allow holders of the Partnership's participation units to benefit from the tax deferral arrangement established in the tax decision, it was determined that the tax certificates to be issued to eligible holders for the tax year will report only the capital gain due for that tax year according to the tax decision. It was further agreed that the capital gain, including the capital gain to be reported in the following years as a result of the sale of the shares of Tamar Petroleum, will be subject to the tax rates that apply in A holder may only offset the profit against a loss incurred up to and including the 2017 tax year. In August 2017, the Partnership paid advance tax payments in the amount of NIS million (approximately USD 156 million) on account of the capital gain. C) Accounting treatment for the Tamar Petroleum sale As a result of the aforesaid completion of the sale of the shares of Tamar Petroleum, in the third quarter of 2017, the Group is expected to recognize a profit from the exercise of its holdings in Tamar Petroleum and from the fair value measurement of the investment in Tamar Petroleum (in view of the loss of control over Tamar Petroleum), which is estimated, at this stage, at between NIS 750 million and NIS 800 million (profit net of tax attributable to equity holders of the Company). This amount also includes the estimated fair value of the rights of the Group companies to royalties based on future production for the rights sold to Tamar Petroleum (contingent consideration). C. As part of the process in which the Company began to exercise the overriding royalties to which it is entitled from the oil assets in which the Partnership holds or held an interest, by way of transferring the right to overriding royalties from the Company to a wholly-owned subsidiary, and the issuance of that company on the TASE, the question was discussed whether the directives of the Gas Outline Plan as set out in Note 12M(1) to the Annual Financial Statements, in connection with the Partnership's obligation to exercise its rights in the Tamar reservoir, also fulfill the need of the Company and companies under its control to realize the overriding royalty they hold from the Tamar reservoir, within the period specified in the outline for the disposal of Tamar, meaning by December 17, 2021 (within 4.5 years). The Company's position in principle, as also expressed in the directives of the Gas Outline Plan, is that the Gas Outline Plan refers to the Partnership s rights in the Tamar reservoir and does not regulate the exercise period of the overriding royalty from the Tamar reservoir, to which the Company and companies under its control are entitled. The official position of the State was not brought to the Company s attention

68 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) D. Block 12, Cyprus Further to Note 12H to the Annual Financial Statements regarding the application for a production license in the Aphrodite reservoir in Cyprus, the partners in the Aphrodite reservoir are working with the Government of Cyprus to obtain the approvals, and in this context, steps are being taken to submit an updated development plan, while continuing to conduct negotiations for the supply of natural gas to the local market in Cyprus, and to export natural gas to other markets, including the Egyptian market. E. Further information about the licenses of the Partnership 1. Further to Note 12B to the Annual Financial Statements, and in accordance with the ruling of the High Court of Justice regarding the petition to the High Court of Justice filed by the Eran partners against the Minister of Energy and the Commissioner, on the Minister of Energy's decision to dismiss the appeal filed by the Eran partners on the Commissioner's decision not to extend the Eran license, the parties turned to mediation. At the parties' request, the Court allowed them to report the results of the mediation process by October 3, Further to Note 12F(7) to the Annual Financial Statements regarding an appeal filed by the partners in the 351/Hanna license ( the Hanna License ), in June 2017, the Minister of Energy informed the partners in the Hanna License of his decision to dismiss the appeal. As a result, the Partnership deducted NIS 90 million (approximately NIS 40 million attributable to equity holders of the Company) for the costs of the Dolphin well under depreciation and amortization in the statement of income for the second quarter of Subsequent to the balance sheet date, the Partnership announced that on August 21, 2017, the Minister of Energy notified the partners in the 367/Alon D license ( The Alon D License or the License ) of his decision according to which the Alon D License will continue to be valid for 32 months from the date of his decision, subject to the conditions that were determined, after the appeal filed by the partners in the license, including the Partnership, to the Minister of Energy on February 25, 2016, on the Commissioner s decision of February 16, 2016 according to which the Alon D License will expire on March 1, 2016, and that failure to obtain the necessary approvals for drilling by law from other authorities does not constitute grounds for extending the Alon D License beyond the period prescribed in the Petroleum Law, F. Agreement to finance the Partnership's share in the costs of developing the Leviathan project On February 20, 2017, Delek Drilling signed the financing documents ( the Financing Agreement or the Agreement ) with a consortium of local and foreign financers headed by HSBC Bank Plc and JP Morgan Limited ( the Lenders ). Under the Financing Agreement, Delek Drilling will receive a limitedrecourse loan of USD 875 million ( the Loan ) to finance its share in the investment in the development of the Leviathan project ( the Leviathan Project ). Concurrently with the signing of the Financing Agreement by Delek Drilling, a financing agreement was signed with the same terms and for the same purposes between the Lenders and Avner for a loan of the same amount. The loans provided to Delek Drilling (after its merger with Avner) amount to USD 1.75 billion. The Loan is divided into facilities, in accordance with the dates and conditions in the agreement. The Loan agreement includes another facility of USD 750 million for each Partnership (a total of USD 2.5 billion), which is contingent on signing agreements for the supply of gas at a minimum total annual volume defined in the Agreement, and a decision to increase the capacity of the production and transmission system to Phase 1B of the development plan or its alternative, which may be given by the Lenders, in whole or in part, or by other lenders, however, there is no undertaking by the Lenders to provide this facility. For further information about the terms of the Loan, see Note 12J(3) to the Annual Financial Statements

69 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) F. Agreement to finance the partnership's share in the costs of developing the Leviathan project (contd.) As of the reporting date, the Partnership withdrew USD 168 million from the loan funds. Under the terms of the Financing Agreement as set out above, the Partnership is exposed to potential changes in cash flows that may arise from changes in the Libor interest rate. As part of the risk management policy of the Partnership, in April 2017, the Partnership entered into IRS cash flow hedges for changes in the Libor interest rate, amounting to USD 1,100 million. The hedges are for changes in the Libor interest rate (three months) from the dates of the transactions until the expiry dates of the hedge transactions (October 2017). In effect, these transactions hedge against interest rate changes until the expected settlement of the transaction. If there is an increase in the interest rate by October 2017, the Partnership will be credited with the difference in the exercise price of each transaction. On the other hand, if there is a decrease in the interest rate, the Partnership will be charged with the difference in the exercise price, accordingly. The effect of the hedge transactions was recognized in hedging capital reserve. The effect of these transactions amounted to immaterial amounts. G. Letter of intent for the supply of natural gas from the Leviathan project to Edeltech Further to Note 12K(2) to the Annual Financial Statements, on January 16, 2017, the Leviathan partners and Edeltech Ltd. signed a non-binding letter of intent, in which the parties confirmed their intention to negotiate for an agreement to supply natural gas from the Leviathan project to the Buyer, in an estimated scope of 14.8 BCM over 17 years. The binding agreement, if signed, is in addition to the supply agreements signed in January As of the approval date of the financial statements, the Leviathan partners continue to hold negotiations, at various stages, with the aim of signing binding agreements for the supply of natural gas from the Leviathan project to the local market. H. Agreement for the export of natural gas from the Leviathan project to the National Electric Power Company of Jordan Further to Note 12K(2)b to the Annual Financial Statements, in February 2017, approval was received from the Commissioner for the export of natural gas under this agreement. In the reporting period, the Leviathan partners provided a company guarantee in accordance with their proportionate share in the Leviathan leases, in the amount of USD 18 million (100%, the Partnership's share is USD 8 million) to Israel Natural Gas Lines Ltd. ( INGL ), in accordance with the terms of the transmission agreement between the marketing company and INGL. I. Further to Note 12K(2) to the Annual Financial Statements, on May 4, 2017, the Partnership together with the Leviathan partners ( the Sellers ) notified their customers in the local market that all the preconditions of the Sellers have been fulfilled, as set out in the natural gas supply agreements signed with them. It should be noted that following the notice to Paz Ashdod Refinery Ltd. ( Paz ), all the preconditions in the gas supply agreement of November 24, 2016 between the Leviathan partners and Paz were fulfilled. J. Further to Note 12K(1)f to the Annual Financial Statements, in June 2017, the Partnership, together with the other Tamar partners, applied for international arbitration with one of the transaction customers. The partners believe, based also on the opinion of their legal counsel, that it is more likely than not that the partner's position, according to which the last agreed price of electricity production applied prior to the split will apply to the gas quantities supplied between May 2013 and February 2015, will be accepted

70 Notes to the Consolidated Interim Financial Statements NOTE 5: INVESTMENTS IN OIL AND GAS EXPLORATION AND PRODUCTION IN ISRAEL AND ITS SURROUNDINGS (CONTD.) K. Royalties to the State 1. In February 2017, a letter was received from the Ministry of Energy regarding advances on royalties for 2017, stating that the effective royalty rate to be paid as advances in 2017 in the Tamar project will amount to 11.65%. It was further clarified that this rate was set as an advance payment alone. The Operator and the other Tamar partners believe that calculation of the actual royalty rate to the state for revenue from the Tamar Project, should reflect the complexity and risks involved in the project, and the scope of investments in the project, compared to the Yam Tethys Project. 2. In February 2017, a letter was received from the Ministry of Energy regarding advances on royalties for 2017, stating that the royalty rate for the Yam Tethys project in 2017 will be 0%. It is noted that, if during the year, production will be significantly higher in the reservoir, this rate will be adjusted. L. In the reporting period, the contingent consideration for the rights from the sale of the Karish and Tamar leases was amended by the Company and the Partnership as set out in Note 12G to the Annual Financial Statements. The amendment was mainly due to the passage of time and the depreciation of the USD. The profit arising from the amendment in the reporting period, attributable to the equity holders of the Company (after tax) amounted to NIS 15 million, and on the other hand, an impairment loss of NIS 25 million was recognized for the depreciation of the US dollar, and was recognized in the statement of comprehensive income. NOTE 6: DEBENTURES As set out in Note 19E to the Annual Financial Statements, on February 21, 2017, the Company issued NIS 995,933,000 par value Debentures (Series B31) by way of expansion of the existing series for NIS 1,006 million (after offsetting issuance expenses of NIS 10 million). The effective annual interest rate of the debenture is 4.2%

71 Notes to the Consolidated Interim Financial Statements NOTE 7: CONTINGENT LIABILITIES There are contingent claims against the Company and certain investees for significant sums, including certification for class actions that might reach hundreds or billions of shekels. In some cases, it is not possible to assess their outcome at this stage, and therefore no provision was recorded in the financial statements, as set out below (see Note 23A to the Annual Financial Statements). A. Further to Note 23A(2) to the Annual Financial Statements, several lawsuits have been filed against The Phoenix, its investees and others, including motions for certification of class actions, amounting to significant sums (for further information see also the reports of The Phoenix, which are available to the public). B. Further to Note 23A(4) to the Annual Financial Statements, on May 20, 2014, a claim and motion for certification as a class action was filed against the Company, the chairman of the board of directors and the CEO of the Company, for alleged impairment of the value of the shares of the subsidiary Delek Energy Systems Ltd. The relief requested in the class action is financial compensation estimated at NIS 100 million (which was subsequently amended). On October 20, 2014, the applicant petitioned the court to amend the motion so that the controlling shareholder in the Company will be added to the respondents. In December 2014, the court hearing was held and shortly thereafter, a ruling accepted the motion for the amendment. In January 2015, the applicant filed an amended motion for certification and an amended statement of claim, including amendments that were not in the original motion, including an increase of the amount of the claim to NIS 400 million. In 2016, evidentiary hearings were held and summations were submitted to the court in respect of the motion for certification. On February 20, 2017, the Tel Aviv District Court handed down a ruling in respect of the motion for certification as a class action. In accordance with the court ruling, the motion for certification against the Company was accepted on the grounds of discrimination of the minority, and against the CEO of the Company and the chairman of the board of directors on the grounds of breach of duty of care and fiduciary duty. The court dismissed the motion for certification against the controlling shareholder. In accordance with the Court's ruling, the date for filing a motion for a rehearing of the motion for certification will be June 21, 2017 and it was ruled that the hearing of the claim will be postponed until the ruling of the Supreme Court on the appeal and the rehearing filed by the respondents. In April and May 2017, the applicant filed an appeal at the Supreme Court in connection with the dismissal of the motion against the controlling shareholder of the Company, as well as an application to reduce the amount of the guarantee set in the appeal and to extend the date for its deposit. In June 2017, an objection was filed on behalf of the Company. A ruling on the motion is yet to be handed down. Subsequent to the balance sheet date, on July 5, 2017, the Company filed an application for a re-hearing on its behalf, and a similar application was filed simultaneously on behalf of the officers. On July 9, 2017, a ruling was handed down according to which the hearing of the applications for a re-hearing filed on behalf of the Company and on behalf of its officers will be consolidated and the last date for filing the response of the applicant was set for September 24, At this stage, the results and risks of these proceedings cannot be assessed. C. Further to Note 23A(3) to the Annual Financial Statements, on September 2, 2012, a motion for certification of a class action was filed against Cohen Development and Industrial Buildings Ltd., the Company and some members of the Cohen and Tadmor family, former controlling shareholders of Cohen Development and Industrial Buildings Ltd. ( the Respondents ) regarding the procedure for acquiring control in Cohen Development and Industrial Buildings Ltd. by the Company. The remedies sought in the class action include monetary relief, which the applicant estimates at no less than NIS 49 million and declaratory relief that the shares acquired from the Respondents will not confer any rights and will be dormant shares as long as they are held by Delek Group. After litigation at the Tel Aviv-Jaffa District Court (Economic Division), in April 2014 the court dismissed the motion for certification as a class action against the Cohen and Delek Group, regarding the procedure for the transaction to gain control of Cohen, but partially upheld the motion for the Cohen family

72 Notes to the Consolidated Interim Financial Statements NOTE 7: CONTINGENT LIABILITIES (CONTD.) C. (contd.) On June 12, 2014, the applicants appealed the decision of the District Court at the Supreme Court, raising claims against the partial approval of their application and against the dismissal of the motion for certification regarding the Company and Cohen Development and Industrial Buildings Ltd. In addition, on June 26, 2014, the Cohen and Tadmor families filed a petition for a rehearing of the ruling of the District Court. On November 26, 2014, the Supreme Court ordered that the hearing of the appeals of the applicants and the Cohen and Tadmor families should be joined. In 2015, mediation failed, and as a result, the appeal was heard at the Supreme Court in June On May 16, 2017, the Supreme Court handed down its judgment in which the applicant s appeal was partially accepted and the claim was certified as a class action against the Company on grounds of breach of statutory duty (due to the failure to publish a tender offer under section 328 of the Companies Law when acquiring control in Cohen Development) and against members of the Cohen family on grounds of unjust enrichment (according to which the consideration of the sale of control in Cohen Development was received by them). The motion for certification in the matter of Cohen Development was dismissed. On May 21, 2017, the plaintiffs filed a notice regarding the Supreme Court's judgment on the appeals, and on June 6, 2017, the plaintiffs filed an amended statement of claim that conformed (according to the plaintiffs) to the judgment of the Supreme Court. The statement of defense on behalf of the Company (as well as the statement of defense on behalf of the Cohen and Tadmor families) was due to be filed at the court by September 6, 2017, however the parties filed a request for an extension (agreed upon), which if granted, statements of defense will be filed by October 16, The pre-trial hearing of the claim was scheduled for January 4, The Company believes, based on the opinion of its legal counsel, that at this stage, the chances that the claim against it will be accepted or the extent of any financial liability cannot be determined, therefore, no provision has been included in the financial statements. D. Further to Note 23A(8) to the Annual Financial Statements regarding the motion for certification of a class action in connection with the merger of Delek Drilling with Avner and in accordance with the court ruling of May 9, 2017, on July 27, 2017, responses to the motion for certification of a class action ( the Motion for Certification ) were filed in connection with the merger of the partnerships, which was filed against Avner Partnership, the general partner in Avner Partnership and members of its board of directors, Delek Group as the controlling shareholder in Avner Partnership (linked), and against PricewaterhouseCoopers Consulting Ltd. (PWC), as the economic advisor of an independent board committee established by Avner Partnership. It should be noted that on June 28, 2017, a motion to join as a respondent to the Motion for Certification was filed on behalf of the Partnership. On July 5, 2017, responses to the motion to join were filed, and on July 6, 2017, the Court ruled that the Partnership would join as a respondent and determined that it must file its response by October 4, The pre-trial hearing of the Motion for Certification will be held on January 31, The Company and the Partnership believe, based on the opinion of their legal counsel, that it is unlikely that the claim will be certified as a class action. E. Further to Note 23A(5) to the Annual Financial Statements regarding the motion for certification of a class action filed at the Tel Aviv District Court by a consumer of IEC against the Tamar partners, in December 2016, the Supreme Court ruled that the Partnership s motion to dismiss the motion for certification of the class action in limine will be heard before a panel as soon as possible, and ordered the applicant of the motion for certification and the Attorney General to submit responses to the motion for leave to appeal. On March 9, 2017, the Attorney General submitted his response to the motion for leave to appeal, whereby the motion should be accepted and court should have dismissed the case in limine. A hearing of the motion for leave to appeal was held on March 16, The ruling on the motion is expected to be handed down in the coming months. The Partnership believes, based on the opinion of its legal counsel, that it is unlikely that the claim will be certified as a class action

73 Notes to the Consolidated Interim Financial Statements NOTE 7: CONTINGENT LIABILITIES (CONTD.) F. Subsequent to the balance sheet date, on August 24, 2017, the Sorek power station, which was constructed by a subsidiary (IPP Delek Sorek Ltd.), was granted a production license and a supply license and subsidiary started to take steps to operate the power station. In an accompanying letter, the Electricity Authority noted that failure to comply with the provisions of Article 14(A) of the Electricity Market Regulations (Conventional Private Electricity Producer), 2005, according to which electricity will be transmitted from a facility over the electrical grid of the holder of the transmission or distribution license, is a violation of the provisions of the law and constitutes grounds for revoking the licenses. The Electricity Authority further clarified that the licenses do not exempt the subsidiary or any of its customers from payment of infrastructure fees or any other fee in accordance with the fees set by the Authority. It is noted that the power station was designed to supply electricity to the nearby desalination plant through a direct connection and not through the electricity grid. The Group is reviewing the contents of the Electricity Authority s letter and it believes, at this stage, based also on the opinion of its legal counsel, that it has solid defense arguments against the position of the Electricity Authority. NOTE 8: CAPITAL 1. On March 29, 2017, the Company declared the distribution of a dividend of NIS 200 million, which was paid in May The dividend per share is NIS An amount of NIS 11 million was distributed to a wholly-owned subsidiary partnership, Delek Financial Investments - Limited Partnership ( the Subsidiary Partnership. 2. On May 28, 2017, the Company declared the distribution of a dividend of NIS 200 million, which was paid in June The dividend per share is NIS NIS 11 million was distributed to the Subsidiary Partnership. 3. Subsequent to the balance sheet date, on August 29, 2017, the Company declared a dividend of NIS 260 million, which will be paid in September The dividend per share is NIS NIS 14 million will be distributed to the Subsidiary Partnership. NOTE 9: TAXES ON INCOME A. Further to Notes 31C and 31D to the Annual Financial Statements, regarding the best judgment tax assessments (Stage A, Assessment 03), which were issued to the Company in March 2016 for the tax years, according to which most of the Company s finance expenses for these years were not approved, in April 2017, the Company reached an agreement with the Income Tax Authority for these tax years. According to the agreement, most of the finance expenses were permitted and it was determined that part of the finance expenses will only be permitted upon the disposal of certain assets. In view of the agreement, as of December 31, 2016, carryforward losses amounted to NIS 2.3 billion. The agreement had no material effect on the Group's financial statements. B. In April 2017, assessments (Stage A, Assessment 03) for the tax years were issued for the subsidiaries (Delek Petroleum Ltd. and Delek Europe Holdings Ltd.). The dispute is in the assessments is mainly about the tax liability for revenue from dividends between Group companies, which were received from the profits for which corporate tax was paid in Israel. However, it should be noted that the Income Tax Authority believes that a credit can be granted for the disputed taxes paid by the companies. The assessments amount to hundreds of millions of NIS, and on the other hand, the amount of the credit may also amount to hundreds of millions of NIS, based on the opinion of the legal counsel and the tax advisors of the companies. The subsidiaries dispute the income tax position, among other things, because they believe it involves double taxation, and they have submitted objections to these assessments. At this stage, the subsidiaries believe, among other things, based also on the opinion of their legal counsel, that the tax assessments are not expected to have a material effect on the Group's financial statements

74 Notes to the Consolidated Interim Financial Statements NOTE 10: OPERATING SEGMENTS A. General In accordance with IFRS 8, the Group s operating segments are determined on the basis of management reports, which are mainly based on the investments in each subsidiary. Prior to the gain of control of Ithaca, the Group reported the following operating segments: Oil and gas exploration and production in Israel, automotive and spare parts and others. Upon the gain of control in Ithaca, which operates in the development and production of oil and gas assets in the North Sea, the Company decided that Ithaca s operations constitute a separate operating segment. Accordingly, subsequent to the acquisition, the operating segments are as follows: Oil and gas exploration and production in Israel and its surroundings: The main operation is in the Tamar joint venture, the Ratio Yam joint venture, the Yam Tethys joint venture, and other oil rights, mainly offshore the coast of Israel. Development and production of gas and oil assets in the North Sea: The activity is carried out by Ithaca, which owns rights in oil and gas assets in the North Sea region. The activity includes mainly production and marketing of oil and gas from the producing reservoirs and the development of additional reservoirs. The Company's share in the results of Ithaca in comparative periods was reclassified from other segments to the development and production of gas and oil assets in the North Sea sector. - Fuel in Israel: The main operation is marketing and sale of fuels and commodities at gas stations and other outlets, and storage and production of fuels in facilities. - Automotive and spare parts: The main operation is importing and marketing of Mazda, Ford and BMW vehicles and spare parts, through the associate Delek Automotive. Other: The main operation is investment in infrastructure, including mainly desalination and establishment of power stations, trading in derivatives through Barak Capital and the biochemical operation that includes mainly production and marketing of fructose, citric acid and ingredients for nutritional additives. It is noted that following classification of the operating results of The Phoenix under income (loss) from discontinued operations (see also Note 3), The Phoenix is not presented as a reportable segment

75 Notes to the Consolidated Interim Financial Statements NOTE 10: OPERATING SEGMENTS (CONTD.) B. Segment reporting 1) Revenue Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Revenue from external sources Oil and gas exploration and production in Israel and its surroundings ,821 Development and production of oil and gas assets in the North Sea Fuel in Israel 1,979 1, ,588 Other segments Inter-segment *) (17) (12) (11) (8) (21) Total in statement of income 3,160 2,726 1,618 1,437 5,778 *) Inter-segment sales are mainly for the sale of natural gas to other segments. 2) Segment results Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Oil and gas exploration and production in Israel and its surroundings ,581 Development and production of oil and gas assets in the North Sea Fuel in Israel Other segments (15) 14 (10) 6 (71) Adjustments *) (31) (16) (19) 1 (92) Operating profit ,486 *) Mainly administrative and general expenses attributable to headquarter companies

76 Notes to the Consolidated Interim Financial Statements NOTE 10: OPERATING SEGMENTS (CONTD.) B. Segment reporting 3) Contribution to net profit from continuing operations attributable to equity holders the Company Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS million Audited Oil and gas exploration and production in Israel and its surroundings Development and production of oil and gas assets in the North Sea 55 (4) *) 47 (13) *) (23) *) Fuel in Israel Automotive Other segments (15) 14 *) (11) 8 *) (21) *) Adjustments **) (129) (90) (23) (33) (102) Net earnings from continuing operations attributable to equity holders of the Company *) Reclassified **) Mainly administrative and general expenses, financing and taxes attributable to headquarter companies and gain from disposal of certain investments and changes in the value of investments

77 Draft 6 - August 29, 2017 Delek Group Ltd. Financial Information from the Interim Consolidated Financial Statements Attributed to the Company At June 30, 2017 Unaudited

78 Special Report in accordance with Regulation 38D Financial Figures and Financial Information from the Interim Consolidated Financial Statements Attributed to the Company Below are the separate figures and financial information attributed to the Company from the interim consolidated financial statements of the Group as at June 30, 2017, published as part of the periodic reporting ("Consolidated Reports"), presented in accordance with Regulation 38D of the Securities Regulations (Periodic and Immediate Reports), 1970: 3

79 Breakdown of Financial Information from the consolidated statement of financial position attributable to the Company Current assets At At June 30 December Unaudited Audited NIS millions Cash and cash equivalents Short-term investments Trade receivables Financial derivatives Other receivables ,005 1,015 1,686 Asset held for sale 1,946 1,702 1,739 Total current assets 2,951 2,717 3,425 Non-current assets Investments in investees and partnerships 6,377 6,498 6,940 Loans and capital notes to investees 2,890 1,028 1,074 Financial assets Long term loans and debit balances 316 1, Investments in oil and gas exploration and production Advance payments on account of the acquisition of a building Investment property Property, plant and equipment, net Total non-current assets 10,044 9,008 8,929 12,995 11,725 12,354 The accompanying additional information is an integral part of the financial information and of the separate financial information. 4

80 Breakdown of Financial Information from the consolidated statement of financial position attributable to the Company Current liabilities At At June 30 December Unaudited Audited NIS millions Current maturities of debentures Current bank and other borrowings and loan maturities Other payables (particularly interest payable) Total current liabilities 1,325 1, Non-current liabilities Long Term Bank Loans Debentures 6,507 6,163 5,475 Debentures convertible into Company shares 1,084-1,080 Deferred taxes Other liabilities (primarily liability for decommission of long term assets) Non-current liabilities 7,768 6,301 6,860 Equity attributable to equity holders of the Company Share capital Share premium 1,917 1,917 1,917 Proceeds for conversion option Retained earnings 2,665 2,431 2,644 Adjustments from the translation of financial statements of foreign operations (526) Reserve from transactions with holders of non-controlling rights Other reserves Treasury shares (433) (433) (433) Total capital 3,902 4,313 4,612 12,995 11,725 12,354 The accompanying additional information is an integral part of the financial information and of the separate financial information. August 29, 2017 Date of approval of the financial statements Gabriel Last Asi Bartfeld Barak Mashraki Chairman of the Board CEO CFO of Directors 5

81 Breakdown of Financial Information from the consolidated statement of income attributable to the Company Six months ended June 30 Three months ended June 30 Year ended December Unaudited Audited NIS million Revenue from overriding royalties and gas sales (net of royalties) Company's share in earnings of partnerships and investees, net Management fees from investees Total revenue Production cost of gas sold General and Administrative Expenses Other expenses (income), net 3 (2) 2 (9) 4 Operating profit Net financing income (expenses) with respect to loans to investees and others Financing income (expenses) (mainly for financial investments), net (24) (6) (29) Financing expenses (mainly with respect to debentures) (234) (186) (140) (114) (408) Pre-tax income Taxes on income Profit from continuing operations Income from discontinued operations, net Net earnings attributed to Company shareholders The accompanying additional information is an integral part of the financial information and of the separate financial information. 6

82 Breakdown of Financial Information from the consolidated statement of comprehensive income attributable to the Company Six months ended June 30 Three months ended June 30 Year ended December Unaudited Audited NIS million Net earnings attributed to Company shareholders Other comprehensive income (loss) Amounts classified or reclassified to profit and loss under specific conditions: Gain (loss) for available-for-sale financial assets, net (132) 10 (87) Transfer to the statement of income for disposal of available-for-sale financial assets - (21) - (18) (60) Transfer to the statement of income for impairment of available-for-sale financial assets Adjustments for translation of financial statements of foreign operations 3 (4) 3 5 Transfer to statement of income for adjustment due to translation of financial statements of foreign operations Profit (loss) for cash flow hedges (20) Attributed to the hedged asset of the results of cash flow hedges Other comprehensive income (loss) attributable to investees and partnerships (after tax effect) (623) (81) (308) 109 (66) Total other comprehensive income (loss) from continuing operations (722) (55) (340) Total other comprehensive income from discontinued operations Total other comprehensive income (loss) (710) (18) (340) Total comprehensive income (loss) attributed to Company shareholders (310) 147 (160) The accompanying additional information is an integral part of the financial information and of the separate financial information. 7

83 Financial Information from the consolidated statements of cash flows attributable to the Company Cash flows from the Company's operating activities Six months ended June 30 Three months ended June 30 Year ended December Unaudited Audited NIS million Net income attributable to Company shareholders Adjustments to reconcile statement of cash flows from the Company's continuing operating activities (a) 13 (236) 203 (158) (794) Net cash from (used for) continuing operations 413 (71) 383 (78) (169) Cash flows from the Company's investment activities Investments in property, plant and equipment and investment property (2) (144) (1) (2) (151) Proceeds from disposal of financial assets Proceeds from sale of investments in investees Short-term investments, net (141) Investment in available-for-sale financial assets (49) - (33) - (201) Collection of loans for others, net Provision of loans and capital investments of investees, net (1,921) (135) (1,705) (15) (164) Net cash from (used for) the Company's investment operations (1,624) 62 (1,634) Cash flows from the Company's financing activities Dividend paid to shareholders of the Company (400) (180) (400) (180) (460) Short term borrowings from banks and others, net 300 (263) 300 (144) (486) Issue of Debentures 1, ,103 Loans received from banks and others Repayment of long-term bank loans and debentures (6) - (6) - (740) Net cash from (used for) the Company's financing operations 900 (443) (106) (324) (423) Increase (decrease) in cash and cash equivalents (311) (452) (1,357) (138) 161 Cash and cash equivalents at the beginning of the period: , Exchange differences for cash balance and cash equivalents (7) (16) Cash balance and cash equivalents at end of period The accompanying additional information is an integral part of the financial information and of the separate financial information. 8

84 Financial Information from the consolidated statements of cash flows attributable to the Company (A) Adjustments to reconcile statement of cash flows from the Company's continuing operating activities: Six months ended June 30 Three months ended June 30 Year ended December Unaudited Audited NIS million Adjustments for profit and loss items of the Company: Depreciation, depletion and amortization Deferred taxes, net Profit from early repayment of a recognized loan (116) Decrease (increase) of loans granted, net 26 (79) (1) (49) (98) Impairment (appreciation) of investments and loans provided, net (17) Company's share in the expenses of subsidiaries*) (89) (174) 120 (97) (634) Cost of share-based payment - (1) - - (2) Increase (erosion) in value of liabilities, net 36 (6) Change in fair value of financial derivatives, net 12 (1) 18 (3) (14) Earnings from disposal of investment in available-for-sale financial assets - (21) - (18) (60) Impairment of available-for-sale financial assets Exchange differences for cash balance and cash equivalents, net 7 (3) (3) (3) 16 Loss from impairment in investment property Changes in the Company's asset and liability items: Decrease in other receivables Increase (decrease) in other accounts payable (5) (5) 13 (17) 8 13 (236) 203 (158) (794) Net of dividends received The accompanying additional information is an integral part of the financial information and of the separate financial information. 9

85 Financial Information from the consolidated statements of cash flows attributable to the Company Six months ended June 30 Three months ended June 30 Year ended December Unaudited Audited NIS million (B) Company's significant non-cash activities Dividend receivable from investees and partnerships Acquisition of Company shares by a subsidiary Proceeds from sale of assets against longterm receivables Provision of a loan against the sale of a subsidiary (C) Additional information on cash flows Cash paid by the Company during the period for: Interest Cash received by the Company during the period for: Interest Dividends The accompanying additional information is an integral part of the financial information and of the separate financial information. 10

86 Additional Information NOTE 1 GENERAL This separate financial information was drafted in a condensed format pursuant to the provisions of article 38D of the Securities Regulations (Periodic and Immediate Reports), This separate financial information should be reviewed in conjunction with the separate financial information to the annual financial statements as of December 31, 2016, and for the year then ended and their accompanying notes, and in conjunction with the consolidated interim financial statements as of June 30, 2017 ("Consolidated Interim Financial Statements"). NOTE 2 CONTINGENT LIABILITIES There are certain contingent claims against the Company and certain investees for significant sums, including petitions to grant class actions, that might amount to anywhere from hundreds of million to several billions of shekels. In some cases, it is not possible to assess their outcome at this stage, and therefore no provision was recorded in the financial statements as set forth in Note 7 to the consolidated interim financial statements. NOTE 3 INVESTMENTS IN INVESTEES In the reporting period the Company acquired, through its wholly owned foreign subsidiary DKL Investments Limited ( DKL ) the remaining holdings in Ithaca Energy Inc. ( Ithaca ) for a total consideration of NIS 1,851 million. For further information see Note 3 to the Consolidated Interim Financial Statements. NOTE 4 CAPITAL With regard to dividends distributed by the Company in reporting period, see Note 8 to the Consolidated Interim Financial Statements

87 Additional Data Concerning the Proforma Consolidated Interim Financial Statements As of June 30, The Company's Board of Directors hereby presents the Company's proforma consolidated interim financial statements as of March 31, 2017, and for the six and three month periods then ended ("Proforma Statements"), as well as additional data connected to the Proforma Statements. This report should be read in conjunction with the Board of Directors Report on the Company's consolidated interim financial statements for the said periods. 2. As detailed in Note 1 to the Proforma Statements, on March 14, 2017, DKL Investments Limited (a wholly-owned foreign subsidiary of the Company - "DKL") submitted documents offering to buy the entire share capital of Ithaca Energy Inc. ("Ithaca" or "the Acquired Company") held by other parties (80%), at a price of CAD 1.95 per share ("the Offer"), following an agreement signed with Ithaca in February 2017 for issuing the Offer as aforesaid. The Offer was open for subscription until April 20, After securing majority acceptance, the Offer was automatically extended for another period until May 3, The Offer (including in the said extension period) was accepted by the holders of 318,833,909 ordinary shares, and DKL bought these shares for a total consideration of CAD 622 million (NIS 1,685 million). Following this purchase, DKL holds 400,699,334 ordinary shares in Ithaca, accounting for 94.2% of its ordinary share capital. On May 12, 2017, DKL announced that, under the terms of the Offer, it plans to perform a forced purchase of Ithaca's remaining ordinary shares not held by DKL, so that after such purchase DKL will hold all of Ithaca's share capital. The forced purchase will be made at the share price specified in the Offer and for a total consideration of CAD 48 million (NIS 126 million). The forced purchase was completed on June 5, 2017, at which time Ithaca's shares were delisted from the AIM exchange in London and the Toronto stock exchange. 3. Following these purchases, the Group holds 100% of Ithaca's share capital. After assuming control of Ithaca, the Group is consolidating Ithaca's financial statements starting from the date when it assumed control (April 21, 2017). The Proforma Statements were prepared to reflect the effect of the said purchases on the Group's results, assuming that Ithaca's statements had also been consolidated with the Company's financial statements in the reporting periods prior to the purchase, as detailed in Notes 2 and 3 to the Proforma Statements below. 4. The Proforma Statements were prepared based on the Company's consolidated interim financial statements, with retrospective consolidation of Ithaca's financial statements for all relevant reporting periods, using the assumptions detailed in Note 3 to the Proforma Statements. 5. Ithaca is an independent oil and gas operator operating in the North Sea, holding both production and development assets. According to the Company's policy for defining operating segments, based mainly on investments in each investee, the Company considers Ithaca's operations a separate segment - Oil and gas asset development and production in the North Sea. Highlights of Ithaca's effect on the Group's income statements, as reflected in the Group's proforma results for each of the periods included in the Proforma Statements, under the proforma assumptions (NIS millions): 1-6/ / / / Revenues from oil and gas sales Operating profit (loss) 93 (36) (9) Contribution to net profit (32) (186)

88 For explanations concerning Ithaca's results, see the Board of Directors Report on the Company's consolidated financial statements as of June 30, It is further noted that Ithaca's consolidation, including the adjustments detailed in Note 3 to the Proforma Statements, caused a NIS 99 million reduction in net profit attributable to Company shareholders in the first half of 2017 (in the first half of unchanged; all of a decrease of NIS 245 million). This decrease in net profit due to Ithaca's consolidation in the reporting period, as compared to actual profit in the same period, was due mainly to the proforma results reversing NIS 137 million in gains from assuming control, which were included in the actual results for the second quarter of In light of the fact that proforma data, by nature, are based on various assessments and judgments and in light of changes that have occurred in Ithaca's operations, the reported proforma data should not necessarily be construed as indicative of Ithaca's contribution to the Group's representative and/or future results following the acquisition. Sincerely Gabriel Last Chairman of the Board Asaf Bartfeld CEO Signature date: Tuesday, August 29, 2017

89 Pro Forma Consolidated Interim Financial Statements June 30, 2017 Unaudited Contents Page Pro Forma Consolidated Statements of Income 2-4 Pro Forma Consolidated Statements of Comprehensive Income 5-7 Notes to the Pro Forma Consolidated Interim Financial Statements

90 Pro Forma Consolidated Statements of Income Actual data Pro forma reconciliations Six months ended June Pro forma Actual data data Pro forma reconciliations (Unaudited) NIS million (Other than net earnings per share) Pro forma data Revenue 3, ,336 2, ,950 Cost of revenues 2, ,277 1, ,000 Gross profit , )20( 950 Selling, marketing and gas station operating expenses General and administrative expenses Other revenues (expenses), net )10( 13 3 )32( )3( )35( Operating profit )36( 540 Financial income Finance expenses )571( )53( )624( )488( )218( )706( )250( )3( Profit from disposal of investments in partnerships and investees, net 150 )150( Group s share in profits of associates, net 51 )23( Income before taxes on income 448 )141( )250( 40 Taxes on income (tax benefit) 57 )42( 15 )97( )250( )347( Profit from continuing operations 391 )99( Profit from discontinued operations, net Net profit 822 )99( Attributable to: Equity holders of the Company 400 )99( Non-controlling interests Net earnings per share attributable to the equity holders of the Company (NIS): 822 )99( Basic earnings: Earnings from continuing operations 17.4 )8.8( Earnings from discontinued operations )8.8( Diluted earnings: Earnings from continuing operations 17.3 )8.7( Earnings from discontinued operations )8.1( The accompanying notes are an integral part of the pro forma consolidated interim financial statements. 2

91 Pro Forma Consolidated Statements of Income Actual data Pro forma reconciliations Three months ended June Pro forma Actual data data Pro forma reconciliations (Unaudited) NIS million (Other than net earnings per share) Pro forma data Revenue 1, ,655 1, ,531 Cost of revenues 1, , ,007 Gross profit Selling, marketing and gas station operating expenses General and administrative expenses Other revenues (expenses), net )12( 16 4 )23( )1( )24( Operating profit Financial income 114 )12( Finance expenses )330( )15( )345( )209( )184( )393( )167( )3( Profit from disposal of investments in partnerships and investees, net 148 )148( Group s share in profits(losses) of associates, net 20 )1( 19 )3( 8 5 Income before taxes on income 230 )147( )159( 2 Taxes on income (tax benefit) 8 )26( )18( 25 )116( )91( Profit from continuing operations 222 )121( )43( 93 Income from discontinued operations, net Net profit 365 )121( )43( 168 Attributable to: Equity holders of the Company 180 )121( )43( 37 Non-controlling interests Net earnings per share attributable to equity holders of the Company (NIS): 365 )121( )43( 168 Basic earnings: Earnings from continuing operations 12.5 )10.8( )3.8( 0.7 Earnings from discontinued operations )10.8( )3.8( 3.3 Diluted earnings: Earnings from continuing operations 12.3 )10.6( )3.8( 0.7 Earnings from discontinued operations )10.5( )3.8( 3.3 The accompanying notes are an integral part of the pro forma consolidated interim financial statements. 3

92 Pro Forma Consolidated Statements of Income (contd.) Year ended December 31, 2016 Actual data Pro forma reconciliations Pro forma data Audited NIS million (Other than net earnings per share) Revenue 5, ,330 Cost of revenues 3, ,271 Gross profit 2, ,059 Selling, marketing and gas station operating expenses General and administrative expenses Other revenue, net 201 (13) 188 Operating profit 1,486 (9) 1,477 Financial income Finance expenses (828) (359) (1,187) 1,049 (351) 698 Group s share in profits of associates, net Income before taxes on income 1,099 (347) 752 Tax benefit (118) (102) (220) Profit from continuing operations 1,217 (245) 972 Income from discontinued operations, net Net profit 1,560 (245) 1,315 Attributable to: Equity holders of the Company 625 (245) 380 Non-controlling interests Net earnings per share attributable to equity holders of the Company (NIS) 1,560 (245) 1,315 Basic earnings from continuing operations 51.5 )21.8( 29.7 Basic earnings from discontinued operations Basic earnings 55.6 )21.8( 33.8 Diluted earnings from continuing operations 51.3 )21.6( 29.7 Diluted earnings from discontinued operations Diluted earnings 55.3 )21.5( 33.8 The accompanying notes are an integral part of the pro forma consolidated interim financial statements.. 4

93 Pro Forma Consolidated Statements of Comprehensive Income Actual data Pro forma reconciliations Six months ended June Pro forma Actual data data (Unaudited) NIS million Pro forma reconciliations Pro forma data Net profit 822 (99) Other comprehensive income (loss) (net of tax effect): Amounts classified or reclassified to profit or loss under specific conditions: Profit (loss) for available-for-sale financial assets (129) - (129) Transfer to statement of income for disposal of available-for-sale financial assets (3) - (3) (21) - (21) Transfer to statement of income for impairment of available-for-sale financial assets Transfer to statement of income for exchange differences on translation of foreign operations 13 (13) Loss from cash flow hedges (28) 20 (8) (2) - (2) Recognition of the hedged asset of cash flow hedging results 20 (20) Exchange differences on translation of foreign operations (955) (145) (1,100) (147) (42) (189) Other comprehensive loss attributable to associates, net (32) - (32) (6) - (6) Total other comprehensive loss from (156) continuing operations (1,097) (158) (1,255) (114) (42) Total other comprehensive income from discontinued operations, net Total other comprehensive loss (1,083) (158) (1,241) (46) (42) (88) Total comprehensive income (loss) (261) (257) (518) 402 (42) 360 Attributable to: Equity holders of the Company (310) (257) (567) 147 (42) 105 Non-controlling interests (261) (257) (518) 402 (42) 360 The accompanying notes are an integral part of the pro forma consolidated interim financial statements. 5

94 Pro Forma Consolidated Statements of Comprehensive Income Actual data Pro forma reconciliations Three months ended June Pro forma Actual data data (Unaudited) NIS million Pro forma reconciliations Pro forma data Net profit 365 (121) (43) 168 Other comprehensive income (loss) (net of tax effect): Amounts classified or reclassified to profit or loss under specific conditions: Profit (loss) for available-for-sale financial assets (85) - (85) Transfer to statement of income for disposal of available-for-sale financial assets (3) - (3) (18) - (18) Transfer to statement of income for impairment of available-for-sale financial assets Exchange differences on translation of foreign operations 13 (13) - Profit from cash flow hedges Cash flows (5) - (5) 1-1 Recognition of the hedged asset of cash flow hedging results 20 (20) - Exchange differences on translation of foreign operations (414) - (414) Other comprehensive income (loss) attributable to associates, net (12) - (12) 6-6 Total other comprehensive income (loss) from continuing operations (470) (33) (503) Total other comprehensive income (loss) from discontinued operations, net (2) - (2) Total other comprehensive income (loss) (472) (33) (505) Total comprehensive income (loss) (107) (154) (261) Attributable to: Equity holders of the Company (160) (154) (314) Non-controlling interests (107) (154) (261) The accompanying notes are an integral part of the pro forma consolidated interim financial statements. 6

95 Pro Forma Consolidated Statements of Comprehensive Income Actual data Year ended December 31, 2016 Pro forma reconciliations Audited NIS million Pro forma data Net profit 1,560 (245) 1,315 Other comprehensive income (loss) (net of tax effect): Amounts classified or reclassified to profit or loss under specific conditions: Profit from available-for-sale financial assets Transfer to statement of income for disposal of available-for-sale financial assets (58) - (58) Transfer to statement of income for impairment of available-for-sale financial assets Profit from cash flow hedges Exchange differences on translation of foreign operations (107) (37) (144) Other comprehensive loss attributable to associates, net (9) - (9) Total other comprehensive loss from continuing operations (8) (37) (45) Total other comprehensive income from discontinued operations, net Total other comprehensive income 62 (37) 25 Total comprehensive income 1,622 (282) 1,340 Attributable to: Equity holders of the Company 669 (282) 387 Non-controlling interests ,622 (282) 1,340 The accompanying notes are an integral part of the pro forma consolidated interim financial statements. 7

96 Notes to the Pro Forma Consolidated Interim Financial Statements NOTE 1: GENERAL A. As described in Note 3B to the Company s consolidated interim financial statements as of June 30, 2017, on March 14, 2017, DKL Investments Limited (a foreign subsidiary, wholly owned by the Company, "DKL") filed an offer to acquire the entire share capital of Ithaca Energy Inc. ("Ithaca" or "the Acquired Company") that it does not hold (80%) at a price per share of CAD 1.95 ("the Offer"), further to the agreement signed with Ithaca in February 2017 to publish the Offer. The Offer was open to acceptance notice until April 20, 2017, and after it was accepted for the most part, it was extended mandatorily until May 3, The Offer (including the extension period) was accepted by the holders of 318,833,909 ordinary shares and DKL acquired their shares for a total consideration of CAD 622 million (approximately NIS 1,685 million). Following the sale, DKL held 400,699,334 ordinary shares of Ithaca, representing 94.2% of its ordinary share capital. On May 12, 2017, DKL announced that, in accordance with the terms of the Offer, it intends to carry out a compulsory acquisition of the remaining ordinary shares of Ithaca that were not held by DKL, so that following the acquisition, DKL will hold the entire share capital of Ithaca, at the price per share set out in the Offer and for a total consideration of CAD 48 million (approximately NIS 126 million). On June 5, the compulsory acquisition was completed on June 5, 2017, after which Ithaca's shares were delisted from the AIM in London and the Toronto Stock Exchange. It should be noted that following the Offer, Ithaca received waivers from banks and other entities holding short- to medium-term liabilities that include change of control items, according to which these entities will not exercise their right for immediate payment due to the change of control following the Offer. B. In view of the gain of control in Ithaca, the Group consolidates Ithaca's financial statements as from the date control was gained. (April 21, 2017). In addition, in accordance with IFRS 3 regarding a step acquisition, the Group s investment in Ithaca shares prior to the offer was measured at fair value and the difference between the fair value and its carrying amount will be recognized in the statement of income. The above (profit) after recognition of the profit or loss of the balance of the capital reserve for translation differences accumulated until the date of the gain in control) amounted to NIS 137 million. The gain of control in Ithaca constitutes a pro forma event as defined in the Israel Securities Regulations (Periodic and Immediate Reports), The pro forma consolidated financial statements were prepared to reflect the effect of the pro forma event (an increase to a rate of 100% of the share capital of Ithaca) on the results of the Company's operations (consolidated), under the assumption that Ithaca's financial statements were consolidated with the Company's financial statements in the reporting periods prior to the acquisition as well, in accordance with Notes 2 and 3 below. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES The accounting policy applied in the pro forma consolidated interim financial statements is consistent with that applied in the preparation of the Company s consolidated interim financial statements \ as of June 30, 2016 and for the six and three months then ended ( the Consolidated Interim Financial Statements ). These pro forma consolidated interim financial statements are prepared in accordance with Regulation 38B of the Israel Securities Regulations (Periodic and Immediate Reports), The pro forma consolidated interim financial statements should be read in the context of the Company's consolidated interim financial statements and the annual financial statements as of December 31, 2016 and the year then ended and their accompanying Notes. 8

97 Notes to the Pro Forma Consolidated Interim Financial Statements NOTE 3: ASSUMPTIONS USED IN THE PREPARATION OF THE CONSOLIDATED INTERIM PRO FORMA FINANCIAL STATEMENTS 1. The pro forma consolidated interim financial statements are based on the consolidated financial statements of the Company and on the financial statements of the acquired company for the relevant reporting periods, which were prepared in accordance with IAS 34, Interim Financial Reporting. 2. The pro forma consolidated statements of income and the pro forma consolidated statements of comprehensive income for the six- and three-month period ended June 30, 2017 and 2016 and for the year ended December 31, 2016 were prepared on the assumption that the acquisition of the acquired company (an increase to a holding of 100%) occurred at the beginning of the earliest presented period (meaning, January 1, 2016). 3. The results of the Company's investment in Ithaca, as included in accordance with the equity method in each of the reported periods, were eliminated in the pro forma consolidated statements of income and pro forma statement of comprehensive income. 4. In the pro forma profit or loss information for the six and three months ended June 30, 2017, profit from the step acquisition was offset by NIS 137 million, as set out in Note 1A above, as well as the losses associated with the transaction costs. In addition, in the pro forma other comprehensive income information for those periods, movements in capital reserves associated with the acquisition of control was offset. 5. The acquisition cost in the total amount of NIS 1,851 million was financed from the Group's liquid resources as at the acquisition date (a decrease in cash and cash equivalents), which arose, among other things, from raising debentures in the periods prior to this date. The pro forma statements of income included notional finance expenses at an annual rate of 4.3% until the date the debentures were raised, to reflect in these reports the effects if such financing had been made on January 1, The pro forma consolidated statements of income did not include a tax benefit for these finance expenses. 6. The pro forma statements of income for all reported periods included the amortization of excess costs arising from the acquisition, based on a provisional measurement of the fair value of Ithaca's assets and liabilities, in accordance with the draft valuation prepared by an external appraiser, as set out in Note 3B to the Company's consolidated interim financial statements. Tax expenses that were computed based on Ithaca's effective tax rate, as stated in Note 5 below, were recognized for the amortization. It should be noted that the pro forma information for 2016 was updated in accordance with the draft valuation as stated above. 7. Since the pro forma information is inherently based on various assessments and estimates, and due to the changes in Ithaca s operations, the reported pro forma information is not necessarily an indication of Ithaca's contribution to the representative and/or future results of the Group subsequent to acquisition of the operations. 9

98 Notes to the Pro Forma Consolidated Interim Financial Statements NOTE 4: OPERATING SEGMENTS A. General In accordance with IFRS 8, the Group s operating segments are determined on the basis of management reports, which are mainly based on the investments in each subsidiary. Prior to the gain of control of Ithaca, the Group reported the following operating segments: Oil and gas exploration and production in Israel, automotive and spare parts and others. Upon the gain of control in Ithaca, which operates in the development and production of oil and gas assets in the North Sea, the Company decided that Ithaca s operations constitute a separate operating segment. Accordingly, subsequent to the acquisition, the operating segments are as follows: Oil and gas exploration and production in Israel and its surroundings: The main operation is in the Tamar joint venture, the Ratio Yam joint venture, the Yam Tethys joint venture, and other oil rights, mainly offshore the coast of Israel. Development and production of gas and oil assets in the North Sea: The activity is carried out by Ithaca, which owns rights in oil and gas assets in the North Sea region. The activity includes mainly production and marketing of oil and gas from the producing reservoirs and the development of additional reservoirs. Fuel in Israel: The main operation is marketing and sale of fuels and commodities at gas stations and other outlets, and storage and production of fuels in facilities. Automotive and spare parts: The main operation is importing and marketing of Mazda, Ford and BMW vehicles and spare parts, through the associate Delek Automotive. Other: The main operation is investment in infrastructure, including mainly desalination and establishment of power stations, trading in derivatives through Barak Capital and the biochemical operation that includes mainly production and marketing of fructose, citric acid and ingredients for nutritional additives. 10

99 Notes to the Pro Forma Consolidated Interim Financial Statements NOTE 4: OPERATING SEGMENTS (CONTD.) B. Pro forma segment reporting 1) Revenue Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS thousands Audited Revenue from external sources Oil and gas exploration and production in Israel and its surroundings ,821 Development and production of oil and gas assets in the North Sea Fuel in Israel 1,979 1, ,588 Other segments Inter-segment *) (17) (12) (11) (8) (21) Total in statement of income 3,336 2,950 1,655 1,531 6,330 *) Inter-segment sales are mainly for the sale of gas to other segments. 2) Segment results Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS thousands Audited Oil and gas exploration and production in Israel and its surroundings ,581 Development and production of oil and gas assets in the North Sea 93 (36) (9) Fuel in Israel Other segments (15) 14 (10) 6 (71) Adjustments *) (16) (16) (4) 1 (92) Operating profit ,477 *) Mainly administrative and general expenses attributable to headquarter companies 11

100 Notes to the Pro Forma Consolidated Interim Financial Statements NOTE 4: OPERATING SEGMENTS (CONTD.) 3) Contribution to net profit from continuing operations attributable to the equity holders of the Company Six months ended June 30 Three months ended June 30 Year ended December Unaudited NIS thousands Audited Oil and gas exploration and production in Israel and its surroundings Development and production of oil and gas assets in the North Sea (32) (186) Fuel in Israel Automotive Other segments (19) 10 (15) (5) (44) Adjustments *) (285) (129) (163) (44) (161) Net earnings from continuing operations attributable to equity holders of the Company *) Mainly administrative and general expenses and financing attributable to headquarter companies NOTE 5: TAXES ON INCOME Ithaca is subject to UK tax laws, which include corporate tax income, supplementary charge tax and petroleum revenue tax. As of June 30, 2017, the effective tax rate including corporate tax income and the additional tax levy applicable to oil and gas companies in the UK was 40%, the tax on oil revenues was 0% (after being fully depreciated as from January 2016) and the supplementary charge tax was 10% (after being depreciated by 20% in September 2016). 12

101 Chapter D Report on the Effectiveness of Internal Controls for Financial Reporting and Disclosure