Annual Report — Form 10-K
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2: EX-10.17 Material Contract 13 40K
3: EX-10.18 Material Contract 2 9K
6: EX-99.1 Miscellaneous Exhibit 38 158K
4: EX-31 Certification -- Sarbanes-Oxley Act - Sect. 302 2± 9K
5: EX-32 Certification -- Sarbanes-Oxley Act - Sect. 906 1 6K
EX-99.1 — Miscellaneous Exhibit
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"ISRAMCO - NEGEV 2"
LIMITED PARTNERSHIP
FINANCIAL STATEMENTS
AS AT DECEMBER 31, 2006 AND 2005 AND
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED
DECEMBER 31, 2006
"Isramco - Negev 2" Limited Partnership
FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
CONTENTS
PAGE
----
Auditors' Report 2
Balance Sheets 3
Statements of Earnings 4
Statements of Changes in Limited Partnership's Capital 5
Statements of Cash Flows 6
Notes to the Financial Statements 8
[KPMG LOGO]
SOMEKH CHAIKIN
MAIL ADDRESS OFFICE ADDRESS TELEPHONE 972 3 684 8000
PO Box 609 KPMG Millennium Tower Fax 972 3 684 8444
Tel Aviv 61006 17 Ha'arba'a Street
Israel Tel Aviv 61070
Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE PARTNERS OF "ISRAMCO - NEGEV 2" LIMITED PARTNERSHIP
We have audited the accompanying balance sheets of "Isramco - Negev 2" Limited
Partnership (hereinafter - "the Limited Partnership") as at December 31, 2006
and 2005, and the statements of earnings, changes in Limited Partnership's
capital and cash flows, for each of the years in the three-year period ended
December 31, 2006. These financial statements are the responsibility of the
Board of Directors and the Management of the General Partner of the Limited
Partnership. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance as to whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Board of Directors and Management of the
General Partner, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Limited Partnership as at
December 31, 2006 and 2005, and the results of its operations, the changes in
its capital and its cash flows for each of the years in the three-year period
ended December 31, 2006, in conformity with generally accepted accounting
principles in Israel.
Accounting principles generally accepted in Israel differ in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected the financial position of the Limited Partnership as at
December 31, 2006 and 2005 and the results of its operations, the changes in its
capital and its cash flows for each of the years in the three-year period ended
December 31, 2006, to the extent summarized in Note 12 to the financial
statements.
As discussed in Note 3C, the above-mentioned financial statements are stated in
reported amounts, in accordance with Accounting Standards published by the
Israel Accounting Standards Board.
Somekh Chaikin
Certified Public Accountants (Isr.)
Member Firm of KPMG International
Tel Aviv, Israel
March 13, 2007
Somekh Chaikin, a partnership registered under the Israeli Partnership
Ordinance, is a member of KPMG International, a Swiss cooperative.
2
"Isramco - Negev 2" Limited Partnership
BALANCE SHEETS AS AT DECEMBER 31
--------------------------------------------------------------------------------
REPORTED AMOUNTS
2006 2005
------------- -------------
NOTE NIS THOUSANDS NIS THOUSANDS
------ ------------- -------------
CURRENT ASSETS
Cash and cash equivalents 15,208 2,720
Marketable securities 4 558,065 583,569
Joint ventures for oil and gas exploration 5 625 1,328
Sundry receivables 310 9
------- -------
573,908 587,626
------- -------
INVESTMENTS
Investment in oil and gas properties 5A 7,609 7,609
------- -------
581,817 595,235
======= =======
CURRENT LIABILITIES
Sundry payables 6 4,034 501
Joint ventures for oil and gas exploration 5 173 183
------- -------
4,207 684
------- -------
CONTINGENT LIABILITIES AND COMMITMENTS 7
LIMITED PARTNERSHIP'S CAPITAL 8 577,610 594,551
------- -------
581,817 595,235
======= =======
[Download Table]
--------------------------- -------------------------- --------------------------
Pinkstone Ltd. - Director Yossi Levy - CEO Ami Krupik - CFO
Isramco Oil and Gas Ltd. - Isramco Oil and Gas Ltd. - Isramco Oil and Gas Ltd. -
General Partner General Partner General Partner
Represented by
Ya'akov Meimon
March 13, 2007
The accompanying notes are an integral part of the financial statements.
3
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF EARNINGS FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
REPORTED AMOUNTS
[Enlarge/Download Table]
2006 2005 2004
------------- ------------- -------------
NOTES NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
----- ------------- ------------- -------------
INCOME
Income from sale of oil and gas rights 812 -- --
Financing income, net 9A 65,229 71,388 58,623
------ ------ ------
66,041 71,388 58,623
------ ------ ------
EXPENSES
Participation in oil and gas exploration, net 9B 1,263 30,802 925
General and administrative expenses 9C 2,896 2,650 2,693
------ ------ ------
4,459 33,452 3,618
------ ------ ------
NET INCOME 61,882 37,936 55,005
====== ====== ======
INCOME PER PARTICIPATION UNIT:
NIS NIS NIS
------ ------ ------
Basic income per participation unit 9D 0.0146 0.0089 0.0129
====== ====== ======
The accompanying notes are an integral part of the financial statements.
4
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF CHANGES IN LIMITED PARTNERSHIP'S CAPITAL
--------------------------------------------------------------------------------
REPORTED AMOUNTS
[Enlarge/Download Table]
PARTNERSHIP ACCUMULATED
CAPITAL LOSS TOTAL
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
BALANCE AS AT JANUARY 1, 2004 856,391 (346,088) 510,303
Net income for the year -- 55,005 55,005
Tax deposits paid on behalf of holders of
the participation units* -- (3,619) (3,619)
------- -------- -------
BALANCE AS AT DECEMBER 31, 2004 856,391 (294,702) 561,689
Net income for the year -- 37,936 37,936
Tax deposits paid on behalf of holders of
the participation units* -- (5,074) (5,074)
------- -------- -------
BALANCE AS AT DECEMBER 31, 2005 856,391 (261,840) 594,551
Net income for the year -- 61,882 61,882
Tax deposits paid on behalf of holders of
the participation units* -- (8,823) (8,823)
Distribution of Partnership earnings to
holders of the participation units -- (70,000) (70,000)
------- -------- -------
BALANCE AS AT DECEMBER 31, 2006 856,391 (278,781) 577,610
======= ======== =======
* Regarding the tax deposits paid on behalf of holders of the participation
units - see Note 8E.
The accompanying notes are an integral part of the financial statements.
5
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31
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REPORTED AMOUNTS
[Enlarge/Download Table]
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
CASH FLOWS GENERATED BY OPERATING ACTIVITIES:
Net income 61,882 37,936 55,005
Adjustment to reconcile net income to net cash flows
generated by operating activities (A) (37,498) (20,003) (32,666)
-------- -------- --------
NET CASH INFLOW GENERATED BY OPERATING ACTIVITIES 24,384 17,933 22,339
-------- -------- --------
CASH FLOWS GENERATED BY INVESTING ACTIVITIES:
Investment in oil and gas properties -- (30,370) --
Investment in marketable securities (458,285) (487,366) (204,464)
Proceeds from sale of marketable securities 524,400 493,318 174,086
Proceeds from sale of oil and gas rights 812 -- --
-------- -------- --------
NET CASH INFLOW (OUTFLOW) GENERATED BY INVESTING ACTIVITIES 66,927 (24,418) (30,378)
-------- -------- --------
CASH FLOWS GENERATED BY FINANCING ACTIVITIES:
Distribution of Partnership earnings to holders
of the participation units (70,000) -- --
Tax deposits paid on behalf of holders of the
participation units (8,823) (5,074) (3,619)
-------- -------- --------
NET CASH OUTFLOW GENERATED BY FINANCING ACTIVITIES (78,823) (5,074) (3,619)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,488 (11,559) (11,658)
BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF
THE YEAR 2,720 14,279 25,937
-------- -------- --------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF THE YEAR 15,208 2,720 14,279
======== ======== ========
The accompanying notes are an integral part of the financial statements.
6
"Isramco - Negev 2" Limited Partnership
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31 (CONT'D)
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REPORTED AMOUNTS
[Enlarge/Download Table]
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
A. ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH FLOWS GENERATED BY OPERATING ACTIVITIES
Income and expenses not involving cash flows:
--------------------------------------------
Gain from marketable securities, net (40,611) (50,479) (36,006)
Gain from sale of oil and gas rights (812) -- --
Amortization of investment in oil and gas properties -- 30,370 --
Changes in asset and liability items:
------------------------------------
Decrease (increase) in sundry receivables (301) -- 309
Increase in sundry payables 3,533 43 46
Change in joint ventures for oil and gas exploration, net 693 63 2,985
------- ------- -------
(37,498) (20,003) (32,666)
======= ======= =======
The accompanying notes are an integral part of the financial statements.
7
DRAFT
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 1 - GENERAL
A. Isramco - Negev 2, Limited Partnership (hereinafter - "the Limited
Partnership" or "the Partnership") was established according to a
limited partnership agreement that was signed on March 2 and 3, 1989
(that has been amended from time to time), between the general partner
- Isramco Oil and Gas Ltd. (hereinafter - "the General Partner") and
the limited partner - Isramco Management (1988) Ltd. (hereinafter -
"the Limited Partner" or "the Trustee"). The Limited Partnership was
registered on March 3, 1989, under the Israeli Partnerships Ordinance
(New Version), 1975.
According to Section 61(a) of the Partnerships Ordinance, the limited
partnership agreement constitutes the Articles of Association of the
Limited Partnership.
B. Under the Limited Partnership agreement, as amended from time to time,
the General Partner and the Limited Partner will bear the expenses and
losses of the Limited Partnership and will be entitled to income in
accordance with their proportionate share of the capital they invested
in the Limited Partnership's capital.
C. The day-to-day management of the Limited Partnership is carried out by
the General Partner, under the supervision of the Supervisor, Yigal
Brightman & Co., Certified Public Accountants, and Mr. David Valiano,
CPA (Isr.). Under the Limited Partnership agreement, the Supervisor
was granted certain supervisory powers.
D. The Limited Partner - Isramco Management (1988) Ltd., has various
rights in the Limited Partnership. Under a trust agreement, the
Limited Partner acts as trustee on behalf of the owners of the
participation units.
E. The Limited Partnership was approved by the Israeli Income Tax
Commissioner for purposes of the Israeli Income Tax Regulations (Rules
for Calculating Tax for Holding and Sale of Participation Units in an
Oil Exploration Partnership), 1988. In December 2005, the
effectiveness of these Regulations was extended up to December 31,
2006. As at the signing date of the financial statements, the
Regulations had not been extended.
8
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 2 - OBJECTIVE OF THE LIMITED PARTNERSHIP
A. The objective of the Limited Partnership is to participate in oil and
gas exploration and production. For this purpose the Limited
Partnership signed joint operating agreements (J.O.A.) with its
partners in various joint ventures.
B. As at the approval date of the financial statements, February __,
2007, the Limited Partnership's rights in oil and/or gas properties
are as follows:
[Enlarge/Download Table]
PARTICIPATION RATE DATE OF EXPIRATION
% OF RIGHTS
------------------ ------------------
"Med Yavne" lease 32.4111 June 10, 2030
"Med Ashdod" lease 19.1369 June 15, 2030
Michal license 27.5000 December 31, 2008
Matan license 27.5000 December 31, 2008
Shikma Carveout (depth of 1,500 meters and under) 10.0000 April 1, 2009
For additional details in connection with the Partnership's rights in oil
and/or gas properties - see Note 5.
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES
A. GENERAL
These financial statements are presented in accordance with generally
accepted accounting principles in Israel and the principles provided in the
Israeli Securities Regulations (Preparation of Annual Financial
Statements), 1993, except for items presented in the format dictated by the
nature of the Limited Partnership's business.
B. DEFINITIONS
1. Related Party - as defined in Opinion No. 29 of the Institute of
-------------
Certified Public Accountants in Israel (hereinafter - the ICPAI).
2. Interested Party - as defined in Paragraph 1 of the definition of an
----------------
"interested party" in a company in Section 1 of the Israeli Securities
Law.
3. CPI - the Consumer Price Index published by the Central Bureau of
---
Statistics in Israel.
4. Dollar - the United States dollar.
------
5. Adjusted Amount - the nominal historical amount adjusted in accordance
---------------
with the provisions of Opinions 23, 34, 36 and 37 of the Institute of
Certified Public Accountants in Israel.
6. Reported Amount - the adjusted amount as at the transition date
---------------
(December 31, 2003), with the addition of amounts in historical values
that were added after the transition date and less amounts eliminated
after the transition date.
7. Nominal Financial Report - the financial report based on reported
------------------------
amounts.
9
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
C. FINANCIAL STATEMENTS IN REPORTED AMOUNTS
(1) In October 2001, the Israeli Accounting Standards Board published
Accounting Standard No. 12, "Discontinuance of Adjustment of Financial
Statements". Pursuant to this Standard and in accordance with
Accounting Standard No. 17 that was published in December 2002, the
adjustment of financial statements for the effect of inflation was
discontinued as of January 1, 2004. Up to December 31, 2003, the
Partnership continued to prepare adjusted financial statements in
accordance with Opinion No. 36 of the Institute of Certified Public
Accountants in Israel. The Partnership has implemented the provisions
of the Standard and has accordingly discontinued the adjustment as of
January 1, 2004.
(2) In the past, the Partnership prepared its financial statements on the
basis of historical cost adjusted for the changes in the Consumer
Price Index. The adjusted amounts as stated, included in the financial
statements as of December 31, 2003 (the transition date) constituted
the starting point for the nominal financial report as of January 1,
2004. Additions subsequent to December 31, 2003, made during the
period are included according to their historical values.
(3) Amounts of the non-monetary assets do not necessarily reflect their
realizable value or updated economic value but, rather, only the
Reported Amount of such assets.
(4) The term "cost" in these financial statements means cost in the
Reported Amount.
D. REPORTING PRINCIPLES
(1) Balance sheets:
a. Non-monetary items (investment in oil and gas properties and
partnership capital) are stated at Reported Amount.
b. Monetary items are stated in the balance sheet at their
historical values as at the balance sheet date.
(2) Statements of earnings:
a. Income and expenses deriving from non-monetary items (such as,
depreciation and amortization, prepaid revenues and expenses,
etc.) and from provisions included in the balance sheet are
calculated as the difference between the Reported Amount of the
opening balance and the Reported Amount of the closing balance.
b. All other items included in the statement of earnings are stated
at their historical value.
E. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include bank deposits having an original
maturity, as at the date of the investment therein, not in excess of three
months.
10
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
F. MARKETABLE SECURITIES
Marketable securities are stated at their market value as at the balance
sheet date. Changes in the value of such securities are recorded in the
statement of earnings as incurred.
G. INVESTMENTS IN OIL AND GAS EXPLORATION
The Limited Partnership uses the "successful efforts" method with respect
to the accounting treatment of the recording of oil and gas exploration
expenses, as follows:
(1) The Limited Partnership's expenses in executing geological and seismic
tests and surveys are expensed immediately in the statement of
earnings as incurred.
(2) Investments in oil and gas wells which are in the drilling stage and
in which it has not yet been proven whether they will produce oil or
gas, or which have not yet been determined to be non-commercial, are
stated in the balance sheet at cost.
(3) Investments in oil and gas wells which were proven to be dry and were
abandoned, or were determined to be non-commercial, or for which no
development plans were prepared for the near future, are written off
in full to the statement of earnings.
H. DECLINE IN VALUE OF ASSETS
The Limited Partnership applies Accounting Standard No. 15 - "Decline in
the Value of Assets" (hereinafter - "the Standard") of ICPAI. The Standard
provides procedures which the Partnership must apply in order to assure
that its assets in the balance sheet (in respect of which the Standard
applies) are not presented at an amount greater than their recoverable
value, which is the higher of the net selling price and the realization
value (the present value of the estimated future cash flows expected to
derive from the use of the asset and its realization).
The Standard applies to all assets in the balance sheet, except for
financial assets. In addition, the Standard provides presentation and
disclosure rules regarding assets whose value has decreased. Where the
value of an asset in the balance sheet is greater than its recoverable
value, the Limited Partnership recognizes a loss from decline in value in
an amount equal to the difference between the book value of the asset and
its recoverable value. The loss recognized, as stated, will be eliminated
only if there have been changes in the estimates used in determining the
asset's recoverable value from the date on which the last loss from decline
in value was recognized.
11
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
I. INCOME PER PARTICIPATION UNIT
Commencing from January 1, 2006, the Partnership applies Accounting
Standard No. 21, "Earnings per Share" (hereinafter - "the Standard"), of
the Israel Accounting Standards Board. Pursuant to the Standard's
provisions, the Partnership calculates the amounts of the basic earnings
per participation unit in respect of income or loss. The basic earnings in
respect of the participation units is calculated by dividing the income or
loss allocable to the holders of the participation units by the
weighted-average number of the participation units that were outstanding
during the period.
J. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as at the date of the
financial statements and the reported amounts of revenues and expenses
during the periods reported. It is clarified that the actual results may
differ from these estimates.
K. DERIVATIVE FINANCIAL INSTRUMENTS
(1) Results of derivative financial instruments held for purposes of
hedging existing assets and liabilities, are recorded on the statement
of earnings in correspondence with the recording of the results of the
hedged assets and liabilities.
(2) Results of derivative financial instruments held for purposes of
hedging firm commitments and anticipated transactions are deferred and
included in the statement of earnings at the time the results of the
hedged transactions are recorded.
(3) Derivative financial instruments not designated or qualifying for
hedging purposes are presented in the balance sheet based on their
fair values. Changes in the fair values are recorded in the statement
of earnings in the "financing" category in the period the change takes
place.
The fair value of derivative financial instruments is determined in
accordance with their market prices or quotes from financial institutions,
and in the absence of a market price or a quote from a financial
institution, the fair value is determined based on a model for appraisal of
market value.
L. REVENUE RECOGNITION
Revenues from sales of oil and gas rights are recognized upon the transfer
of the principal risks and rewards arising from ownership over the sold
rights.
12
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
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NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
M. DISCLOSURE OF EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD PRIOR
TO THEIR IMPLEMENTATION
1. Accounting Standard No. 29 regarding adoption of International
--------------------------------------------------------------
Financial Reporting Standards
-----------------------------
In July 2006, the Israel Accounting Standards Board published
Accounting Standard No. 29, "Adoption of International Financial
Reporting Standards (IFRS)" (hereinafter - "the Standard"). The
Standard provides that entities subject to the Israeli Securities Law,
1968, that are required to report according to the regulations of this
law, are to prepare their financial statements for periods beginning
as from January 1, 2008 according to IFRS. The Standard permits early
adoption as from financial statements published after July 31, 2006.
In addition, the Standard provides that entities that are not subject
to the Securities Law, 1968 and not required to report according to
the regulations of this law, are also permitted to prepare their
financial statements according to IFRS commencing with financial
statements published after July 31, 2006. The initial adoption of IFRS
will be effected in accordance with the provisions of IFRS 1, "Initial
Implementation of IFRS", for purposes of the transition.
In accordance with the Standard, the Partnership is required to
include in a note to the annual financial statements for December 31,
2007, the balance sheet data as at December 31, 2007 and the statement
of earnings' data for the year then ended, that have been prepared
according to the recognition, measurement and presentation principles
of IFRS.
The Partnership is examining the implications of the transition to
IFRS, however, it has not yet determined the impact of adoption of
IFRS on its financial statements.
2. Accounting Standard No. 23 regarding the Accounting Treatment of
----------------------------------------------------------------
Transactions between an Entity and a Controlling Interest Therein
-----------------------------------------------------------------
In December 2006, the Israel Accounting Standards Board published
Accounting Standard No. 23, "The Accounting Treatment of Transactions
between an Entity and the Controlling Interest Therein" (hereinafter -
"the Standard"). The Standard supersedes Israeli Securities
Regulations (Presentation of Transactions between a Company and a
Controlling Interest Therein in the Financial Statements), 1996, and
provides that assets and liabilities regarding which a transaction was
executed between the entity and the controlling interest therein are
to be measured on the transaction date based on fair value and the
difference between the fair value and the consideration recorded in
the transaction is to be recorded in shareholders' equity. A "debit
balance" difference constitutes essentially a dividend and, therefore,
it reduces the retained earnings. A "credit balance" difference
constitutes essentially a shareholder's investment and, therefore, it
is presented in a separate section in the shareholders' equity
category entitled "capital reserve from transaction between an entity
and the controlling interest therein".
13
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 3 - REPORTING PRINCIPLES AND ACCOUNTING POLICIES (CONT'D)
M. DISCLOSURE OF EFFECT OF NEW ACCOUNTING STANDARDS IN THE PERIOD PRIOR
TO THEIR IMPLEMENTATION (CONT'D)
2. Accounting Standard No. 23 regarding the Accounting Treatment of
----------------------------------------------------------------
Transactions between an Entity and a Controlling Interest Therein
-----------------------------------------------------------------
(cont'd)
The Standard addresses three issues involved with transactions between an
entity and the controlling interest therein, as follows: transfer of an
asset to the entity from the controlling interest or, alternatively,
transfer of an asset from the entity to the controlling interest;
assumption of a liability of the entity to a third party, in whole or in
part, by the controlling interest therein, indemnification of the entity by
the controlling interest therein in respect of an expense, and waiver by
the controlling interest in favor of the entity of a debt due to the
controlling interest from the entity, in whole or in part; and loans made
to the controlling interest or loans received from the controlling
interest. In addition, the Standard provides the disclosure required to be
made in the financial statements in connection with transactions between
the entity and the controlling interest therein during the period.
The Standard applies to transactions between an entity and a controlling
interest therein executed after January 1, 2007, and to a loan made to or
received from the controlling interest prior to the effective date of this
Standard commencing from its effective date.
In the Partnership's estimation, application of the new Standard is not
expected to have a material impact on its results of operations and its
financial position.
N. RATES OF EXCHANGE AND LINKAGE BASIS
Assets and liabilities denominated in or linked to foreign currency are
stated in the balance sheet according to the representative exchange rates
published by Bank of Israel as at the balance sheet date.
Assets and liabilities linked to the CPI are stated in accordance with the
specific linkage terms relating to each asset or liability.
Below is data with respect to the Consumer Price Index and the dollar
exchange rate:
DECEMBER 31 % CHANGE
------------- --------------------
2006 2005 2006 2005 2004
----- ----- ----- ---- -----
Index - in points 102.9 103.0 (0.10) 2.39 1.20
Exchange rate of the dollar in NIS 4.225 4.603 (8.21) 6.85 (1.62)
14
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 4 - MARKETABLE SECURITIES
[Enlarge/Download Table]
DECEMBER 31 DECEMBER 31
2006 2005
------------- -------------
NIS THOUSANDS NIS THOUSANDS
------------- -------------
Shares and options (1) 118,914 82,396
Government debentures (2) -- 33,094
Convertible debentures (1) 97,877 86,370
Corporate debentures (3) 322,162 364,940
Participation units in mutual funds 11,633 10,871
Participation units in limited partnerships (1) 7,479 5,898
------- --------
558,065 583,569
======= =======
(1) INCLUDING MARKETABLE SECURITIES OF RELATED PARTIES (NOTE 10B) 36,047 8,638
======= =======
[Download Table]
DECEMBER 31 DECEMBER 31
2006 2005
------------- -------------
NIS THOUSANDS NIS THOUSANDS
------------- -------------
(2) GOVERNMENT DEBENTURES - LINKAGE BASE
Unlinked -- 33,094
======= =======
(3) CORPORATE DEBENTURES - LINKAGE BASES
CPI linked 250,822 292,475
Linked to dollar 60,816 62,574
Unlinked 10,524 9,891
------- --------
322,162 364,940
======= =======
15
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION
COMPOSITION
DECEMBER 31 DECEMBER 31
2006 2005
------------- -------------
NIS THOUSANDS NIS THOUSANDS
------------- -------------
Debit Balances
--------------
"Med Yavne" Joint Venture 625 1,120
"Nir 2" Joint Venture -- 208
--- -----
625 1,328
=== =====
Credit Balances
---------------
"Med Ashdod" Lease Joint Venture 52 63
"Nordon 1" Joint Venture 42 42
"Gad 1" Joint Venture 79 78
--- -----
173 183
=== =====
ADDITIONAL INFORMATION:
GENERAL
-------
Oil and gas exploration activities are generally performed through oil and gas
exploration joint ventures having various partners, this being due to the high
costs involved with these types of activities and the wish/need to spread the
risk. The manner of operating in the framework of the joint ventures is as
follows: the partners in the joint ventures are required to approve the expense
budget in connection with the various activities involved in the oil and gas
exploration activities. After approval of the expenses, the joint venture makes
a "cash call" to the partners, each one in accordance with its share in the
budget approved by the partners.
The Partnership records its share of the cash calls from the joint venture in an
"exchange" account and, upon payment of the amounts by the joint venture, the
Partnership records its share on the statement of earnings or in an investment
account (similar to proportional consolidation), based on its accounting policy,
as stated in Note 3G, above.
The balances shown in the balance sheet and relating to the joint ventures
constitute the amount of the actual investment of the Limited Partnership in
each joint venture less its share in the losses of that venture.
16
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
A. "MED YAVNE" LEASE
1. General
-------
In June 2000, the Petroleum Commissioner (hereinafter - "the
Commissioner") granted the partners in the Offshore License 239/"Med
Yavne" (hereinafter - "Med Yavne License"), in which the Limited
Partnership had oil rights, a lease for a period of 30 years for an
area of 250 sq. km. out of the area of the aforesaid license,
following the results of the "Or 1" drilling.
The lease conditions provide, among other things, that the leaseholder
shall act diligently to develop the lease and to produce gas from the
lease, and at the end of 5 years from the date the lease was granted
the leaseholder shall submit a plan for continued activity in the
lease area. In June 2005, the Commissioner approved the operator's
request for a change in the terms of the lease in such a manner that
the work plan for development of the lease will be submitted to the
Commissioner at the time applicable to development of the "Noa" well
(see Section 3, below).
The lease is limited in the entire area thereof, to the subterranean
space as far as the roof of messenian ophorites or to the base of the
Pliocene in absence of the ophorites. In 2001, an area of 105 square
kilometers of the northern area of the lease was returned in which no
drilling prospects were located. In 2002, an additional area of 92
square kilometers out of the northern portion of the lease was
returned in light of the operator's recommendation not to execute any
drillings in accordance with the conditions of the lease since, based
on the existing data, the prospects currently indicated are at a high
level of risk. The remaining lease area after return of the said
portions is 53 square kilometers.
Regarding the lease period - see Note 7G., below.
Regarding the Partnership's liability for payment of royalties - see
Note 7A., below.
2. The "Or 1" well in the "Med Yavne" License
------------------------------------------
In October 1999, the "Or 1" drilling was executed in the "Med Yavne"
License. The results of the production test performed at the well
indicated that the rate of production in the area examined was 21
million cubic feet per day. Nonetheless, in the operator's estimation,
the well is capable of producing gas at a higher rate, once the well
is completed for regular production, with appropriate equipment and by
opening up additional areas in the target layer.
The Partnership's participation percentage in the "Or 1" well is
32.4111%. The cost of the well amounted to $5.2 million. The
Partnership's share in the well costs amounted to NIS 7.6 million, and
was recorded in the category "Investment in oil and gas properties".
17
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
A. "MED YAVNE" LEASE (CONT'D)
3. The gas reserves in the "Or 1" Well in the "Med Yavne" Lease
------------------------------------------------------------
According to the operator's estimations, based on the drilling results
of the "Or 1" Well, along with a three-dimensional seismic survey
performed in the area of the lease, the recoverable gas reserves in
the "Or 1" well in the lease, is about 50 billion cubic feet.
In November 2002, the Partnership received an opinion from a
consulting firm in the United States, the object of which was to
perform a techno-economic examination for the development of the "Or
1" well. The said opinion indicates that, under certain assumptions,
development of the reserve, by connecting it to the production
platform in the adjacent "Meri" well (at a distance of 12 km) and from
there via a transportation pipe to Ashdod, is economically feasible.
In January 2007, the Partnership received an updated opinion
(including an update of the development costs and the sales prices)
that also indicates that development in the "Or 1" well, assuming
connection of the well to the production platform in the "Meri" well
as stated, is economically feasible.
In 2005, the operator of the "Med Yavne" lease contacted Noble Energy
Mediterranean Ltd. (hereinafter - "Noble"), operator of the "Yam
Tatis" joint venture (the holder of the rights in the "Noa", "Noa
South" and "Meri" wells), to examine the possibility (including an
estimate of the expenses) to connect the "Or 1" well to the gas
pipeline Noble plans to install between the "Noa" well and the
production platforms in the "Meri" well, which is supposed to run
close to the "Or 1" well in order to pipe the gas produced from the
"Or 1" well to the production platforms in the "Meri" gas field, and
from there to Ashdod.
Noble notified the operator of the lease that it is prepared to
discuss a joint venture with respect to development of the "Or 1" well
together with the "Noa" well, the development of which is planned for
2009-2010.
In the estimation of the General Partner, based on the opinion
received, as stated, and based on the price of the gas and the
development costs, the fair value of the "Or 1" well is not less than
its value as recorded.
B. THE "MED ASHDOD" LEASE
1. General
-------
In January 2002, the Commissioner granted the partners in the Offshore
License 242/"Med Ashdod", a lease (hereinafter - "the Lease") in an
area of 250 square kilometers out of the "Med Ashdod" License area for
a period of 30 years (commencing from June 2000), this being based on
the findings of the "Nir 1" well, which was executed in the license
area. The Partnership's share in the Lease is 19.1369%.
Regarding the lease period - see Note 7G., below.
Regarding obligations of the Partnership to pay royalties - see
Note79A., below.
18
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
B. THE "MED ASHDOD" LEASE (CONT'D)
1. General (cont'd)
-------
The work plan in the Lease, as determined by the Commissioner (after
extensions and changes), includes presentation of a drilling agreement
for prospects from the Jurassic age up to May 1, 2007, and commencing
of the drilling no later than May 1, 2008. If no further discovery is
made beneath the Pliocene base, the Lease shall be restricted to the
Pliocene base.
In February 2004, Isramco Inc., the operator of the lease (hereinafter
- "the Operator") presented to the Partners the "Yam 3" prospect - a
drilling for oil prospects (hereinafter - "the Drilling") in the
Jurassic layer at a depth of 5,900 meters, and with an estimated
budget of $40 million.
Execution of the Drilling is subject to approval of the Ministry of
Defense and signing of an agreement with an owner of the drilling
equipment (Semi or Jack Up).
In meetings held in 2004 and 2005, the Operator and the Ministry of
Defense discussed the conditions for execution of the Drilling. In
August 2005, upon submission of the summation with the Ministry of
Defense, the Operator contacted drilling companies for purposes of
receiving its proposal for execution of the Drilling. If and subject
to acceptance of the proposals and an agreement in-principle with the
drilling contractor (who will comply with the limitations of the
Ministry of Defense), the Operator will update the budget for the
Drilling and will bring its execution for the approval of the partners
in the lease as well as the approval of the Ministry of Defense. At
this stage, and as long as proposals have not been received from
drilling companies and approvals have not been received from the
Ministry of Defense and the partners in the lease, as stated, it is
not possible to estimate if and when the Drilling of "Yam 3" well will
be executed.
2. "Gad 1" Well
------------
In February 2005, the operator recommended to the partners in the
Lease to execute a drilling for gas prospects - the "Gad 1" Well
(hereinafter - "the Well"). In the absence of a unanimous decision of
all the partners with respect to execution of the Well, the operator
issued a "Sole Risk" notification in the name of the Partnership to
the other partners in the Well. The meaning of the "Sole Risk"
notification is that every partner in the Lease is given a period of
30 days from the date of receipt of the "Sole Risk" notification to
notify the operator of his interest in participating in the Well, at
the full rate of his rights or a part thereof, or not to participate
in the Well at all.
In response to the "Sole Risk" notification, in addition to the
Partnership, other partners holding approximately 14.9% of the rights
in the Lease gave notice of their interest in participating in the
Well. Accordingly, the rights of those partners not responding to the
"Sole Risk" notification were transferred to the Partnership.
19
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
B. THE "MED ASHDOD" LEASE (CONT'D)
2. "Gad 1" Well (cont'd)
-----------
Pursuant to the decision made on August 25, 2005 by the General
Meeting of the holders of the Participation Units in the Partnership:
1. On August 29, 2005, the Partnership entered into an agreement
with the U.S. company, Palace Petroleum Crop. (hereinafter -
"Palace"), pursuant to which the Partnership will transfer to
Palace participation rights in the Well at the rate of 30% in
exchange for Palace investing in the Well 34.2% of the drilling
costs and 30% of the production tests (if any). In addition, the
Partnership will grant Palace an option to acquire participation
rights at the rate of 30% of every additional drilling, if
executed in the future in the Med Ashdod Lease site, this being
only in a case where the Partnership receives additional
participation rights (in addition to the present rate of its
rights in the Lease) as part of the "Sole Risk" process, and at a
rate that will not be less than the rights to be transferred to
Palace as part of the option as stated above.
2. On August 28, 2005, the Partnership transferred participation
rights in the Well at the rate of 1% to Petroleum Fields
Exploration (1992) Limited Partnership, in exchange for it
bearing its relative share of the drilling costs.
3. On September 13, 2005 and September 26, 2005, the Partnership
transferred participation rights in the Well at the rate of 4%
and 5%, respectively, to Delek Drilling Limited Partnership, in
exchange for it bearing its relative share of the drilling costs.
After transfer of the rights as stated, the Partnership remains with
45.103% of the rights in the Well.
On September 25, 2005, execution of the Well was commenced by the
offshore drilling rig, Atwood Southern Cross. The Well was planned for
a depth of approximately 2,600 meters and has a budget (after updates)
of $16.4 million (not including production tests). When the Well
reached its final depth, electrical examinations were made which
indicated that the target layers are saturated with water. Therefore,
on November 16, 2005, the Partners decided to abandon the Well. The
Well costs amounted to roughly $16.4 million.
The Partnership's share in the Well costs amounted to NIS 30.4 million
and this amount was recorded on the statement of earnings in 2005.
C. MICHAL AND MATAN MARINE LICENSES
In March 2005, the operator (BG) notified the partners in the Michal and
Matan licenses (hereinafter - "the Licenses") and the Commissioner that it
relinquishes its rights in the Licenses and resigns it position as operator
of the Licenses. As a result of that notification and pursuant to the joint
operating agreement, BG's rights were transferred to the other partners in
the Licenses based on their proportionate shares therein. Accordingly, the
participation rate of the rights in the Licenses transferred to the
Partnership was 20.510%.
20
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 5 - JOINT VENTURE FOR OIL AND GAS EXPLORATION (CONT'D)
C. MICHAL AND MATAN MARINE LICENSES (CONT'D)
In May 2005, an agreement was reached pursuant to which Dor Chemicals Ltd.
and the Dor Gas Explorations, Limited Partnership transferred, for no
consideration, to the Partnership and to the limited partnership Delek
Drillings (hereinafter - "Delek") and Avner Petroleum Exploration
(hereinafter - "Avner") participation rights in the Licenses, such that the
Partnership was transferred 4.885% and Delek and Avner were transferred
15.197% each. In January 2006, additional participation rights, at the rate
of 11.55%, were transferred to the Partnership by STX (2000) Limited
Partnership.
After transfer of the rights as stated, the participation rate of the
Partnership's rights in the Licenses was 41.95%.
Further to notification of the partners in the Licenses to the Commissioner
of their intention to execute "Tamar 1" well in the Matan License
(hereinafter - "the Tamar Well"), the Commissioner extended the validity of
the Licenses up to the end 2008.
On July 24, 2006, an agreement was signed (hereinafter - "the Agreement")
between the Partnership and additional partners in the Licenses, on the one
side, and Noble, pursuant to which participation rights in the Licenses at
the rate of 33% were transferred to Noble and Noble was appointed as
operator of the Licenses. The Agreement provides, among other things, that
Noble will act to the best of its ability to enter into an agreement with a
drilling contractor for execution of the "Tamar" well, in such a manner
that the drilling will be performed no later than the end of 2007. If a
well agreement, as stated, is not signed by June 30, 2007, the Agreement
will come to an end and Noble will return its rights in the Licenses and
will leave its position as operator.
In accordance with the Agreement, Noble paid the existing partners $1
million, of which $550 thousand was paid to third parties in connection
with marketing the Licenses to international entities. Out of the balance,
the Partnership received $188 thousand based on its proportionate share
(41.95%). This amount was recorded on the statement of earnings as "gain on
sale of oil and gas rights".
In August 2006, approvals for the agreement were received from the
Commissioner and the Supervisor of Restrictive Business Practices, and the
agreement entered into effect. After transfer of the rights to Nobel, the
Partnership holds rights in the Licenses at the rate of 27.5%.
The decision of the Supervisor of Restrictive Business Practices includes a
number of limitations, the main ones of which are: the Avner and Delek
partnerships and the Partnership and/or any party related thereto, shall
not hold jointly (including together with other holders), in any gas right,
except for the Licenses, except with the express approval of the Supervisor
of Restrictive Business Practices. In any arrangement relating to
determination of a mechanism for making decisions between the holders in
the Licenses with respect to marketing natural gas, none of the said
parties shall hold, directly or indirectly, any right to prevent the other
holders from making a decision or taking an action in connection with
marketing of the natural gas.
In November 2006, the operator presented a budget for execution of the
"Tamar" well, in the amount of $69 million, as well as an operating budget
for the years 2006 and 2007, in the aggregate amount of $2.2 million.
On December 14, 2006, the Partnership notified the operator that it
approves its share of the said well and operating budgets.
At this stage, and as long as no contract has been signed with a drilling
contractor, the General Partner is unable to estimate if and when the said
drilling will be executed.
Regarding the Partnership's liability for an overriding royalty - see 7B.,
below.
21
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 6 - SUNDRY PAYABLES
[Download Table]
DECEMBER 31 DECEMBER 31
2006 2005
------------- -------------
NIS THOUSANDS NIS THOUSANDS
------------- -------------
Payables in respect of financial instruments (1) 3,560 --
Accrued expenses 474 501
----- ---
4,034 501
===== ===
(1) See Note 11B(2).
NOTE 7 - CONTINGENT LIABILITIES AND COMMITMENTS
A. In the event of discovery of oil and/or gas and/or other valuable
material that can be produced within the licenses and leases in which
the Partnership is active at present and other licenses and leases in
which the Partnership will participate, the Partnership is obligated
to pay royalties from the revenues generated from the first 10% of its
share in the license/lease, as follows:
[Enlarge/Download Table]
ONSHORE LICENSES OFFSHORE LICENSES
------------------------------------- -------------------------------------
UP TO THE DATE OF FOLLOWING THE UP TO THE DATE FOLLOWING THE
RETURN OF THE DATE OF RETURN OF OF RETURN OF THE DATE OF RETURN OF
INVESTMENT THE INVESTMENT INVESTMENT THE INVESTMENT
----------------- ----------------- ----------------- -----------------
To Isramco Inc. 5.00% 13.00% 1.00% 13.00%
In addition, in the event of a discovery of oil and/or gas and/or
other valuable material that will be extracted and realized from the
Med Ashdod Lease and the Med Yavneh Lease, the Limited Partnership is
obligated to pay royalties from the revenues generated from the first
10% of its share in the lease as specified below:
[Download Table]
THE MED ASHDOD LEASE AND
MED YAVNEH LEASE
-------------------------------------
UP TO THE DATE OF FOLLOWING THE
RETURN OF THE DATE OF RETURN OF
INVESTMENT THE INVESTMENT
----------------- -----------------
To J. O. E. L. Jerusalem Oil Exploration Ltd. 0.51% 6.58%
To Equital Ltd. 0.38% 4.93%
To Isramco Inc. 0.06% 0.83%
Isramco Inc. is entitled to an overriding royalty of 2% from the
Partnership's share in the oil and/or gas, that is produced from the
Med Ashdod and Med Yavneh lease and/or of any petroleum right that
comes in their place, which is in addition to any other royalty and/or
consideration to which Isramco Inc. is entitled at present.
22
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 7 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
B. The Partnership has an obligation for the payment of an overriding
royalty to the General Partner of 5% of the Partnership's share of the
revenues from oil and/or gas (gross, before expenses and other
payments including a royalty to the State according to the Israeli
Petroleum Law, 1952) that is produced from the Matan and Michal
Licenses, including any petroleum asset that may come in their place.
C. According to an agreement dated February 1997, the Partnership
acquired the full rights of Equital Ltd., a related party, in the
Shikma Carveout in the Ashdod Lease (10%) to a depth of 1,500 meters
and below.
The Partnership has an obligation to pay Equital Ltd. if the well is
found to be commercial, the amount of $84.5 thousand, as well as a
royalty at the rate of 6% before and after the return of the
investment.
D. The Partnership has an obligation to pay royalties to the State of
Israel in accordance with the Petroleum Law, 1952
E. According to an amendment to the Limited Partnership agreement, dated
August 6, 1993, that is valid from June 1993, it was determined that
the Limited Partnership shall pay the General Partner an amount that
is the equivalent of $35,000 a month for placing the services of the
employees of the General Partner, as needed, at the disposal of the
Limited Partnership and for rent and regular maintenance of part of
the offices of Isramco Inc. in Israel that is also used by the Limited
Partnership.
At the General Meeting of owners of the participation units, that was
held in February 1997, it was decided to approve an update of the
payment to the General Partner to a sum that is the equivalent of
$42,000 (plus Value Added Tax) from January 1997. At that meeting, a
commitment was given by the General Partner according to which the
General Partner would collect a monthly payment of only $40,000 (plus
Value Added Tax).
F. According to an agreement (hereinafter - "the Marketing Agreement")
signed in March 1989 between the Limited Partnership and the East
Mediterranean Oil and Gas Company Ltd. (hereinafter - "EMOG"), EMOG
was granted the right to be appointed the exclusive marketing agent of
the Limited Partnership in Israel and areas under its control for the
wholesale marketing of crude oil from the oil fields of the Negev 2
Venture to which the Limited Partnership is entitled. In an agreement
signed in March 1992 between the Limited Partnership and other
companies some of whom at that time were parties having an interest in
the General Partner (J O.E.L. Jerusalem Oil Explorations Ltd. and
Isramco Inc.), various oil rights were transferred to the Limited
Partnership, including the "Negev Med" preliminary permit on the basis
of which the Med Ashdod and Med Yavneh leases were issued later on
(hereinafter - "the Rights Transfer Agreement"). In the Rights
Transfer Agreement, it was determined that the marketing of the crude
oil produced from the petroleum assets that had been transferred to it
from the above interested parties according to the Rights Transfer
Agreement would be carried out by EMOG in accordance with the
Marketing Agreement.
The period of the agreement is fifteen years from the first commercial
production. EMOG may assign its rights and obligations under the
agreement.
23
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 7 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
G. The oil rights in which the Limited Partnership has a share are
allocated for a fixed term and on certain conditions. An extension of
the validity of a petroleum asset is usually at the discretion of the
authorities in accordance with the Petroleum Law as well as the
renewal of any part thereof or the stipulating of additional
conditions. In the event of failure to fully comply with the
conditions, the right may be cancelled or reduced. The ability to
exploit the petroleum assets in accordance with the lease and the
licenses is contingent, among other things, on the Limited Partnership
and the partners therein being willing and able to finance the various
operations therein as well as the availability of appropriate
equipment and personnel in Israel. The lack of equipment or personnel
could increase the costs or totally prevent fulfillment of the terms
of the lease or the license or the permit or prevent or reduce the
period of their extension or even lead to their cancellation.
In addition, in accordance with the Petroleum Law, if within the first
three years of the granting of the lease, oil/gas is not produced from
the lease site in commercial quantities, the appointed Minister is
permitted to send the lease owner a notification demanding that
production of oil/gas in commercial quantities be commenced within the
time period determined by the Minister in the notification - which may
not be less than 60 days. If production, as stated, is not commenced,
the lease will expire. In the estimation of the General Partner and
based on discussions with the Commissioner of Petroleum Matters, a
notification as stated will not be sent with respect to the Med Ashdod
lease - up to the end of the time allocated for execution of a
drilling for oil prospects (that is, July 1, 2007) and with respect to
the Med Yavneh lease - so long as development from the "Noa" gas field
has not been started, which is nearby and subject to development from
the "Or 1" gas field having been started at the same time.
H. According to the trust agreement referred to in Note 1D, in the event
of termination of the trust, the cash received as a result of the
realization of the trust assets less the costs involved in the
realization and termination of the trust, will be divided among the
owners of the participation units and the holders of options (if any)
less the exercise premium.
I. The Supervisor is entitled to receive wages from the Limited
Partnership in an amount in shekels that is equivalent to $3,500 per
month, as long as the trust agreement, referred to in Note 1D, remains
in effect. Similarly, the Supervisor is entitled to receive from the
Limited Partnership expenses that were duly incurred in the discharge
of his duties and that were approved by the General Meeting. The
Supervisor received approval for a budget for purposes of legal
consultation, in the amount of $10,000 per year.
In addition, the Supervisor is entitled to additional compensation for
his work in connection with issuance of additional rights, in the
amount of $20,000 in respect of every issuance, or such higher amount
that will be approved by the General Meeting.
J. According to the trust agreement, referred to in Note 1D, the Limited
Partner (the trustee) is entitled to receive annual wage of $1,000.
K. The Limited Partnership has undertaken to indemnify the General
Partner and any of its employees and/or directors for any loss,
expenses or damage that they or their agents bear or are required to
bear, whether directly or indirectly, as a result of any act or
omission in accordance with the provisions of the Limited Partnership
agreement or in accordance with law.
24
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 7 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT'D)
L. Some of the offshore drillings in which the Partnership may be a
partner, are subject to the conditions and restrictions that
determined or that may be determined in future by the Defense System.
These conditions and restrictions could cause a change and delay in
the time schedules and, as a result, could generate an increase in
expected costs and a failure to comply with the lease.
M. (1) The Limited Partnership shall be dissolved upon the occurrence of
any of the following instances:
a. At the end of the period in which the Limited Partnership
holds, directly or indirectly, a valid petroleum asset or
rights therein or in the petroleum to be produced.
b. If the General Partner should cease to fulfill its position
and no other partner is appointed in its place within 6
months from the date on which it left office.
c. If the partners agree to dissolve the Limited Partnership.
(2) According to the directives of the Israeli Stock Exchange, the
Board of Directors of the Stock Exchange may remove the Limited
Partnership's securities from trading in the following instances
(this being in addition to the causes of action included in the
Stock Exchange's Articles of Association in respect of suspending
of trade and cancellation of the registration of securities of
companies):
a. If the Limited Partnership ceases to operate in the area of
the activities that were specified by the Limited
Partnership before the registration for trading, for a
period of nine consecutive months in which most of the
Partnership's expenses are not expenses for exploration and
development, within the meaning of the Income Tax
Regulations (Deductions from Income of Holders of Oil
Rights), 1956.
b. The Limited Partnership commences to also engage in
activities in areas that are not within the limits of its
exclusive area of occupation.
c. The Limited Partnership commences to also engage in projects
other than those that were specified by the Limited
Partnership before the first registration for trading or
other than those that were specified in the Limited
Partnership agreement after the first registration for
trading and that an amendment of the partnership agreement
was approved by the General Meeting of the owners of the
participation units.
It is noted that further to the Trustee's inquiry to the Stock
Exchange in 2005, the Stock Exchange responded to the Trustee
that the interpretation of the term "exploration and development
expenses", within the meaning of the guidelines of the Stock
Exchange's Articles of Association, also includes expenses
incurred for management of the Partnership's current oil
exploration activities, pursuant to the provisions of the Income
Tax Regulations (Rules for Recording the Tax due to the Holding
and Sale of Participation Units in Oil Exploration Partnerships),
1988.
25
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 8 - LIMITED PARTNERSHIP'S CAPITAL
[Download Table]
DECEMBER 31 DECEMBER 31
2006 2005
----------- -----------
Participation units of NIS 0.01 par value (in thousands) 4,250,908 4,250,908
========= =========
A. THE GENERAL PARTNER - ISRAMCO OIL AND GAS LTD.
Up to December 31, 2006, the General Partner invested NIS 389 thousand in
the capital of the Limited Partnership, and it participates in the Limited
Partnership's expenses and losses and is entitled to its income according
to the share of the General Partner in the capital invested in the Limited
Partnership's capital.
As at December 31, 2006, the share of the General Partner in the capital is
0.05% and is progressively reduced with every increase in capital, in which
the General Partner does not participate.
B. THE LIMITED PARTNER - ISRAMCO MANAGEMENT (1988) LTD.
As at December 31, 2006, the Limited Partner invested in the capital of the
Limited Partnership, NIS 856,002 thousand (after deduction of the issuance
costs) and it participates in the Limited Partnership's expenses and losses
and is entitled to its income according to its share in the capital
invested in the Limited Partnership's capital. As at December 31, 2006, the
share of the Limited Partner in the capital is 99.95% and is progressively
increased with every increase in capital, in which the General Partner does
not participate.
C. THE CAPITAL OF THE LIMITED PARTNERSHIP
The composition of the capital of the Limited Partnership is as follows:
[Enlarge/Download Table]
LIMITED PARTNER GENERAL PARTNER TOTAL
--------------- --------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
--------------- --------------- -------------
Partners' investment, net 856,002 389 856,391
-------- ---- --------
Loss balance at beginning of the year (261,657) (183) (261,840)
Net income for the year 61,851 31 61,882
Distribution of Partnership earnings to holders
of the participation units (70,000) -- (70,000)
Tax deposits paid on behalf of holders of the
participation units (8,823) -- (8,823)
-------- ---- --------
Loss balance at end of the year (278,629) (152) (278,781)
-------- ---- --------
Limited Partnership capital at end of the year 577,373 237 577,610
======== ==== ========
26
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 8 - LIMITED PARTNERSHIP'S CAPITAL (CONT'D)
D. In accordance with a legal opinion received by the Limited
Partnership, it was recommended that when the partners will have
accrued profits, the Limited Partner and/or the Supervisor would
request the Court to issue instructions in respect of the doubts
raised in the opinion regarding the distributable profits and if and
when distribution of profits by the Limited Partnership will be deemed
to be a withdrawal of part of the investment of the Limited Partner
within the meaning of Section 63(B) of the Partnerships Ordinance.
E. Further to the demand of the Israeli Tax Authorities that the tax
deriving from the taxable income attributable to the holders of the
participation units shall be paid by the Partnership on behalf of the
holders of the participation units, an agreement was signed between
the Partnership and the Tax Authorities, according to which it was
provided that the Partnership shall be entitled to receive an
exemption from withholding of tax at the source on its income, subject
to the condition that beginning from 2004, the Partnership will pay to
the Tax Authorities, at the end of every tax year, an advance deposit
on account of the tax liability of the holders of the participation
units, which shall be calculated based on the amount of the
Partnership's income for tax purposes in the relevant tax year by
category (interest, dividends, gains/losses from sale of securities)
less the Partnership's allowable deductions for tax purposes in a
manner proportionate to the income, multiplied by the rates fixed in
the agreement. The said payment will be attributed to the credit of
every certificate holder (as defined in the Income Tax Regulations)
based on his proportionate share, as an advance deposit on account of
the tax.
Pursuant to the agreement, in the current year the Partnership paid
NIS 8,823 thousand (in 2005 - NIS 5,074 thousand and in 2004 - NIS
3,615 thousand), which was recorded to the credit of every certificate
holder based on his proportionate share, as a deposit on account of
the tax and that will be included as part of the certificate for
purposes of calculating the deduction to which the holder is entitled
due to the holding of participation units.
The amounts paid by the Partnership, as stated, are presented as a
reduction of Partnership capital.
F. At the General Meeting of the holders of the participation units, held
on April 25, 2006, changes were approved to the Partnership Agreement
and to the Trust Agreement in connection with distribution of the
Partnership's earnings for 2006 and thereafter, mainly as follows:
1. Calculation of the earnings will always be made for the year
ended December 31. Earnings shall not be distributed if receipt
thereof by the limited partner will be considered a withdrawal of
his investment or a portion thereof, within the meaning thereof
in Section 63(B) of the Partnerships Ordinance (New Version),
1975.
27
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 8 - LIMITED PARTNERSHIP'S CAPITAL (CONT'D)
F. (CONT'D)
2. Distribution of the Partnership's earnings to the Trustee in
respect of any year, shall be made on the date determined by the
General Partner and shall be no later than June 30 of the
following year, as follows:
a. The Partnership shall distribute all its earnings deriving
from oil and/or gas production activities that it may
distribute under law as earnings, less the amounts required
by the Partnership in order to meet its liabilities, as
provided in the Partnership Agreement.
b. The Partnership shall distribute 40% of its earnings
deriving from its activities other than oil and/or gas
production, including income from securities and other
interim investments that it may distribute under law as
earnings, less amounts designated for taxes that it shall
transfer to the Assessing Officer (pursuant to the agreement
therewith), and subject to the liquid resources remaining in
its accounts immediately after the said distribution not
being less than $100 million. If it is possible to
distribute in respect of such year less than 40% of the said
amounts, in such a manner that the balance of the liquid
resources remaining in the Partnership's accounts
immediately after the said distribution will be $100 million
- the amount shall be distributed accordingly.
c. The General Partner and the Trustee shall issue an Immediate
Report detailing the amount of the earnings available for
distribution, the tax rate with respect to withholding at
the source, the effective date for holding of the
participation units for purposes of eligibility to receive a
distribution and the actual distribution date.
In addition, the above-mentioned General Meeting approved an
agreed-to arrangement whereby a one-time amount of NIS 70 million
will be distributed in respect of the Partnership's earnings for
the years 2003, 2004 and 2005, which is to be paid to the Trustee
on the date determined by the General Partner and no later than
60 days after fulfillment of the following cumulative conditions:
(i) receipt of court approval for the agreed-to arrangement as a
final arrangement and (ii) receipt of approval from the Taxes
Authority regarding the rate for withholding of tax at the source
in respect of the said distribution.
In July 2006, the court approved distribution of NIS 70 million
pursuant to the agreed-to arrangement and approval was received
from the Taxes Authority according to which the distribution is
exempt from withholding of tax at the source.
Pursuant to the decision of the General Partner and the Trustee,
the effective date for purposes of eligibility regarding the
above-mentioned distribution was set as September 4, 2006. On
September 18, 2006, the distribution was made.
28
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 9 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES
A. FINANCING INCOME, NET
[Enlarge/Download Table]
FOR THE YEAR ENDED 31 DECEMBER
---------------------------------------------
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
Gain from marketable securities, net * 40,611 50,479 36,005
Unrealized loss from derivative financial instrument (3,560) -- --
Interest on deposits in banks and exchange
rate differences 585 281 553
Dividend and interest income from
marketable securities 31,777 24,432 25,955
Commissions, management fees and others (4,184) (3,804) (3,890)
------ ------ ------
65,229 71,388 58,623
====== ====== ======
* Including gain from investment in securities
of third parties 9,713 2,107 2,524
====== ====== ======
B. PARTICIPATION IN OIL AND GAS EXPLORATION, NET
[Enlarge/Download Table]
FOR THE YEAR ENDED 31 DECEMBER
---------------------------------------------
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
"Med Ashdod" 344 91 106
"South Marine" License -- -- 187
"Med Yavne" Lease 726 279 231
"Gal" Licenses 192 62 23
"Shikma Sea" License - "Nordon 1" well -- -- 366
"Med Ashdod" Lease - "Gad 1" well 1 30,370 --
Others -- -- 12
----- ------ ---
1,263 30,802 925
===== ====== ===
Including expenses to related parties 536 2,910 664
===== ====== ===
29
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 9 - DETAILS TO STATEMENT OF EARNINGS CATEGORIES (CONT'D)
C. GENERAL AND ADMINISTRATIVE EXPENSES
[Enlarge/Download Table]
FOR THE YEAR ENDED 31 DECEMBER
---------------------------------------------
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
Management fee to the General Partner -
related party 2,133 2,157 2,154
Professional services 411 151 160
Taxes and permits 103 105 105
Wages to the limited partner and the supervisor 184 195 192
Others 65 42 82
----- ----- -----
2,896 2,650 2,693
===== ===== =====
D. INCOME PER PARTICIPATION UNIT
[Enlarge/Download Table]
FOR THE YEAR ENDED 31 DECEMBER
---------------------------------------------
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
Number of participation units used to compute
the basic income per participation unit
(in thousands) 4,250,908 4,250,908 4,250,908
Income used in computing basic income
(in NIS 000) per participation unit 61,851 37,919 54,977
NOTE 10 - INTERESTED PARTIES AND RELATED PARTIES
A. The limited partnerships, Naphtha Explorations, I.N.O.C. Dead Sea and
the Partnership, are managed by related companies that are controlled
by the same controlling interest. The said partnerships together with
Isramco Inc., which is also under the control of the same controlling
interest, are partners, in full or in part, in different gas and oil
exploration rights.
The joint ventures for oil and gas explorations, in which the said
partnerships and the Partnership participate, receive services from
companies that are related parties and are controlled by the same
controlling interest. Also, in most of the joint ventures, in which
the Partnership participates, some of the partners are related parties
and interested parties that also act in part as venture operators who
are entitled to venture operator fees at a set rate of the direct
expenses or venture operator fees at a fixed monthly amount, according
to the joint venture agreements.
30
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 10 - INTERESTED PARTIES AND RELATED PARTIES (CONT'D)
B. MARKETABLE SECURITIES OF RELATED PARTIES
[Enlarge/Download Table]
FOR THE YEAR ENDED DECEMBER 31, FOR THE YEAR ENDED DECEMBER 31,
2006 2005
-------------------------------- --------------------------------
RATE OF HOLDINGS MARKET VALUE RATE OF HOLDINGS MARKET VALUE
---------------- ------------- ---------------- -------------
% NIS THOUSANDS % NIS THOUSANDS
---------------- ------------- ---------------- -------------
Naphta Explorations, Limited Partnership 13.52 5,104 13.52 4,114
Hanal Dead Sea, Limited Partnership 4.43 2,376 4.43 1,784
J.O.E.L. Jerusalem Oil Exploration Ltd. 0.74 4,936 0.90 2,740
Isramco Inc. 4.7 15,942 -- --
Nitzba Holdings 1995 Ltd. 9.02 7,689 -- --
------ -----
36,047 8,638
====== =====
The income from the investment in marketable securities of related parties
in the years 2006, 2005 and 2004 amounted to NIS 9,713 thousand, NIS 2,107
thousand, and NIS 2,524 thousand, respectively.
C. Balances and transactions with related and interested parties are
included in the notes to the financial statements in the appropriate
categories.
D. For information on undertakings with related and interested parties -
see Note 7.
E. For information on royalties to related parties and interested parties
- see Note 7.
NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
GENERAL
During the regular course of its business, the Partnership is exposed to
interest risks, currency risks, risks relating to gas and oil prices and
the market value of marketable securities.
A. INTEREST RISKS
The Partnership's interest rate risk stems mainly from investment in
debentures, presented as an investment in marketable securities, at a fixed
rate of interest, which exposes the Partnership to an interest rate risk in
connection with their fair value.
Changes in the interest rate in the economy may expose the Partnership to
losses on marketable securities, since there is a connection between the
real (inflation-adjusted) price of the security and the difference between
the interest rate borne by the security and the market interest rate.
DECEMBER 31, 2006
-----------------------------
AVERAGE
EFFECTIVE UP TO
INTEREST RATE 1 YEAR
------------- -------------
% NIS THOUSANDS
------------- -------------
FINANCIAL INSTRUMENTS AT A FIXED RATE
Corporate debentures 6.16 322,162
Convertible debentures 2.32 97,877
31
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONT'D)
B. EXCHANGE RATE RISKS
1. The Partnership is exposed to foreign currency risks mainly in
connection with changes in the exchange rate of the dollar. The
oil and gas prices, as well as the inputs relating to oil and gas
exploration, are denominated in dollars. In addition, the
Partnership has investments in marketable securities, some of
which are denominated in dollars, financial derivatives and it is
a party to agreements for payment of management fees to the
General Partner, and fees to the Supervisor and the Trustee, that
are also denominated in dollars.
2. As at the balance sheet date, the Partnership has a forward
contract, not for hedging purposes, for acquisition of dollars in
exchange for shekels, in the amount of $20 million, which comes
due in July 2007. In 2006, the Partnership included in its
financial statements an unrealized loss and a payable of NIS 3.6
million, in respect of the aforesaid contract.
C. RISKS RELATING TO OIL AND GAS PRICES
The Partnership's purpose is to participate in oil and gas exploration
and production activities. Declines in oil and gas prices expose the
Partnership to losses deriving from a reduction in the projected
revenues and declines in asset values, on the one hand, while on the
other hand, increases in oil and gas prices may expose the Partnership
to losses resulting from an increase in the inputs required for oil
and gas exploration.
D. MARKET RISKS RELATING TO MARKETABLE SECURITIES
The Partnership invests most of its cash balances in marketable
securities. Changes in the market prices of the marketable securities
expose the Partnership to losses. In order to reduce the level of
risk, the Partnership has a policy requiring wide dispersion of the
investments' portfolio and investment of at least 70% in low-risk
channels, such as, corporate and government debentures.
E. FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of the cash and cash equivalents, marketable
securities, other receivables and debits and other payables and
credits, equals or approximates their fair value.
32
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 11 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONT'D)
F. LINKAGE BASES OF MONETARY ITEMS
[Enlarge/Download Table]
DECEMBER 31, 2006
----------------------------------------------------------------
ISRAELI CURRENCY FOREIGN CURRENCY
----------------------------- ----------------
UNLINKED CPI-LINKED DOLLAR TOTAL
------------- ------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents 10,163 -- 5,045 15,208
Marketable securities 123,391 349,979 84,695 558,065
Joint ventures for oil and gas
exploration -- -- 625 625
Sundry receivables 310 -- -- 310
CURRENT LIABILITIES:
Sundry payables (3,912) -- (122) (4,034)
Joint ventures for oil and gas
exploration -- -- (173) (173)
------- ------- ------ -------
129,952 349,979 90,070 570,001
======= ======= ====== =======
[Enlarge/Download Table]
DECEMBER 31, 2005
----------------------------------------------------------------
ISRAELI CURRENCY FOREIGN CURRENCY
----------------------------- ----------------
UNLINKED CPI-LINKED DOLLAR TOTAL
------------- ------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents 1,806 -- 914 2,720
Marketable securities 131,521 378,844 73,204 583,569
Joint ventures for oil and gas
exploration -- -- 1,328 1,328
Sundry receivables 9 -- -- 9
CURRENT LIABILITIES:
Sundry payables (360) -- (141) (501)
Joint ventures for oil and gas
exploration -- -- (183) (183)
------- ------- ------ -------
132,976 378,844 75,122 586,942
======= ======= ====== =======
33
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 12 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
A. GENERAL
The Limited Partnership's financial statements are prepared in accordance
with generally accepted accounting principles in Israel ("Israeli GAAP"),
which differ in certain respects from generally accepted accounting
principles in the United States ("U.S. GAAP"). Differences which have a
significant effect on the Limited Partnership's net assets, income and
equity, are set forth below.
1. Effect of inflation
-------------------
Up to December 2003, the Limited Partnership included the effect of
price level changes in the accompanying financial statements, as
required under Israeli GAAP and as discussed in Note 3 to these
financial statements.
U.S. GAAP does not provide for recognition of the effects of such
price level changes. However, the U.S. Securities and Exchange
Commission permits recognition of the effects of price level changes
and, therefore, such effects are not included in the reconciliation of
net income or equity presented herein.
2. Marketable securities
---------------------
a. The Limited Partnership owns 13.5% of the participation units of
a related limited partnership, which is engaged in oil and gas
exploration. Under Israeli GAAP, these participation units, which
are designated for sale in the short term, are recorded at market
value as at the balance sheet date with unrealized income/losses
being recorded in the statements of earnings. Under U.S. GAAP,
the participation units are recorded using the equity method in
accordance with EITF D-46, "Accounting for Limited Partnership
investments" which requires implementation of Statement of
Position 78-9, "Accounting for Investments in Real Estate
Ventures" for the Limited Partnership's investments.
The effect of reversing the unrealized income/losses on the
participation units for Israeli GAAP, and application of the
equity method of accounting for U.S. GAAP purposes, are
presented below as separate adjustments.
b. The Limited Partnership invests in marketable securities which
are classified as trading securities, both under Israeli GAAP and
U.S. GAAP.
Regarding the presentation in the Statements of Cash Flows: under
Israeli GAAP cash flows from purchases, sales and maturities of
trading securities shall be classified as cash flows from
investing activities, whereas under U.S. GAAP those cash flows
shall be classified as cash flows from operating activities, in
accordance with FAS 115, "Accounting for Certain Investments in
Debt and Equity Securities".
The effect of the different classification of the trading
securities activity in the statements of cash flows for U.S. GAAP
purposes, is presented below as separate adjustment.
B. THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS, IS
SHOWN BELOW:
1. On the statements of earnings:
-----------------------------
[Download Table]
YEAR ENDED DECEMBER 31
---------------------------------------------
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
Net income under Israeli GAAP 61,882 37,936 55,005
------ ------ ------
Adjustments
-----------
Revaluation of marketable securities (990) (972) (943)
Partnership equity in earnings of
an investee partnership 1,049 265 955
------ ------ ------
59 (707) 12
------ ------ ------
Net income under U.S. GAAP 61,941 37,229 55,017
====== ====== ======
34
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 12 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (CONT'D)
B. THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS, IS
SHOWN BELOW: (CONT'D)
1. On the statements of earnings: (cont'd)
-----------------------------
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31
---------------------------------------------
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
BASIC AND DILUTED INCOME PER
PARTICIPATION UNIT (UNDER U.S. GAAP)
Net income 61,941 37,229 55,017
========= ========= =========
General partner's share in the net
income 31 19 28
========= ========= =========
Net income attributable to
participation unit holder 61,910 37,210 54,989
========= ========= =========
Basic net income per participation
unit (NIS) 0.0146 0.0088 0.0129
========= ========= =========
Weighted-average number of participation
units used in calculation of basic
income per unit (in thousands) 4,250,908 4,250,908 4,250,908
========= ========= =========
2. On balance sheet items:
----------------------
[Enlarge/Download Table]
DECEMBER 31
---------------------------------------------------------------------------------------------
2006 2005
--------------------------------------------- ---------------------------------------------
AS PER AS PER
AS REPORTED ADJUSTMENT U.S. GAAP AS REPORTED ADJUSTMENT U.S. GAAP
------------- ------------- ------------- ------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- ------------- ------------- ------------- -------------
ASSETS
Marketable
securities (1) 558,065 (5,104) 552,961 583,569 (4,114) 579,455
======== ====== ======== ======== ====== ========
Investment in
affiliate (2) -- 6,658 6,658 -- 5,609 5,609
======== ====== ======== ======== ====== ========
EQUITY
Accumulated
loss (1) (2) (278,781) 1,554 (277,227) (261,840) 1,495 (260,345)
======== ====== ======== ======== ====== ========
(1) Change in value of investment securities to market value.
(2) Partnership equity in earnings of a partnership.
35
"Isramco - Negev 2" Limited Partnership
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2006, 2005
AND 2004
--------------------------------------------------------------------------------
NOTE 12 - DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (CONT'D)
B. THE EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP
DERIVING FROM THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS, IS
SHOWN BELOW: (CONT'D)
3. On the statement of cash flows:
------------------------------
[Enlarge/Download Table]
YEAR ENDED DECEMBER 31
---------------------------------------------
2006 2005 2004
------------- ------------- -------------
NIS THOUSANDS NIS THOUSANDS NIS THOUSANDS
------------- ------------- -------------
Net cash inflow generated by
operating activities - Israeli GAAP 24,384 17,933 22,339
Adjustments
-----------
Net (loss) income 59 (707) 12
Gain from marketable securities, net 990 972 943
Proceeds from disposal (investment in)
marketable securities, net 66,115 5,952 (30,378)
Partnership equity in earnings of
a partnership (1,049) (265) (955)
-------- -------- --------
Net cash inflow (outflow) generated by
operating activities - U.S. GAAP 90,499 23,885 (8,039)
======== ======== ========
Net cash outflow generated by
investing activities - Israeli GAAP 66,927 (24,418) (30,378)
Adjustments
-----------
Investment in marketable securities 458,285 487,366 204,464
Proceeds from disposal of marketable
securities (524,400) (493,318) (174,086)
-------- -------- --------
Net cash outflow generated by
investing activities - U.S. GAAP 812 (30,370) --
======== ======== ========
36
KPMG
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