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Ampal-American Israel 10-Q 2011 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2011
OR
For the transition period from _______________________ to_______________
Commission file number 0-538
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer", "accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares outstanding of the issuer’s Class A Stock, par value $1.00 per share, its only authorized common stock, is 56,133,764 (as of April 25, 2011).
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
Index to Form 10-Q
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(*) Retroactively adjusted to reflect acquisition under common control (see Note 9)
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(*) Retroactively adjusted to reflect acquisition under common control (see Note 9)
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(U.S. Dollars in thousands)
Unaudited
* In thousands
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(U.S. Dollars in thousands)
Unaudited
* In thousands
(**) Retroactively adjusted to reflect acquisition under common control (see Note 9)
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reference should be made to the Company’s consolidated financial statements for the year ended December 31, 2010 for a description of the critical accounting policies. Also, reference should be made to the notes to the Company’s December 31, 2010 consolidated financial statements for additional information regarding the Company’s consolidated financial condition, results of operations and cash flows.
Accounting Standards Codification ("ASC") 820 (formerly Statement of Financial Accounting Standards ("SFAS") No. 157)
In January 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2010-06 ("ASU 2010-16") for Fair Value Measurements and Disclosures (Topic 820): “Improving Disclosures about Fair Value Measurements”. ASU 2010-16requires new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements and separate presentation of purchases, sales, issuance and settlements in the reconciliation of activity in Level 3 fair value measurements. ASU 2010-16also clarifies existing disclosures for level of disaggregation and about inputs and valuation techniques. The new disclosures were effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 disclosures, will be effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The adoption did not have any impact on the Company's financial statements.
Cash equivalents are short-term, highly liquid investments (bank accounts and bank deposits) that have original maturity dates of three months or less and are readily convertible into cash.
Cash equivalents equal to $1.5 million have been allocated as a compensating balance for various loans provided to the Company and would therefore be unavailable if the Company wished to pledge them in order to provide an additional source of cash.
In November 2007, Ampal and the Israel Infrastructure Fund ("IIF"), leading a group of institutional investors ("Investors"), purchased a 4.3% interest in East Mediterranean Gas Co. S.A.E., an Egyptian joint stock company ("EMG"), through Merhav Ampal Energy Holdings, LP, an Israeli limited partnership (the “Joint Venture”), from Merhav (M.N.F) Ltd. (“Merhav”) for a purchase price of approximately $95.4 million, using funds provided by the Investors. In addition to the Joint Venture’s purchase from Merhav, Ampal contributed into the Joint Venture an additional 4.3% interest in EMG already held by Ampal. The Joint Venture now holds a total of 8.6% of the outstanding shares of EMG. Ampal’s contribution was valued at the same price per EMG share as the Joint Venture’s purchase. This amount is equivalent to the purchase price (on a per share basis) paid by Ampal for its December 2006 purchase of EMG shares from Merhav.
The investment in EMG is accounted for as a cost method investment.
The Company evaluates the carrying value amount of its interest in EMG periodically in connection with the preparation of its financial statements. In light of the recent developments in Egypt, the Company obtained an updated valuation from an independent valuator for the quarter ended March 31, 2011. The periodic independent valuations obtained by the Company to assist in its preparation of financial statements customarily indicate a range of values depending on underlying assumptions. In the case of the most recent independent valuation, due to uncertainties in Egypt, the lower end of the indicated valuation range was materially lower than in the past and not substantially higher than the value at which EMG is carried on the Company's balance sheet. The principal factors affecting valuation are the price, quantity, delivery dates and reliability of the gas as well as the discount rate. An adverse change in any of these factors could result in a material reduction in the value of EMG and a reduction in the carrying value amount of the asset on the Company's balance sheet. The Company will continue to evaluate developments with regard to EMG and will make determinations each fiscal period as to whether an impairment charge is appropriate.
8
As of March 31, 2011, the Company’s Financial Statements reflect a 16.8% interest in shares of EMG, with 8.2% held directly and 8.6% held through the Joint Venture (of which Ampal owns 50%).
EMG organized in 2000 in accordance with the Egyptian Special Free Zones system, has been granted the right to export 7.0 BCM/year of natural gas from Egypt to Israel, other locations in the East Mediterranean basin and to other countries. EMG has linked the Israeli energy market with the Egyptian national gas grid via an East Mediterranean pipeline with the first gas delivery occurring in May 2008. EMG is the developer, owner and operator of the pipeline and its associated facilities on shore in both the point of departure at El Arish, Egypt and the point of entry in Ashkelon, Israel.
From February 5, 2011 to March 15, 2011 the supply of gas to EMG, and therefore to EMG’s Israeli clients, was interrupted due to a damage in a small portion of a GASCO (the Egyptian gas transport company) pipeline serving EMG resulting from an explosion and subsequent fire in a metering station along a separate GASCO owned and operated gas pipeline from Egypt to Jordan. Neither EMG's site nor EMG's pipeline were damaged as the affected GASCO station is not a part of the EMG pipeline system and is located some 30 kilometers (about 18.6 miles) from the EMG site.
On April 27, 2011 there was an explosion at a gas valve station 2Km from Al Arish, Egypt and some 30 Km from the EMG terminal. The station is owned and operated by GASCO, the Egyptian gas transport company, which is a subsidiary of EGAS, the Egyptian national gas company (EMG's gas supplier).
Following the explosion EGAS has initiated its standard shut down procedure affecting gas transportation throughout the Sinai Peninsula and gas supply to Jordan, Lebanon, Syria; to major Egyptian industries and gas consumers in the Sinai; and to EMG.
The Company has been informed by EMG that the repair work has been completed on the valve station and that the site is technically ready for gas transmission. In addition, EMG has advised the Company that EMG was informed that the government of Egypt has been implementing additional security measures for securing its gas transportation system in the Sinai from further attacks and that the gas deliveries to Jordan, Syria, Lebanon, Israel and Egyptian industrial and electric facilities in the Sinai, will resume once these security measures have been fully implemented. EMG was informed that these measures are expected to be completed and gas deliveries are expected to resume by the end of May 2011.
EMG is in the process of negotiating several additional agreements covering much of the anticipated 7.0 BCM annually earmarked for the Israeli market. This project is governed by an agreement signed between Israel and Egypt which designates EMG as the authorized exporter of Egyptian gas, secures EMG’s tax exemption in Israel and provides for the Egyptian government’s guarantee for the delivery of the said 7 BCM/year gas to the Israeli market.
Gadot, a wholly owned subsidiary of Ampal (99.99% on a fully diluted basis), was founded in 1958 as a privately held Israeli company with operations in distribution and marketing of liquid chemicals for raw materials used for industrial purposes. Since then, Gadot has expanded into a group of companies, which currently forms Israel’s leading chemical distribution organization. Through its subsidiaries, Gadot ships, stores, and distributes liquid chemicals, oils, and a large variety of materials to countries across the globe, with an emphasis on Israel and Western Europe. In our description of Gadot’s business operations, the term “Gadot” refers to Gadot and its consolidated subsidiaries.
Gadot’s business is influenced by certain economic factors, which include (i) global changes in demand for chemicals used as raw materials for industrial purposes, (ii) price fluctuations of chemicals and raw materials, (iii) price fluctuations of shipping costs, ship leases and ship fuel, (iv) general global financial stability, and (v) currency fluctuations between the New Israeli Shekel ("NIS") and other currencies, primarily the U.S. dollar.
Gadot’s operations are divided into three main service sectors:
These service sectors are synergistic and complimentary, so that Gadot provides its customers with a full range of services, from acquiring chemicals based on a customer’s needs, logistical handling including shipping and transport, offloading, storage and delivery. Members of the Gadot group of companies also provide services for other members of the group, strengthening the group as a whole.
9
On March 3, 2011 Merhav-Ampal Grop Ltd. (formerly Merhav-Ampal Energy Ltd.), an Israei corporation and wholly owned subsidiary of Ampal ("MAG") closed the transaction to sell all of the outstanding shares of 012 Smile Telecom Ltd., a wholly owned subsidiary of MAG ("012") to Partner Communications Company Ltd. ("Partner"), in accordance the Share Purchase Agreement between MAG, 012 and Partner, signed on October 13, 2010 (the “012 sale”). As part of the 012 Sale, Partner also assumed approximately NIS800 million (approximately $225.4 million) of the total debt of 012 Smile. Accordingly, 012 Smile has been reported as discontinued operations since December 31, 2010. The 012 sale closed on March 3, 2011. Partner paid to Ampal approximately NIS 650 million (approximately $180 million) out of which Ampal recorded a gain of $28.9 million, net of early repayment fee the Company paid in connection with the repayment of a loan received to finance the purchase of 012 and net of tax, from the 012 Sale. In addition the company recorded income from discontinued operations of $19.9 million in 2010 and $5.2 million in the period ended March 31, 2011.
All the indirect interest expenses were recorded as a continuing operation.
Classification
We classified certain operations as discontinued using generally accepted accounting principles in the United States of America, as the associated operations and cash flows will be eliminated from our ongoing operations and we will not have any significant continuing involvement in their operations after the respective sale transactions. For all periods presented, all of the operating results for these operations were removed from continuing operations and are presented separately as discontinued operations, net of tax. The Notes to the Consolidated Financial Statements were adjusted to exclude discontinued operations unless otherwise noted.
10
Pursuant to the Exercise Agreement, the conversion of the Loan into a 25% equity interest in the Project will take the form of the issuance to MAG of 25% of all of the issued and outstanding equity interests in Merhav Renewable Energies Limited, a Cyprus corporation and subsidiary of Merhav (“Merhav Energies”). The purchase price for the 25% equity stake in Merhav Energies, to be paid at closing, is the outstanding balance of the Note on December 31, 2009, or approximately $22.3 million. The closing of the purchase of the 25% equity stake and the conversion of the Loan is subject to, among other things, (i) the initial disbursement of (or other evidence of) long term debt financing for the Project obtained from Banco do Brasil or any other unaffiliated third party lender (the date such financing is obtained, the “Qualified Financing Date”), (ii) the payment in full of all outstanding amounts due and payable under the Note, and (iii) the delivery at closing of the Shareholders’ Agreement (as defined below) by Merhav and MAG, setting forth certain agreements relating to the governance of Merhav Energies. At closing, the Note and the Guaranty shall be cancelled and the pledge of Merhav’s shares of Class A Stock under the Pledge Agreement shall be released. The closing was to occur on the Qualified Financing Date or as soon as practicable thereafter, but no later than December 31, 2010 (the "Termination Date"). Since the Qualified Financing Date did not occur prior to December 31, 2010, on December 31, 2010, the parties amended the Exercise Agreement such that the Termination Date and the maturity date of the Note was extended to December 31, 2011.
The Exercise Agreement contains other customary closing conditions, as well as customary representations and warranties.
Merhav is a multinational corporation with interests in a range of sectors, including energy, infrastructure projects and agriculture. Merhav is a significant shareholder of Ampal and is wholly owned by Mr. Yosef A. Maiman, the President, CEO and member of the controlling shareholder group of Ampal. Because of the foregoing relationship, a special committee of the Board of Directors of Ampal composed of Ampal’s independent directors negotiated and approved the transaction. Houlihan Lokey Financial Advisors, Inc., which has been retained as financial advisor to the special committee, advised the special committee on this transaction.
Ampal and Gadot entered into a management services agreement (intercompany transaction), according to which Ampal provides Gadot with management services for an annual consideration calculated as a percentage of Gadot's profits.
Ampal entered into a management services agreement with Merhav, according to which Merhav provides the Company and its subsidiaries with management, marketing, financial, development and other administrative services for an annual consideration which will be determined annually and shall be equal to a percentage of the direct and indirect expenses incurred by Merhav in connection with providing services to or for the benefit of Ampal. The management fee shall be determined by the Special Committee of the Board of Directors of Ampal (composed solely of independent Directors) at or around the end of each fiscal year.
Ampal entered into an Aircraft Sharing Agreement with Merhav, according to which Ampal has a limited and non exclusive right to use the aircraft possessed and operated by Merhav. For the usage of the aircraft, Ampal will pay Merhav a pro rata share of the fixed costs related to the aircraft (calculated annually based on the flight hours of the aircraft used by Ampal compared to the total flight hours of the aircraft, with a maximum amount of $500,000 per annum) and the direct costs and expenses of operating each flight for Ampal.
As stipulated above, Yosef A. Maiman, the Chairman, President and CEO of Ampal and a member of the controlling shareholders group of Ampal, is the sole owner of Merhav. Because of the foregoing relationship, a special committee of the Board of Directors composed of Ampal’s independent directors negotiated and approved the transactions between Ampal and Merhav.
11
The Company is exposed to certain risks relating to its ongoing business operations, including financial, market, political, and economic risks. The following discussion provides information regarding the Company's exposure to the risks of changing commodity prices, interest rates, and foreign currency exchange rates.
The Company’s derivative activities are subject to management's discretion.
The interest rate and foreign exchange contracts are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility, and in order to cover underlying exposures. A swap contract was entered into to convert some of the Company's NIS denominated debt in the amount of NIS 150 million (approximately $43.9 million) into U.S. Dollar denominated debt and to convert Israeli interest rates into LIBOR interest rates.
On April 1, 2009, the Company signed an interest rate swap contract in order to convert some of the Company's LIBOR interest rate denominated debt in the amount of $43.7 million into fixed interest rate debt, for a contractual term of 10 years.
We use foreign currency forward contracts to mitigate fluctuations in foreign currency exchange rates due to variations in payment or receipt of currencies other than the Company's functional currency. We use contracts to purchase U.S. Dollars and sell Euros, contracts to purchase Euros and sell U.S. Dollars and contracts to purchase U.S. Dollars and sell NIS.
We enter into derivative financial instruments, including swaps and forward agreements. We report the fair value of the derivatives on our balance sheet. The derivatives used are not designated as a hedging instrument under ASC 815. Changes in fair value are recognized in earnings in the period of change.
The following summarizes the gross fair market value of all derivative instruments and their locations in our consolidated balance sheet, and indicates which instruments are in an asset or liability position.
Asset Derivatives
_________________________________________________________________________________
Liability Derivatives
_________________________________________________________________________________
Statements of Operations
_________________________________________________________________________________
12
Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 consisted of the following (in thousands):
** See Note 12.
The carrying amount of the Company's traded debentures as of March 31, 2011 is $286 million. The market value of such debentures, based on the closing price of those debentures on March 31, 2011 on the TASE, was $272 million. The total carrying value of long-term loans as of March 31, 2011 was $338 million. The Company estimates that the fair value of the long-term loans approximates their carrying value, since substantially all of them bear non-fixed interest and there is no significant change in the credit risk of such loans.
The Chemical segment consists of Gadot which operates in the distribution and marketing of liquid chemicals for raw materials used in the chemical industry.
The Energy segment consists of the investment in EMG, an Egyptian joint stock company, which holds the right to supply and supplies natural gas to Israel through an underwater pipeline from Egypt to Israel. This investment is accounted for under the cost method.
13
The Leisure-time segment consists of an affiliate, Country Club Kfar Saba Ltd., the Company’s 51%-owned subsidiary, located in Israel.
The Finance segment consists of all other activities which are not part of any of the above segments.
(*) Retroactively adjusted to reflect acquisition under common control (see Note 9)
None
14
EMG Pipeline
On April 27, 2011 there was an explosion at a gas valve station 2Km from Al Arish, Egypt and some 30 Km from the EMG terminal. The station is owned and operated by Gasco, the Egyptian gas transport company, which is a subsidiary of EGAS, the Egyptian national gas company (EMG's gas supplier).
Following the explosion EGAS has initiated its standard shut down procedure affecting gas transportation throughout the Sinai Peninsula and gas supply to Jordan, Lebanon, Syria; to major Egyptian industries and gas consumers in the Sinai; and to EMG.
The Company has been informed by EMG that the repair work has been completed on the valve station and that the site is technically ready for gas transmission. In addition, EMG has advised the Company that EMG was informed that the government of Egypt has been implementing additional security measures for securing its gas transportation system in the Sinai from further attacks and that the gas deliveries to Jordan, Syria, Lebanon, Israel and Egyptian industrial and electric facilities in the Sinai, will resume once these security measures have been fully implemented. EMG was informed that these measures are expected to be completed and gas deliveries are expected to resume by the end of May 2011.
Debenture Repurchase Program
Ampal’s Board of Directors approved a repurchase program of Ampal’s Series A, Series B and Series C debentures (the "Debentures") that are traded on the TASE. Under the program, Ampal is authorized to repurchase Debentures in a total amount not in excess of the NIS equivalent of $30 million. The repurchases may be made in transactions in TASE or outside TASE, in block trades or otherwise. The program may be suspended or discontinued at any time.
The repurchase program will be funded using Ampal’s available cash and by possible future borrowings.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
The preparation of Ampal-American Israel Corporation's ("Ampal", and collectively with its subsidiaries, the "Company") consolidated financial statements is in conformity with accounting principles generally accepted in the United States ("GAAP") which requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. Actual results may differ from these estimates. To facilitate the understanding of Ampal’s business activities, described below are certain Ampal accounting policies that are relatively more important to the portrayal of its financial condition and results of operations and that require management’s subjective judgments. Ampal bases its judgments on its experience and various other assumptions that it believes to be reasonable under the circumstances. Please refer to Note 1 to Ampal’s consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for a summary of all of Ampal’s significant accounting policies.
No significant updates have occurred since the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Revenue Recognition
Revenue is recognized when (a) the significant risks and rewards of ownership of the goods have been transferred to the buyer; (b) the Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; (c) the amount of revenue can be measured reliably; (d) it is probable that the economic benefits associated with the transaction will flow to the Company; and (e) the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Chemical income derives from the following activities: sales of a wide range of liquid chemicals, providing maritime shipping services of chemicals by ships and providing other services which include logistics and storage services for chemicals.
Revenue from services is recognized as follows:
Recently Adopted and Recently Issued Accounting Pronouncements
ASC 820 (formerly SFAS No. 157)
In January 2010, the Financial Accounting Standards Board ("FASB") issued ASU No. 2010-06 for Fair Value Measurements and Disclosures (Topic 820): “Improving Disclosures about Fair Value Measurements”. ASU 2010-06 requires new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements and separate presentation of purchases, sales, issuance and settlements in the reconciliation of activity in Level 3 fair value measurements. ASU 2010-06 also clarifies existing disclosures for level of disaggregation and about inputs and valuation techniques. The new disclosures were effective for interim and annual periods beginning after December 15, 2009, except for the Level 3 disclosures, will be effective for fiscal years beginning after December 15, 2010 and for interim periods within those years. The adoption did not have any impact on the Company's financial statements.
16
Results of Operations
Chemicals
Changes in pricing and demand for chemicals
The overall demand for chemical products, especially commodity chemicals, is highly dependent on general economic conditions. In the past quarter, the price of crude oil increased, accordingly the prices of commodity chemicals as well as the average freight prices increased.
In the three months ended March 31, 2011 and 2010, the Company included the following certain data of Gadot Chemical Tankers and Terminals Ltd. ("Gadot"):
(*) Retroactively adjusted to reflect acquisition under common control (see note 9)
Three months ended March 31, 2011 compared to three months ended March 31, 2010
The Company recorded a consolidated net income attributable to Ampal’s shareholders of $17.2 million for the three months ended March 31, 2011, compared to a net loss of $7.1 million for the corresponding period in 2010. The gain in 2011 is primarily attributable to the capital gain that was recorded from the sale of 012 Smile.
In the three months ended March 31, 2011, the Company recorded $2.6 million of marketing expense, as compared to a $2.2 million marketing expense in the corresponding period in 2010. These expenses are attributable to Gadot and composed mainly of salary and commission expenses. The increase is primarily attributable to commissions paid.
In the three months ended March 31, 2011, the Company recorded $13.8 million of general, administrative and other expenses, as compared to $11.9 million in the corresponding period in 2010.The increase resulting mainly from the revaluation of the NIS compared to the U.S. Dollar and the increase in payments on account of annual management fees.
In the three months ended March 31, 2011, the Company recorded $2.2 million of net gain attributable to noncontrolling interests, as compared to $1.5 million of net gain attributable to noncontrolling interests in the corresponding period in 2010. These losses are mainly attributable to translation loss in the notes issued to the partners in Merhav Ampal Energy, LP, an Israeli limited partnership (the "Joint Venture"), resulting from the revaluation of the NIS compared to the U.S. Dollar.
In the three months ended March 31, 2011, the Company recorded a $9.7 million interest expense, as compared to a $6.2 million interest expense for the corresponding period in 2010. The interest expense relates to the financing the Company obtained in order to purchase Gadot, the Company's debentures, the Company's notes payable and the interest expense resulting from the swap agreements. The increase in interest expense relates, mainly, to the issuance of the Serious C debentures.
In the three months ended March 31, 2011, the Company recorded a $3.9 million translation loss, as compared to a $3.4 million translation loss for the corresponding period in 2010. The increase in translation loss is related to a change in the valuation of the NIS as compared to the U.S. Dollar, which decreased 1.9% in the three months ended March 31, 2011, as compared to a decrease of 1.6% for the corresponding period in 2010.
The Company recorded a $0.2 million net gain in Equity in earnings of affiliates for the three months ended March 31, 2011, compared to a minor net gain in Equity in earnings of affiliates for the corresponding period in 2010.
17
Results of operations analyzed by segments for the three months ended March 31:
(*) Retroactively adjusted to reflect acquisition under common control (see Note 9)
The Chemicals income relates solely to Gadot and was derived from the following activities: sales of a wide range of liquid and solid chemicals, providing maritime shipping services of chemicals by ships and providing other services which include logistics and storage services for chemicals. In the three months ended March 31, 2011, the Company recorded $136.6 million in revenue which was comprised of $134.5 million in the Chemicals segment, $1.2 million in the Finance segment, $0.7 million in the Leisure-time segment, and a $0.2 million in Equity in earnings of affiliates, as compared to $121.7 million for the same period in 2010, which was comprised of $118.2 million in the Chemicals segment, $2.8 million in the Finance segment and $0.7 million in the Leisure-time segment and a minor Equity in earnings of affiliates. The increases in chemical commodity sale prices (revenues) and some volume growth were more than offset by chemical commodity cost increases (cost of goods sold).
(*) Retroactively adjusted to reflect acquisition under common control (see Note 9)
In the three months ended March 31, 2011, the Company recorded $155.4 million in expenses which was comprised of $136.5 million of expenses in the Chemicals segment, $18.3 million of expenses in the Finance segment and a $0.7 million of expenses in the Leisure-time segment, as compared to $132.7 million in expenses for the same period in 2010 which was comprised of $120.3 million of expenses in the Chemicals segment, $11.8 million of expenses in the Finance segment and a $0.6 million of expenses in the Leisure-time segment. Chemical commodity pricing is derivative of crude oil pricing. During the three months ended March 31, 2011, the price of crude oil increased, which led to a moderate increase in the Chemical commodity prices.
Income taxes
In the three month period ended March 31, 2011, the Company reported a tax expense of $7.0 million (out of which $6.9 million classified as discontinued operations) as compared to approximately $0.2 million of tax benefit in the corresponding period in 2010. The tax expense which was recorded in 2011 attributable mainly to the capital gain from the sale of 012 Smile. The Company intends to apply a tax planning strategy of selling all or a portion its cost method investment, which currently has sufficient unrealized gains, to fully utilize the net deferred tax assets that are attributable to foreign tax credits and loss carryforwards arising in the U.S., due to unrealized gain from several investments which the Company holds.
18
Liquidity and Capital Resources
Cash Flows
On March 31, 2011, cash, cash equivalents and marketable securities were $120.5 million, as compared with $34.2 million at December 31, 2010. The increase is mainly attributable to the sale of 012's shares.
As of March 31, 2011, the Company had $0.9 million of marketable securities as compared to $0.9 million as of December 31, 2010.
The Company may also receive cash from operations and investing activities and amounts available under credit facilities, as described below. The Company believes that these sources are sufficient to fund the current requirements of operations, capital expenditures, investing activities and other financial commitments of the Company for the next 12 months. However, to the extent that contingencies and payment obligations described below and in other parts of this report require the Company to make unanticipated payments, the Company would need to further utilize these sources of cash. The Company may need to draw upon its other sources of cash, which may include additional borrowing, refinancing of its existing indebtedness or liquidating other assets, the value of which may also decline.
In addition, Ampal’s interest in Gadot has been pledged and cash equivalents equal to $1.5 million have been allocated as a compensating balance for various loans provided to the Company.
Cash flows from operating activities
Net cash used in operating activities totaled approximately $26.3 million for the three months ended March 31, 2011, compared to approximately $9.5 million provided by operating activities for the corresponding period in 2010. The increase in cash used in operating activities is primarily attributable to the increase in other assets and inventories and the increase in the net loss from continuing operations which increased by $8.2 million, mainly from the increase in interest expenses and the revaluation of the NIS, as compared to the corresponding period in 2010.
Cash flows from investing activities
Net cash provided from investing activities totaled approximately $9.0 million for the three months ended March 31, 2011, compared to approximately $9.7 million provided from investing activities for the corresponding period in 2010.
Cash flows from financing activities
Net cash used in financing activities was approximately $59.1 million for the three months ended March 31, 2011, compared to approximately $56.0 million of net cash provided from financing activities for the corresponding period in 2010. The change in cash used in financing activities is primarily attributable to the notes payable repaid due to the sale of 012’s shares in the three months ended March 31, 2011, as compared to the notes payable received for the acquisitions of 012’s business in the corresponding period in 2010.
Investments
EMG
As of today, EMG has entered into gas supply contracts as detailed in the following table:
19
The Company evaluates the carrying value amount of its interest in EMG periodically in connection with the preparation of its financial statements. In light of the recent developments in Egypt, the Company obtained an updated valuation from an independent valuator for the quarter ended March 31, 2011. The periodic independent valuations obtained by the Company to assist in its preparation of financial statements customarily indicate a range of values depending on underlying assumptions. In the case of the most recent independent valuation, due to uncertainties in Egypt, the lower end of the indicated valuation range was materially lower than in the past and not substantially higher than the value at which EMG is carried on the Company's balance sheet. The principal factors affecting valuation are the price, quantity, delivery dates and reliability of the gas as well as the discount rate. An adverse change in any of these factors could result in a material reduction in the value of EMG and a reduction in the carrying value amount of the asset on the Company's balance sheet. The Company will continue to evaluate developments with regard to EMG and will make determinations each fiscal period as to whether an impairment charge is appropriate.
Debt
Notes issued to institutional investors in Israel, the convertible note issued to Merhav M.N.F Ltd. ("Merhav") and other loans payable pursuant to bank borrowings are either in U.S. Dollars, linked to the Consumer Price Index (the "CPI") in Israel or in unlinked NIS, with interest rates varying depending upon their linkage provisions and mature between 2011-2019.
The Company finances its general operations and other financial commitments through bank loans from Bank Hapoalim, Union Bank of Israel Ltd. ("UBI") and Israel Discount Bank Ltd. ("IDB"). As of March 31, 2011, the outstanding indebtedness under these bank loans totaled $360.1 million, and the loans mature between 2011-2019.
On September 13, 2010, Ampal completed a public offering in Israel of NIS 170.0 million (approximately $45.0 million) aggregate principal amount of its Series C debentures, due in 2019. The debentures are linked to the CPI and carry an annual interest rate of 6.95%. The Series C debentures rank pari passu with Ampal’s unsecured indebtedness. The debentures will be repaid in six equal annual installments commencing on September 7, 2014, and the interest will be paid semi-annually. As of December 31, 2010, the outstanding debt under the debentures amounts to $48.4 million. Ampal deposited an amount equal to $12.5 million with Ziv Haft Trust Company Ltd. in accordance with a trust agreement dated August 31, 2010, to secure the first four years' worth of payments of interest on the debentures.
On March 3, 2011 Midroog Ltd. (an affiliate of Moody's Investors Service) ("Midroog") has downgraded Ampal's Series A, Series B and Series C Debentures' (the "Debentures") ratings by one notch, to BAA1 from A3 with a negative outlook. The Debentures remain on Midroog's "Watchlist”.
Ampal funded the Gadot acquisition with a combination of available cash and the proceeds of the credit facility, dated November 29, 2007 (the "Credit Facility"), between MAG and IDB, for approximately $60.7 million, which amount was increased, on the same terms and conditions, on June 3, 2008 by approximately $11.3 million in order to fund the second stage of the transaction and on September 23, 2008 by approximately $15.4 million in order to fund the third stage of the transaction. The Credit Facility is divided into two equal loans of approximately $43.7 million. The first loan is a revolving loan that has no principal payments and may be repaid in full or in part on December 31 of each year until 2019, when a single balloon payment will become due. The second loan also matures in 2019, has no principal payments for the first one and a half years, and shall thereafter be paid in equal installments over the remaining 9.5 years of the term. As of March 31, 2011, the outstanding debt under the loan amounts to $39.8 million. Interest on both loans accrues at a floating rate equal to LIBOR plus 2% and is payable on a current basis. Ampal has guaranteed all the obligations of MAG under the Credit Facility and Ampal’s interest in Gadot has also been pledged to IDB as a security for the Credit Facility. Yosef Maiman has agreed with IDB to maintain ownership of a certain amount of the Company’s Class A Stock. The Credit Facility contains customary affirmative and negative covenants for credit facilities of this type.
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As of March 31, 2011, the Company has a $5.0 million loan with UBI that bears interest at an annual rate of LIBOR plus 2% to be repaid in six annual installments commencing on April 2, 2008 and various other loans with UBI in the aggregate amount of $3.0 million linked to the CPI, bearing interest of 2.9% to be repaid during 2011.
As of March 31, 2011, the Company has a $105.3 million loan from institutional investors who own 50% of Merhav Ampal Energy Holdings, LP. The loan is not linked to the CPI, bears no interest and is repayable upon agreement by both parties.
The Company has a short-term loan from Bank Hapoalim in the aggregate amount of $3.5 million that bears interest at an annual rate of 2.89%, to be repaid by June 30, 2011.
As of March 31, 2011, Gadot had $4.98 million outstanding under its other debentures. These debentures are not convertible into shares and are repayable in five equal annual installments on September 15 of each of the years 2008 through 2012. The outstanding balance of the principal of the debentures bears interest at an annual rate of 5.3%. The principal and interest of the debentures are linked to the CPI and the interest is payable in semi-annual installments on March 15 and September 15 of each of the years 2006 through 2012.
As of March 31, 2011, Gadot has short-term loans, including current maturities, payable in the amount of $114.8 million and long-term loans payable in the amount of $149.6 million. The various short term-loans payable are either unlinked or linked to the USD or Euro and bear interest at rates between 2.0% to 7.0%. The various long-term loans payable are either unlinked or linked to the CPI or linked to the U.S. Dollar or Euro and bear interest at annual rates between 1.49% to 6.85%.
The weighted average interest rates and the balances of these short-term borrowings at March 31, 2011 and December 31, 2010 were 4.1% on $127.5 million and 3.8% on $131.9 million, respectively.
Our significant contractual obligations as of March 31, 2011 are summarized in the following table (in thousands):
As of March 31, 2011, the Company had issued guarantees in the aggregate principal amount of $42.0 million. These include:
Some of the Company's credit contracts are subject to covenant clauses, whereby the Company is required to meet certain key performance indicators. Certain subsidiaries did not fulfill the required covenants.
Due to these breaches of covenant clauses, the bank is contractually entitled to request early repayment of the outstanding amount. The outstanding balance is classified as a current liability. The bank has not requested early repayment of the loans.
Off-Balance Sheet Arrangements
Other than the foreign currency contracts specified below, the Company has no off-balance sheet arrangements.
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FOREIGN CURRENCY CONTRACTS
The Company’s derivative financial instruments consist of foreign currency forward exchange contracts to purchase or sell U.S. dollars. These contracts are utilized by the Company, from time to time, to manage risk exposure to movements in foreign exchange rates. None of these contracts have been designated as hedging instruments. These contracts are recognized as assets or liabilities on the balance sheet at their fair value, which is the estimated amount at which they could be settled, based on market prices or dealer quotes, where available, or based on pricing models. Changes in fair value are recognized currently in earnings.
As of March 31, 2011, the Company had open foreign currency forward exchange contracts to purchase U.S. Dollars and sell Euros in the amount of $1.8 million and to purchase U.S. Dollars and sell NIS in the amount of $2.0 million.
FORWARD LOOKING STATEMENTS
This Quarterly Report (including but not limited to factors discussed above, in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as those discussed elsewhere in this Quarterly Report on Form 10-Q) includes forward-looking statements (within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) and information relating to the Company that are based on the beliefs of management of the Company as well as assumptions made by and information currently available to the management of the Company. When used in this Quarterly Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” and similar expressions, as they relate to the Company or the management of the Company, identify forward-looking statements. Such statements reflect the current views of the Company with respect to future events or future financial performance of the Company, the outcome of which is subject to certain risks and other factors which could cause actual results to differ materially from those anticipated by the forward-looking statements, including among others, the economic and political conditions in Israel and the Middle East and the global business and economic conditions in the different sectors and markets where the Company’s portfolio companies operate.
Should any of those risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary from those described herein as anticipated, believed, estimated, expected, intended or planned. These risks and uncertainties may include, but are not limited to, those described in this report, in Part II, Item 1A. Risk Factors and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2010, and those described from time to time in our future reports filed with the Securities and Exchange Commission. The Company assumes no obligation to update or revise any forward-looking statements.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.
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Part II – OTHER INFORMATION
For information on the legal proceedings, please see Note 16 to the financial statements incorporated in this Form 10-Q.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
We have updated the last three risk factors under the heading “Risks Associated with EMG’s Business” affecting our business since those presented in our Annual Report on Form 10-K, Part I, Item 1A, for the fiscal year ended December 31, 2010, as set forth below:
The operation of the Pipeline facilities and the delivery of gas involve many risks—operating risk, availability risk, technology risk and the risk of events beyond EMG's control.
The operation of EMG's Pipeline facilities and the delivery of gas to customers involves many risks, including, without limitation, the breakdown or failure of equipment or processes, operator errors, labor disputes, delays in obtaining or renewing or inability to obtain or renew permits, approvals or licenses, violation of permit requirements, shortages of equipment or spare parts, delays in transporting such equipment or spare parts to the Pipeline facilities, or catastrophic events such as fires, earthquakes, explosions or terrorist attacks. The occurrence of any of these events could significantly reduce or entirely prevent the delivery of gas or adversely impact the quality of gas delivered and subject to existing insurance arrangements, could adversely impact EMG's revenues The occurrence of any of these events could significantly reduce EMG's revenues, which, in turn, would have a material adverse effect on its value and on its ability to distribute dividends to us. Most recently, from February 5, 2011 to March 15, 2011 the Pipeline suffered a hold in supply due to an explosion in a facility serving a nearby pipeline. On April 27, 2011 another hold on supply commenced due to another attack on a valve station owned by GASCO. It is uncertain when gas supply will resume.
The volatile political situation in Egypt may adversely affect EMG’s business and revenues.
EMG's status as a natural gas supplier in Israel is based on EMG's long-term contract with the Egyptian government for the purchase of natural gas from Egypt for the resale into the Israeli market through its pipeline system, and EMG's long-term contracts with several Israeli gas consumers, including Israel's Electric Company. EMG's ability to purchase gas from Egypt is associated with the peace treaty between Israel and Egypt, and EMG depends on the gas supply from the Egyptian governmental owned supplier and on the Egyptian government itself. The political situation in Egypt is uncertain at this point, including whether the Egyptian government will honor its treaty obligations, as is its effect on EMG's business. EGAS has indicated that, at the very least it will attempt to renegotiate the current contract with EMG, which may result in higher prices paid by EMG. If EMG is unable to pass along such higher prices to its customers, its margins may be reduced resulting in reduced profit, or a loss, to EMG. The occurrence of any of these events could adversely impact the business terms under which EMG operates, which, in turn, would have a material adverse effect on its value and on its ability to distribute dividends to us and may result in a reduction of EMG value to an extent that would require the Company to impair its investment in EMG.
Investigations in Egypt could adversely effect EMG.
Following the replacement of the Mubarak administration in Egypt, the current Egyptian government launched several investigations into the actions and operations of its predecessors, including those related to the agreements to export gas to Israel. Consequently, the former minister of petroleum as well as several other former senior ministry and EGPC/EGAS officials have been detained and are under investigation in connection with various gas transactions, including gas sales to Israel. There could be other investigations as well. Although the Company has no knowledge with respect to the likely outcome and effect on EMG, the government in Egypt could resort to these investigations to justify withholding – temporarily or otherwise - further EMG sales, or otherwise to demand to amend EMG's gas purchase agreement and its terms and conditions.
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None.
None.
None.
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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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AMPAL-AMERICAN ISRAEL CORPORATION AND SUBSIDIARIES
Exhibit Index
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