Energean Israel Half Year 2022 Accounts

ENERGEAN ISRAEL LIMITED

Unaudited interim condensed consolidated financial statements

AS OF 30 JUNE 2022

INDEX

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ENERGEAN ISRAEL LIMITED

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

ENERGEAN ISRAEL LIMITED

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

ENERGEAN ISRAEL LIMITED

For the period of six months ended 30 June 2022 (Unaudited):

For the period of six months ended 30 June 2021 (Unaudited):

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

ENERGEAN ISRAEL LIMITED

(*) The loan to related party was repaid as part of the Share Premium Capital reduction, see note 6(B).

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

ENERGEAN ISRAEL LIMITED

NOTE 1:  GENERAL

A.  Energean Israel Limited (the "Company") was incorporated in Cyprus on 22 July 2014 as a private company with limited liability under the Companies Law, Cap. 113. Its registered office is at Lefkonos 22, 1^st Floor, 2064, Nicosia, Cyprus.

B.  The Company and its subsidiaries (the "Group") was established with the objective of exploration, production and commercialisation of natural gas and crude oil. The Group's main activities are performed in Israel by the Company's Israeli Branch.

C.  The Group's core assets as of 30 June 2022 are composed of:

(1)  The Company holds 80% interests in four licences, blocks 55, 56, 61 and 62 (together, "Zone D") in Israel's Exclusive Economic Zone ("EEZ").  Following Energean's submission of a formal notice of relinquishment to the Ministry of Energy, the licences will expire on 27 October 2022, at the end of their term. See note 7(A).

D.  The Energean Power FPSO arrived on location in Israel on 5 June 2022 and is expected to deliver first gas within a few weeks.

NOTE 2:  ACCOUNTING POLICIES AND BASIS OF PREPARATION

These unaudited interim condensed consolidated financial statements for the six months ended 30 June 2022 have been prepared in accordance with the International Financial Reporting Standards ("IFRS") as adopted by United Kingdom (UK). The unaudited interim condensed consolidated financial statements do not include all the information and disclosures that are required for the annual financial statements and must be read in conjunction with the Group's annual consolidated financial statements for the year ended 31 December 2021.

These unaudited interim financial statements have been prepared on a going concern basis.

ENERGEAN ISRAEL LIMITED

NOTE 3:  FINANCIAL POSITION

A.  Property, Plant and Equipment:

1)  Composition:

(*) The additions to oil & gas properties are primarily due to development costs for the Karish field, incurred under the EPCIC contract. Works relate primarily to the FPSO, subsea and onshore construction.

(**) Capitalised borrowing costs relate primarily to the secured senior notes.

ENERGEAN ISRAEL LIMITED

NOTE 3:  FINANCIAL POSITION (Cont.)

2)  Cash flow statement reconciliations:

(*) This amount includes US$10.85 million which was paid to the sellers of the Karish and Tanin leases during 2021.

B.  Intangible Assets:

1)  Composition:  

(*) Additions to exploration and evaluation assets are primarily due to geological surveys, seismic acquisition and processing and drilling activities undertaken in Block 12, offshore Israel. See also notes 6(E), 6(F).

ENERGEAN ISRAEL LIMITED

NOTE 3:  FINANCIAL POSITION (Cont.)

2)  Cash flow statement reconciliations:

C.  Deferred expenses

Deferred expenses relate to compensation of US$22.9 million that was accrued in 2021 following delays to the supply of gas from the Karish project. It is presented on the balance sheet as a current asset as it will be treated as variable consideration under IFRS 15, offsetting gas sales once gas delivery commences. First gas from the Karish project is expected within the next few weeks.

D.  Senior secured notes:

1)  Issuance of US$2,500,000,000 senior secured notes:

On 24 March 2021 (the "Issue Date"), Energean Israel Finance Ltd (a 100% subsidiary of the Company) issued US$2,500,000,000 of senior secured notes.

The Notes were issued in four equal tranches as follows:

The interest on each series of the Notes is paid semi-annually, on 30 March and on 30 September of each year.

The Notes are listed on the TACT Institutional of the Tel Aviv Stock Exchange Ltd. (the"TASE").

With regards to the indenture document, signed on 24 March 2021 with HSBC BANK USA, N.A (the "Trustee"), no Indenture default or Indenture event of default has occurred and is continuing.

ENERGEAN ISRAEL LIMITED

NOTE 3:  FINANCIAL POSITION (Cont.)

2)  Restricted cash:

As of 30 June 2022, the restricted cash of the Company includes:

o  Short term restricted cash of US$100 million debt payment fund that will be released upon achieving three quarters of production of 3.8 bcm/year on an annualised basis

o  Short term restricted cash of US$35.6 million to cover the interest reserve account for the accrued interest of the senior secured notes till 30 June 2022.

3) Credit rating:

The senior secured notes have been assigned a Ba3 rating by Moody's and a BB- rating by S&P Global.

E.  Fair value measurements:

The information set out below provides information about how the Group determines the fair values of various financial assets and liabilities.

The fair values of the Group's non-current liabilities measured at amortised cost are considered to approximate their carrying amounts at the reporting date.

The carrying value less any estimated credit adjustments for financial assets and financial liabilities with a maturity of less than one year are assumed to approximate their fair values due to their short term-nature.

The fair value hierarchy of financial assets and financial liabilities that are not measured at fair value (but fair value disclosure is required) is as follows:

ENERGEAN ISRAEL LIMITED

NOTE 3:  FINANCIAL POSITION (Cont.)

(*) The senior secured notes are measured at amortised cost in the Company's financial statements. The notes are listed for trading on the TACT Institutional of the Tel Aviv Stock Exchange Ltd. (the "TASE")". The carrying amount as of 30 June 2022 was US$2,467 million and as of 31 December 2021 was US$2,463 million.

F.  Trade and other payables:

ENERGEAN ISRAEL LIMITED

NOTE 3:  FINANCIAL POSITION (Cont.)

(1)  Trade payables and accrued expenses relate primarily to development expenditure on the Karish project, with the main contributors being FPSO and subsea construction costs. Trade payables are non-interest bearing.

(2)  In December 2016, the Company acquired the Karish and Tanin leases for US$40 million of up front consideration plus contingent consideration of US$108.5 million (paid over 10 equal instalments) bearing interest at an annual rate of 4.6%. As at 30 June 2022, the total discounted deferred consideration was US$60 million (31 December 2021: US$57million).

The Sale and Purchase Agreement ("SPA") includes provisions in the event of Force Majeure that prevents or delays the implementation of the development plan as approved under one lease for a period of more than ninety (90) days in any year following the final investment decision ("FID") date. In the event of Force Majeure, the applicable annual payment of the remaining consideration will be postponed by an equivalent period of time, and no interest will be accrued in that period of time as well.

  Due to the effects of the COVID-19 pandemic which constitute a Force Majeure event, the deferred payment due in March 2022 was postponed accordingly.

(3)  Amount payable to Technip in respect of the EPCIC contract. The amount is payable in eight equal instalments commencing nine-months following practical completion of the project and therefore has been discounted at 5.831% per annum.

(4)  The sales consideration received in advance relates to the agreement with Israel Natural Gas Lines ("INGL") for the transfer of title (the "Hand Over") of the near shore and onshore part of the infrastructure that will deliver gas from the Energean Power FPSO into the Israeli national gas transmission grid. It is intended that the hand over to INGL will become effective at least 90 days after the delivery of first gas from the Karish field, which is expected in the next few weeks. Following Hand Over, INGL will be responsible for the operation and maintenance of this part of the infrastructure.

ENERGEAN ISRAEL LIMITED

NOTE 4:  COMPREHENSIVE INCOME

A.  Operating loss:

.

ENERGEAN ISRAEL LIMITED

NOTE 4:  COMPREHENSIVE INCOME (Cont.)

B.  Net finance income (expenses):

(1)  See also Note 3(D)(1).

(2)  See also Note 3(A).

NOTE 5:  TAXATION

A.  Tax income:

ENERGEAN ISRAEL LIMITED

NOTE 5:  TAXATION (Cont.)

B.  Deferred tax:

Deferred taxes, driven by the activity in Israel by the Israeli Branch of the Company, are computed at an average tax rate of 23%, based on the tax rates that are expected to apply upon reversal. The deferred taxes are presented in the statement of financial position as non-current assets. Below are the items for which deferred taxes were recognised:

ENERGEAN ISRAEL LIMITED

NOTE 6:  SIGNIFICANTS EVENTS AND TRANSACTIONS DURING THE REPORTING PERIOD

A.  Gas supply agreement with the Israel Electric Company

In March 2022, Energean signed a gas supply agreement with the Israel Electric Company.
The gas price will be determined in each period, with volumes determined on a daily basis.
Starting upon the commencement of first gas production from Karish, the agreement will
be valid for an initial one-year period with an option to extend subject to ratification by
both parties

B.  Share Premium Capital reduction:

In April 2022 the Company reduced its share premium capital by US$360 million and credited US$346 million against the shareholder loan account plus accrued interest.

C.  Termination of contract with Gas Buyer

In May 2022, further to the claims raised by the parties in the related arbitration proceedings with Dalia Power Energies LTD ("Dalia") (including the counterclaim filed by the Company seeking a declaration that Company is entitled to terminate the GSPA), Dalia and the Company agreed to end all claims and disputes between the parties. Both sides agreed that the Dalia GSPA (which represents up to 0.8 bcm/year was lawfully terminated, that the arbitration proceedings were terminated, and that neither party owes or will be liable to the other for any payment in connection with and due to the Dalia GSPA, the arbitration proceedings and the facts subject thereof. This was agreed to be final and unappealable.

D.  Contract signed with East Hagit Power Plant

In May 2022, the Company signed a new GSPA, representing up to 0.8 bcm/year, to supply gas to the East Hagit Power Plant Limited Partnership ("EH Partnership"), a partnership between the Edeltech Group and Shikun & Binui Energy.

The GSPA is for a term of approximately 15 years, for a total contract quantity of up to 12 bcm. The contract contains provisions regarding floor pricing, offtake exclusivity and a price indexation mechanism (not Brent price linked).

E.  Commencement of growth drilling campaign:

The Company started its 2022 drilling campaign during March 2022, which originally included three firm wells. In June 2022, the Company exercised its contractual option to drill two further wells, the drilling locations for which were selected as the Hermes and Zeus prospects.

F.  Athena Gas Discovery

A commercial discovery was made by the Athena exploration well, located in Block 12, in the A, B and C sands. Preliminary analysis indicated that the Athena discovery contained recoverable gas volumes of 8 bcm on a standalone basis.

The discovery de-risked an additional 50 bcm of gross mean unrisked prospective resources across Company's Olympus Area (total 58 bcm including Athena). The Olympus Area is the Company's newly defined area which includes Athena, plus the undrilled prospects on Block 12 and the adjacent Tanin Lease.

ENERGEAN ISRAEL LIMITED

NOTE 6:  SIGNIFICANTS EVENTS AND TRANSACTIONS DURING THE REPORTING PERIOD (Cont.)

G.  Claim submitted under the Karish-Tanin SPA

  On 31 May 2022, NewMed Energy LP (previously Delek Drilling LP) ("NewMed") filed a lawsuit against the Company before the Tel Aviv District Court. NewMed Energy LP  claimed that the remaining US$65.1 million of outstanding contingent consideration due under the SPA for the Karish and Tanin leases (see Note 3(E)(2)) plus interest and indexation, should be accelerated. The residual remedy requested is US$10.85 million plus interest and indexation, reflecting the annual payment for the year 2021. The claim is purportedly based on a payment acceleration mechanism set in the SPA, combined with NewMed's rejection of the Company's Force Majeure claim. The claim is being assessed by the Company together with its legal advisors. A statement of defense will be filed mid-September.  

H.  The FPSO sailed away from Singapore and arrived on location in Israel on 5 June 2022.

J.  Bank Guarantee Facility:

On 8 June, 2022 the Company's guarantee facility was extended and amended to a total of NIS355 million instead of NIS250 million. The facility is secured by Energean PLC parent company guarantee of US$112 million. This facility is valid until April 30, 2023.

NOTE 7:  SIGNIFICANTS EVENTS AND TRANSACTIONS AFTER THE REPORTING PERIOD

A.  Zone D:

On 27 July, 2022, the Company sent a formal notice to the Ministry of Energy notifing the relinquishment of Zone D and discontinuation of related work. As such, the licences are expected to expire on October 27, 2022.