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Name of Announcer * THE ISRAEL ELECTRIC CORPORATION LTD.

Company Registration No. 520000472

Announcement submitted on behalf of

THE ISRAEL ELECTRIC CORPORATION LIMITED - BONDS

Announcement is submitted with respect to *

THE ISRAEL ELECTRIC CORPORATION LIMITED - BONDS

Announcement is submitted by * David Yahav

Designation * Legal Advisor

Date & Time of Broadcast 11-Nov-2012 22:54:23

Announcement No. 00009

>> ANNOUNCEMENT DETAILS

The details of the announcement start here ...

Announcement Title * Immediate report: The announcement of the local rating agency Midroog

Description The Israel Electric Corporation Ltd. ("The Company") announces hereby, that on 11 November, 2012, the local rating company Midroog ("Midroog"), published an announcement, stating that: (1) The rating of debentures series 22 remains at Aa3, with the same negative outlook; (2) The rating of Hashmal Shikli series and series 23 remains at Aaa; (3) Assigning an Aa3 rating with negative outlook to the expansion of Series 2022 and/or the offering of Hashmal Tzamud 2016 series and/or the offering of Hashmal Shikli 1113 series by the Company during November 2012. The offering, which includes the three above series, will be in a maximum sum of NIS 3 billion par value. (4) Assigning an Aaa rating for the expansion of Series 24 and/or Series 25 in a sum of about NIS 500 million. The total amount of about NIS 1 billion will be issued during November 2012. Midroog also stated that the government support of the Company and the co-dependency between the government and the Company are factors having a major impact on the rating. The ratings of the aforementioned series are subject to the following complementary actions: Receipt of approval by the Knesset Finance Committee of a government-guaranteed offering of about NIS 500 million; Receipt of approval by the Ministry of Finance of and government-guaranteed offering of another NIS 500 million; Explaining the difference in the deficit estimations and the mistake in estimations, including the Company's report to the Israel Securities Authority; Providing a financing solution to the financing deficit of about NIS 0.9 billion; Final signed version of financing documents and other accompanying documents regarding: (i) Bond series 2022 and/or Hashmal Tzamud 2016 and/or Hashmal Shikli 1113, (ii) Amendment of the deed of trust of Bond 24 and/or 25 plus amendment of the guarantee agreement and amendment of the letter of guarantee. Midroog also stated that the rating action report refers to the projected issue structure, based on information supplied to Midroog until 11 November, 2012. In case changes occur toe the issue structure, Midroog will have the right to reassess the rating and change the assigned rating.

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Enclosed please find Midroog's announcement. Israel Electric Corporation Ltd. By: David Yahav, Legal Advisor and Company Secretary Harel Blinde, Senior Vice-President of Finance and Economics

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1

Israel Electric Corporation Inc.

Rating Action November 2012 ו

Author:

Yuval Skornik, Analyst yuvals@midroog.co.il

Adam Ben Yehuda, Team Leader

adamb@midroog.co.il

Contacts: Merav Ben Cnaan-Heller, CPA, VP and Head of Structured Project Finance meravb@midroog.co.il

2

Israel Electric Corporation Ltd.

Series 2022 rating Aa3 Outlook: Negative

Series 221 rating Aa3 Outlook: Negative

Hashmal Tzamud 2016 Series Rating Aa3 Outlook: Negative

Hashmal Shikli 1113 Series Rating Aa3 Outlook: Negative

Hashmal Shikli 2013 Series Rating Aaa -

Series 23 Rating Aaa -

Series 24 Rating Aaa -

Series 25 Rating Aaa -

Midroog maintains the Aa3/negative outlook rating it assigned to Series 22.

Midroog maintains the Aaa rating it assigned to Hashmal Shikli 2013 series and Series 23.

Midroog announces that it is assigning an Aa3 rating/negative outlook to the expansion of

Series 2022 and/or the offering of Hashmal Tzamud 2016 series and/or the offering of Hashmal

Shikli 1113 series by Israel Electric Corp. Ltd. (hereinafter: "IEC" or the "Company") during

November 2012. The offering, which includes the three above series, will be in a maximum sum

of NIS 3 billion par value2. In accordance with the resolution of the Company's board of

directors passed on October 21, 2012, the issue proceeds are for refinancing debts paid in 2012

(NIS 0.75 billion), advancing the refinancing of a debt payable in 2013 (NIS 1.25 billion), and

increasing available cash balances (NIS 1 billion).

Midroog announces that it is assigning an Aaa rating for the expansion of Series 24 and/or

Series 25 in a sum of about NIS 500 million. It is noteworthy that a sum of NIS 500 million was

rated in the rating action of September 20123. The total amount of about NIS 1 billion will be

issued during November.

Government support of IEC (hereinafter: the "support") and the co-dependency between the

Government and IEC (hereinafter: the "dependency" (jointly hereinafter: the "connection")

are factors having a major impact on the rating. Midroog estimates the support and the

dependency as very high based on, among other things, statements made by senior Ministry of

Finance officials that the Government does not intend to impose on IEC the financing of the

fuel crisis. Therefore, increasing available cash balances and/or early scheduling of debt-

refinancing are not intended for the financing of the fuel crisis. Midroog will continue to

monitor the extent of the support and dependency, and emphasizes that a decline in the

assessment of the support and dependency could lower the rating significantly. It is

1 Series 22 was issued in accordance with the prospectus dated May 21, 2002.

2 The issue limit of the Hashmal Shikli 1113 series is NIS 1 billion par value. The issue limit of the Hashmal

Tzamud 2016 series and the expansion of Series 2022 will be NIS 2 billion par value each. 3 See link to Rating Action (September 2012) on chapter 9.

3

noteworthy that in Midroog's evaluation, the connection between IEC and the Government is

very strong, but is not absolute, and there is no full identity of interests.

Following a mistake in projections and the enlargement of 2012 cash-flow deficit (as reported

on 24/09/2012), an audit report was requested, by the Company's CEO and by the Company's

board of directors. Midroog will continue to follow over the findings of this report and its

possible consequences over the ratings.

This rating action report refers to the projected issue structure, based on information supplied

to Midroog until 11/11/2012. In case changes occur toe the issue structure (duration, issue

amount, issue conditions, etc.), Midroog will have the right to reassess the rating and change

the assigned rating. Only upon the receipt by Midroog of all final issue documents relevant to

the bonds, including the supplements noted in chapter 7 of this report, Midroog's rating will be

considered as valid.

Following is a breakdown of the main terms of the existing series rated by Midroog as of

September 30, 2012:

Series Original Date

of Issue

Annual

Coupon Linkage

Balance of Liabilities in

Books (Nis M)

Principal Maturity

Years

Series 2222 Jan. 2011 6% CPI 852,4 2222-2222

Series 22 May 2002 6.,% CPI 652,6 2202-220,

Hashmal Shikli 2013 April 2012 2.22% NIS 05,22 2202

Series 23 July 2012 2.2,% NIS 2,3994 2202

Series 24 July 2012 2.6,% CPI 1,5095 220,

Series 25 July 2012 0.22% CPI ,20 2202

4 The series was expanded in September 2012 by NIS 1 billion.

5 The series was expanded in September 2012 by NIS 0.5 billion.

4

Company's Condensed Financial Figures6, NIS Millions

1H2012P7 1H2012 1H2011 2200 2202 222,

Revenues 118,11 118,11 198101 168,40 19,843 19,723

Profit from operating the power grid 1859, 1859, 18161 68561 3,154 4,213

Profit (loss) from regular activity (019) (019) 18116 18,,, 1,712 2,796

Financing expenses* 18111 18111 696 1819, 2,50, 2,940

Net profit (loss) (184,6) (184,6) 59, (,01) 2 1,424

FFO (18146) (18146) ,60 1811, 3,657 5,395

EBITDA8 186,, 186,, 186,6 ,8166 6,421 6,401

CAPEX 18119 18119 1806, 6815, 3,311 4,057

Balance sheet total 0984,5 ,181,5 ,98,19 ,1865, ,98,,, 81,602

Of which: Fixed assets, net 418,,1 418,,1 418694 418,14 62,286 62,502

Of which: Assets with respect to severance

pay benefits, net

58051 58051 ,86,4 ,8,11 4,654 4,478

Of which: Cash, cash value and long-term

investments

,11 ,11 18114 18011 3,817 3,988

Liabilities (current and non-current) ,6801, 44851, 4189,, 448915 418,1, 63,936

Of which: Debt 5,804, 59854, 658169 6,8094 45,830 47,767

Equity 158,6, 158,6, 1,8,11 1,8611 18,050 17,666

* Actual cash flow expenditure. Financing expenses in 1H/2012P do not include added financing expenses

for the additional financial debt.

1. Main Rating Rationale

IEC's BCA rating9 is first and foremost influenced by the fact that the Company is a monopoly in a

closed electricity sector with particularly high entry barriers. IEC is a vertically integrated

company, responsible for power generation, transmission and distribution to the Israeli economy.

The Company's extensive reliance on coal-powered electricity generation is partly moderated by

6 The figures are adjusted to the shekel of June 2012, except for statement of income and cash flow figures

for 2009 and 2010, which are adjusted to the shekel of December 2011, and 2009 balance sheet figures, which are adjusted to the shekel of December 2010. Figures for June 2012 and June 2011 are unaudited. 7 Pro forma data for 1H2012P include an issue of about NIS 2.9 billion, raised by the Company in July 2012,

an issue of about NIS 1.5 billion, raised by the Company in August 2012, a future guaranteed issue of about NIS 1 billion in November 2012, and an issue of NIS 3 billion, which are the subject of this rating report. 8 Including the transfer of financing expenses to a regulatory asset (non-cash flow expenditure).

9 Baseline Credit Assessment.

5

the absence of restrictive regulation on this subject (Israel is not a signee to the Kyoto Protocol

and is not obligated to meet pollutant reduction targets)10 and based on forecasts for the

production of natural gas found off of Israel's coasts in the short and medium terms. The

Company is dependent on the regular supply of natural gas to the Israeli economy. The Company

is subject to regulatory control under a law enacted about 15 years ago (hereinafter: the

"Electricity Authority" or the "Regulator"). Nevertheless, there are subjects under disagreements

between the Company and the Regulator, related to the transparency of the Regulator's decision-

making process, as well as to the way in which the electricity tariff-base is calculated and the

coverage of the Company's regular operating costs, investments, financing rounds and other

subjects. It is therefore sometimes difficult to anticipate the Company's financial situation, both

in the short term and in the long term. Having said that, it should be noted that there is no

dispute about the regular update of the fuels component in the electricity tariff due to changes in

fuel costs11. The Company's high leverage and low liquidity increase its sensitivity to extraneous

crises, such as the gas crisis which calls for switching to the use of more expensive fuels. This

crisis has created for the Company a need for external financing of its ongoing operations. This

need was already expressed in the first quarter of 2012 in the negative FFO. The timing gap

between the cost of the basket of fuels and the pace of tariff hikes was financed by raising the

Company's leverage, a factor that led to consistently eroding anyway weak financial ratios12. This

situation could pose challenges for the Company to obtain outside financing in the amounts

and/or at prices convenient for the Company and leads to a lower BCA rating.

Following a mistake in projections and the enlargement of 2012 cash-flow deficit, an audit report

was requested, by the Company's CEO and by the Company's board of directors. Midroog will

continue to follow over the findings of this report and its possible consequences over the rating.

Midroog estimates the support and the dependency as very high, in light of, inter alia, statements

made by senior Ministry of Finance officials that the Government does not intend to impose on

IEC the financing of the fuel crisis. Therefore, increasing available cash balances and/or early

scheduling of debt-refinancing are not earmarked for financing of the fuel crisis.

The dependency between the Company and the Government is expressed, among other ways, in

having similar credit risks, both in terms of exposure to a significant amount of foreign debt and

in terms of its exposure to geopolitical crises; the Company and the Government are both reliant

on the same sources of income, which make up the entire Israeli economy; and IEC is fully

government-owned (99.85%). Special support on the part of the Government, in scope and on

10

The Company has pollutant reduction targets set by the Ministry of the Environment. 11

It should be noted that there are disagreements on other components that go into the calculation of the fuel basket, such as production unit operating parameters. 12

It is noteworthy that according to Moody's methodology, the financial ratios are for three years on average. They therefore tend to moderate the fluctuations in the Company's financial situation, as it is on the date of writing the report.

6

time, is first and foremost reflected in the essentiality of the Company for running the country's

economy (as a vital service provider); the Government's willingness to provide guarantees in

significant amounts for IEC's debt issuances in the face of liquidity problems due to the change in

the mix of fuels and the Government's willingness to guarantee the Company's foreign debt, if

necessary; the declaration of high-ranking government officials of their support of the Company,

if necessary; unwillingness on the part of the Government to effect significant organizational

changes in the Company, among other factors, due to the existence of an organized and powerful

workers' union with political clout; non-existence of statutory restrictions on government

support; a history of government support and intervention in times of crisis, including during the

present gas supply crisis. It should be noted that should Midroog lower its evaluation of the

connection between the Government and IEC, this could significantly downgrade the rating

accordingly.

The connection between the government and the Company, which is expressed, among other

things, in guaranteeing the Company's debt, as necessary, is a factor supporting the rating. The

negative outlook was assigned due to a significant downturn in the financial strength ratios and a

negative FFO due, inter alia, to the deepening fuel crisis. Financing the negative cash flow with

external debt increases the Company's dependency on sources of financing and diminishes its

flexibility and robustness. A factor offsetting this risk is the connection between the government

and the Company, which in Midroog's assessment is very high, but not absolute, and in Midroog's

assessment there is not a full identity of interests.

2. The Rating Action

Issue proceeds are earmarked for refinancing debt and increasing available cash balances

The Company plans to raise about NIS 3 billion for refinancing debt, about NIS 1.25 billion of

which will be raised for refinancing loans payable in 2013 and about NIS 1 billion for increasing

available cash balances from NIS 1 billion to about NIS 2 billion (as per resolution of IEC's board of

directors of October 21, 2012). The remaining NIS 0.75 billion of the issue proceeds will be used

to refinance debt payable in November 2012.

According to the Company, early scheduling of the bond issue of about NIS 1.25 billion was

meant to ride the existing momentum of demands on the capital market and to avoid large issues

at close intervals in the first months of 2013. The following table condenses the issue figures

versus the Company's debt payments in 2011-2013:

7

IEC intends to expand government-backed Series 24 and/or Series 25 by about NIS 1 billion. It

should be noted that about NIS 500 million was rated in the rating action of 2012 and approved

by the Ministry of Finance, subject to the approval of the Knesset Finance Committee. The

expansion in the sum of an additional NIS 500 million is subject to the approval of the Ministry of

Finance and the Knesset Finance Committee.

3. Key Developments – Surplus Costs Due to Change in the Fuel Mix and Mistake in Estimates

for 2012

In 2011, the change in the fuel mix triggered an operating cash flow deficit of about NIS 3 billion.

The following measures were taken to remedy this deficit: (1) the electricity tariff was raised by

about 9.89%; (2) the tax on diesel oil was lowered to about 31% of the previous rate; (3) the use

of fuel oil, which is cheaper than diesel oil, was permitted; (4) the Electricity Authority approved

non-transfer of two payments to two dedicated accounts; (5) IEC was allowed to use issue

proceeds, previously restricted to making investments, for refinancing debt. The deficit created in

2012 owing to the change in the fuel mix was financed by government-guaranteed bond issues.

About NIS 5.9 billion guaranteed by the State was issued up to the end of September 2012. The

Company plans to raise another NIS 1 billion guaranteed by the State in November 2012, subject

to the approval of the Ministry of Finance and the Knesset Finance Committee13.

On September 24, 2012, the Company reported another cash flow deficit until the end of 2012 of

about NIS 1.5 billion owing to the change in the fuel mix. According to the Company, because of

the lower fuel costs in October 2012, the cash flow deficit as of the end of October 2012 dropped

13

Out of the amount approved by the Government in September 2012 for the issuance of a government-guaranteed bond of about NIS 2.0 billion, about NIS 1.5 billion was actually issued.

2200 2202 2202

Debt

refinancing

NIS 4bn NIS 3.60bn NIS 4.77bn

(Not including refinancing

government-backed loans)

Issues

NIS 4 bn in

bonds

Totaling NIS 4bn

NIS 1.85bn raised during 2012

NIS 0.75bn, subject of the rating

action, against debt-refinancing

NIS 1bn for increasing available

cash balances (increasing debt)

NIS 1bn raised in 2011 against

refinancing debt paid in 2012

Totaling NIS 4.6bn

NIS 1.25bn, subject of the

rating action, against

debt-refinancing of 2013

NIS 3.52bn future issue

Totaling NIS 4.77bn

8

from NIS 1.5 billion to NIS 0.9 billion. The Company expects the Government to find solutions for

this deficit caused by the change in the fuel mix. In relation to that, it should be noted that a

senior deputy at the Accountant General of the Ministry of Finance, representing the position of

the State of Israel, stated in a conversation that the Government does not intend to impose on

IEC the financing of the fuel crisis. Therefore, increasing available cash balances and/or advancing

debt-financing are not meant to finance the fuel crisis. According to him, since the fuel crisis

erupted, the Government stated it would back IEC in finding financing solutions to the deficit

created due to the fuel crisis; the additional deficit reported by the Company is being examined.

As for the re-estimation of the deficit reported by the Company, we were told that in the

assessment of the Government, IEC management is making enormous efforts to investigate the

change and draw conclusions, and that this re-estimation is not causing the Government to

swerve from its support of the costs related to the fuel crisis.

It should be noted that the Company believes that further government support will be required

in 2013, including by additional government-guaranteed issues. However, it is still too early to tell

how much will be needed.

4. Effect of the Added Debt on the Financial Ratios

Due to the raising of up to NIS 3 billion, including a guaranteed bond issue of NIS 1 billion, the

Company's financial strength was further eroded, expressed in poorer financial ratios relating to

the total debt.

9

Selected Financial Ratios:

1H2012 1H2011 2012P14

2200 2202 222,

Ratio of FFO to financing expenses15

9095 105, 1.6, 106, 2.5 2.8

Debt/FFO NR NR 6,01 1,0, 11.5 8.9

Debt/Cap16

,900% 4401% ,101% 4,04% 67.4% 68.7%

Gross Margin %17 1104% 5601% 46% 64% 53% 53%

Operating Margin %18 -,09% 1100% 10.7% 190,% 13.4% 14.2%

For details of the full financial analysis, see the link to the rating action of May 2012 (a link

is attached at the end of this document).

5. Company Profile

Israel Electric Corporation Ltd. is a government- owned company (the State of Israel holds

approximately 99.85% of its shares19) engaging in the generation, transmission, distribution and

supply of electricity, electricity trading and in the setup of the infrastructure required for these

operations. The Company was incorporated in mandatory Palestine in 1923, and its activity is

regulated and controlled under the Electricity Law (hereinafter: the "Electricity Law"), which

replaced the Electricity Concessions Ordinance. Under the Electricity Law, the Public Utilities

(Electricity) Authority sets electricity rates and methods of updating them and also sets criteria

for the Company's operations. Among its other functions, the Electricity Authority sets electricity

rates and methods of updating them, grants conditional and permanent licenses for the

generation, distribution and supply of electricity to all electricity producers in the economy and

supervises them based on criteria that it has set. The Company is a monopoly in the Israeli

electricity sector, it generates, transmits, distributes, and supplies the absolute majority of

Israel's electricity needs.

14

Pro forma figures for 2012 are based on figures for 2011, plus about NIS 1.9 billion (about $0.5 billion) raised in February 2012 from foreign institutions, the issuance of guaranteed Hashmal Shikli 2013 series in a sum of about NIS 1.5 billion, raised in April 2012, the issuance of about NIS 2.9 billion, raised in July 2012 (guaranteed series 23, 24 and 25), the issuance of about NIS 1.5 billion raised by the Company in August 2012 under guarantee and a future guaranteed series in a sum of about NIS 1 billion in November 2012 and the issuance of NIS 3 billion – which is the subject of this rating report. These additions do not affect financial ratios not connected to the amount of the total debt. 15

Actual cash flow expenditure. The financing expenses in 2012P do not include added financing expenses for the additional financial debt. 16

The Cap factors-in debt, equity, and deferred taxes, net. 17

Gross profit is defined as revenues net of fuel costs and electricity purchases. 18

Operating profit discounting a provision for non-recognition of fixed asset costs. 19

In the assessment of the Company, the balance of shares is spread among the public, where some of the holders cannot be identified.

11

6. Rating Outlook20

Series 2022 and 22, Hashmal Tzamud 2016 and Hashmal Shikli 1113:

Factors likely to improve the rating:

Stronger capital and debt structure.

Regulatory stability in the sector, including in the structure of the electricity sector and

agreements with the workers union.

Significant sustained improvement in the Company's financial results, including liquidity.

Large-scale participation from outside financing sources and the involvement of the private

sector in the Company's investments and development plan.

Factors likely to lower the rating:

Decline in government support of the Company, including with respect to recognition of the

Company's expenses and investments in the tariff and structural change.

Continuing significant erosion in the Company's financial results, including failure to maintain

liquid balances at an adequate rating level relative to the expected scope of activity and

repayment burden.

Difficulty in raising capital and/or significant increase in issuance costs.

Difficulty in refinancing the existing debt.

Failure to meet the Company's forecasts for obtaining additional sources of financing.

7. Supplements

1. Receipt of approval by the Knesset Finance Committee of a government-guaranteed

offering of about NIS 500 million.

2. Receipt of approval by the Ministry of Finance of and government-guaranteed offering of

another NIS 500 million.

3. Explaining the difference in the deficit estimations and the mistake in estimations,

including the Company's report to the Israel Securities Authority.

4. Providing a financing solution to the financing deficit of about NIS 0.9 billion.

20

The rating outlook is for the non-guaranteed series. The rating of the guaranteed series, subject to the final letter of guarantee, is the same as the country rating.

11

5. Final signed version of financing documents and other accompanying documents

regarding:

Bond series 2022 and/or Hashmal Tzamud 2016 and/or Hashmal Shikli 1113

Amendment of the deed of trust of Bond 24 and/or 25 plus amendment of the

guarantee agreement and amendment of the letter of guarantee.

8. Rating History

Series 2022: Series 22

Hashmal Shikli 2013 series: Series 23, 24, 25:

12

9. Relevant Professional Information

Last rating date: September 2012

Israel Electric Corporation Ltd. – Initial Rating Action

Israel Electric Corporation Ltd. – Ration Action (September 2012)

Israel Electric Corporation Ltd. – Ration Action (May 2012)

Moody's methodology on: Rating of Regulated Electricity and Gas Companies (English)

Moody's methodology on: Government-affiliated issuer (English)

13

Obligations Rating Scale

Investment

grade

Aaa Obligations rated Aaa are those that, in Midroog's judgment, are of

the highest quality and involve minimal credit risk.

Aa Obligations rated Aa are those that, in Midroog's judgment, are of

high quality and involve very low credit risk.

A Obligations rated A are considered by Midroog to be in the upper-

end of the middle rating, and involve low credit risk.

Baa Obligations rated Baa are those that, in Midroog's judgment, involve

moderate credit risk. They are considered medium grade obligations,

and could have certain speculative characteristics.

Speculative

Investment

Ba Obligations rated Ba are those that, in Midroog's judgment, contain

speculative elements, and involve a significant degree of credit risk.

B Obligations rated B are those that, in Midroog's judgment, are

speculative and involve a high credit risk.

Caa Obligations rated Caa are those that, in Midroog's judgment, have

weak standing and involve a very high credit risk.

Ca Obligations rated Ca are very speculative investments, and are likely

to be in, or very near to, a situation of insolvency, with some

prospect of recovery of principal and interest.

C Obligations rated C are assigned the lowest rating, and are generally

in a situation of insolvency, with poor prospects of repayment of

principal and interest.

Midroog applies numerical modifiers 1, 2 and 3 in each of the rating categories from Aa to Caa.

Modifier 1 indicates that the bond ranks in the higher end of the letter-rating category. Modifier

2 indicates that the bonds are in the middle of the letter-rating category; and modifier 3 indicates

that the bonds are in the lower end of the letter-rating category.

14

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For further information on the rating procedures of Midroog or of its rating committee, please refer to the relevant

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