ISRAEL ELECTRIC CORPORATION LIMITED · 2012. 11. 21. · Companies Authority; (2) a...

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Supplementary prospectus of Israel Electric Corporation Ltd. of dated June 26, 2012, as amended by Prospectus Amendment dated July 2, 2012

ISRAEL ELECTRIC CORPORATION LIMITED (hereinafter: the “Company”)

Prospectus subject to completion

of

NIS 1,500,000,000 (nominal value) of bonds (Series 23) of the Company (hereinafter: the “Bonds (Series 23)”), which are registered bonds, secured by a guarantee by the State of Israel (as set forth below) (hereinafter: the “State Guarantee”), and

bear fixed annual interest, which shall be established by way of a tender and shall not exceed the rate of interest which shall

be set forth in a Supplementary Notice which shall be published by the Company (hereinafter: the “Interest with Respect to

the Bonds (Series 23)”). The Bonds (Series 23) are not linked (principal and interest) to any linkage basis whatsoever. The

principal of the Bonds (Series 23) shall be repaid in one (1) installment on July 9, 2013. The Interest with Respect to the

Bonds (Series 23) shall be repaid on the Date of Repayment of the Principal of the Bonds (Series 23), with respect to the

period which begins on the first trading day after the date of the Tender and ends on the Date of Repayment of the Principal

of the Bonds (Series 23), and shall be based on fixed annual interest, calculated on the basis of 365 days per year, as shall be

reported by the Company by way of an Immediate Report with respect to the outcome of the issue of the Bonds (Series 23).

For additional details, see Chapters 2 and 3 of the Prospectus.

and of

NIS 1,000,000,000 (nominal value) of bonds (Series 24) of the Company (hereinafter: the “Bonds (Series 24)”), which are registered bonds, secured by the State Guarantee, and bear fixed annual interest, which shall be established by way of a

tender and shall not exceed the rate of interest which shall be set forth in a Supplementary Notice which shall be published

by the Company (hereinafter: the “Interest with Respect to the Bonds (Series 24)”). The Bonds (Series 24) are linked to the

Consumer Price Index (principal and interest), whereby the base index is the Consumer Price Index which was published on

June 15, 2012 with respect to the month of May 2012 (hereinafter: the “Base Index”) insofar as if it is found on the date of

payment of the principal and the interest for the bonds, the index is higher than the Base Index, then the Company shall pay

that installment of principal and interest enlarged in proportion to the rate of increase in the index compared to the Base

Index. If it is found that the index known on the payment date of principal and/or interest has decreased compared to the

Base Index, the payment index shall be the Base Index. The principal of the Bonds (Series 24) shall be repaid in one (1)

installment on July 9, 2015. The Interest with Respect to the Bonds (Series 24) shall be paid in annual installments, on July 9

of each of the years 2013 through 2015 (inclusive), with respect to the twelve‐month (12) period which begins on the first

day after the interest period immediately before it. The first payment of Interest with Respect to the Bonds (Series 24) shall

be paid on July 9, 2013, with respect to the period which begins on the first trading day after the date of the tender, and

which ends on the date of payment in accordance with that which has been set forth above, and shall be based on fixed

annual interest, calculated on the basis of 365 days per year, as shall be reported by the Company by way of an Immediate

Report with respect to the outcome of the issue of the Bonds (Series 24). The last payment of Interest shall be paid on July 9,

2015, on the date of payment of the balance of the principal of the Bonds (Series 24). For additional details, see Chapters 2

and 3 of the Prospectus.

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and of

Up to NIS 500,000,000 (nominal value) of bonds (Series 25) of the Company (hereinafter: the “Bonds (Series 25)”), which are registered bonds, secured by the State Guarantee, and bear fixed annual interest, which shall be established by way of a

tender and shall not exceed the rate of interest which shall be set forth in a Supplementary Notice which shall be published

by the Company (hereinafter: the “Interest with Respect to the Bonds (Series 25)”). The Bonds (Series 25) are linked to the

Base Index insofar as if it is found on the date of payment of the principal and the interest for the bonds, the index is higher

than the Base Index, then the Company shall pay that installment of principal and interest enlarged in proportion to the rate

of increase in the index compared to the Base Index. If it is found that the index known on the payment date of principal

and/or interest has decreased compared to the Base Index, the payment index shall be the Base Index. The principal of the

Bonds (Series 25) shall be repaid in one (1) installment on July 9, 2017. The Interest with Respect to the Bonds (Series 25)

shall be paid in annual installments, on July 9 of each of the years 2013 through 2017 (inclusive), with respect to the twelve‐

month (12) period which begins on the first day after the interest period immediately before it. The first payment of Interest

with Respect to the Bonds (Series 25) shall be paid on July 9, 2013, with respect to the period which begins on the first

trading day after the date of the tender, and which ends on the date of payment in accordance with that which has been set

forth above, and shall be based on fixed annual interest, calculated on the basis of 365 days per year, as shall be reported by

the Company by way of an Immediate Report with respect to the outcome of the issue of the Bonds (Series 25). The last

payment of Interest shall be paid on July 9, 2017, on the date of payment of the balance of the principal of the Bonds (Series

25). For additional details, see Chapters 2 and 3 of the Prospectus.

The Bonds (Series 23), (Series 24) and (Series 25) (hereinafter jointly: the “Offered Bonds”) are offered

to the public by means of a uniform offer in three (3) separate tenders, as follows:

Tender A – NIS 1,500,000,000 (nominal value) of Bonds (Series 23) of the Company are offered to the public at 100% of their

nominal value by means of 1,500,000 units of NIS 1,000 nominal value Bonds (Series 23) each, by way of a tender for the

interest rate, whereby the annual interest rate which shall be determined in the tender shall not exceed the interest rate

which shall be set forth in a Supplementary Notice which shall be published by the Company (hereinafter: the “Bonds 23

Units”), whereby the period for submission of orders for the purchase of Bonds 23 Units shall be set forth in the

Supplementary Notice (as set forth below).

Tender B – NIS 1,000,000,000 (nominal value) of Bonds (Series 24) of the Company are offered to the public at 100% of their

nominal value by means of 1,000,000 units of NIS 1,000 nominal value Bonds (Series 24) each, by way of a tender for the





Tender C – NIS 500,000,000 (nominal value) of Bonds (Series 25) of the Company are offered to the public at 100% of their

nominal value by means of 500,000 units of NIS 1,000 nominal value Bonds (Series 25) each, by way of a tender for the





The deadline for the submission of orders for the purchase of units within the framework of the Tender shall be the date

of publication of the Supplementary Notice, which shall be published by the Company.

The Company shall be entitled to engage in a preliminary engagement with classified investors, in the context of each of the

series of the Offered Bonds, pursuant to which the classified investors shall submit orders at quantities and prices, the results

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of which shall be published in the Supplementary Notice which shall be published by the Company. The Company shall

publish an Immediate Report on its decision to engage or not to engage in a preliminary engagement with classified

investors. See Section 2.2.5 of the Prospectus. The Bonds which are offered to the public pursuant to this Prospectus shall be

offered by way of a uniform offer, as set forth in Chapter B of the Securities Regulations (Manner of Offer of Securities to the

Public) ‐ 2007 (hereinafter: the “Manner of Offer Regulations”). Following the publication of this Prospectus, the Company

shall publish a Supplementary Notice pursuant to Section 16 (a1) (2) of the Securities Law and the Securities Regulations

(Draft Proposal and Supplementary Notice) ‐ 2007 in the context of the Tender (hereinafter: the “Supplementary Notice”)

and the “Supplementary Notice Regulations”, respectively). Within the framework of the Supplementary Notice, the details

which are missing in this Prospectus shall be completed and/or the details which can be updated in this Prospectus shall be

updated, pursuant to the provisions of the Supplementary Notice Regulations, including, but not limited to, details with

respect to a preliminary engagement by the Company with classified investors (to the extent that the Company decides to

engage in a preliminary engagement with classified investors), details on the maximum interest rate in each of the tenders

and changes, if any, in the quantity and terms of the Offered Bonds. The Supplementary Notice shall be published no later

than July 5, 2012. For details with respect to the Supplementary Notice, see Section 2.2.5 of the Prospectus.

The Company has a number of principal risk factors, which are likely to affect its activity and its business results: macro risks:

(1) regulation which applies to the Company’s activity, including the Electricity Sector Law and the regulations pursuant

thereto, by virtue of which licenses for its activity are issued to it, the policy and regulations of the Government, the

resolutions by the Electricity Authority, the provisions of the Government Companies Law and the decisions by the

Companies Authority; (2) a security‐related, geopolitical and/or economic situation in Israel and its environs; (3) natural

disasters (earthquake/flood); (4) fires; (5) market risks; (6) information systems and information security; sectoral risks:

(7)determination of the electricity rate; (8) capital leasing and financing; (9) shortage in the supply of natural gas; (10) the

Electricity Sector Law and the Company’s licenses, including its status as a “Critical Service Supplier”; (11) the environment;

(12) human capital; (13) technical failures; (14) suppliers; (15) health and safety; (16) project risks; risks specific to the

Company: (17) liquidity risks; (18) clauses with respect to calling in for immediate payment and cross‐default clauses in

financing agreements; (19) switching to reporting according to the rules of the International Financial Reporting Standards

(IFRS); (20) the filing of audited financial statements for profit centers; (21) competition; (22) the planning and

implementation of the development program in the generation, transmission, transformation and distribution systems; (23)

structural change; (24) the Property Settlement; (25) capital raising; (26) legal – class actions; (27) credit risks; (28) labor

relations; (29) undertakings with respect to the pension fund; (30) planning, maintenance and management of reserve; (31)

failures in the transmission system; (32) risks to reputation. For details with respect to the risk factors set forth above, see

Section 29 of Chapter 6 of the Prospectus.

The Company reserves the right to expand at any time, without needing the consent of the Trustee and/or the Bond Holders,

any of the bond series, by a private offer/s and/or public offer, under conditions as it sees fit (hereinafter: the “Additional

Bonds”) subject to the provisions and restrictions that apply pursuant to the State Guarantee concerning the issue of the

Additional Bonds, subject to receipt of approvals as required by law, including approval by the Comptroller General and the

Finances Committee of the Knesset, in advance and in writing (and subject to the Additional Bonds to be issued by the

Company being backed by a State of Israel Guarantee (under the same conditions), to the effect that the total nominal value

of the Bonds secured by the State Guarantee shall increase to reflect fully the increase to the amount of the nominal value of

the Bonds at whatever price and in whatever manner as the Company shall see fit, including a discount or premium rate

which is different from other issues which were made of the relevant series, and provided that the Company shall give notice

to that effect to the Trustee. It is clarified that upon the increase in the nominal value of the principal of the Bonds, the

additional backed liabilities shall increase accordingly too, except the limit of the indemnification amount from bondholders

that will not increase in the case of expansion of the series. See Section 3.7.10 in Chapter 3 of the Prospectus.

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The Trustee for the Offered Bonds shall be required / entitled (as is relevant) to convene a meeting of the holders of the

Bonds (of the relevant series), on the agenda of which shall be the calling‐in of that series of Bonds for immediate

repayment, solely and exclusively in the cases which are set forth in Section 3.7.11 in Chapter 3 of the Prospectus. The

Trustee is not entitled to call in the Bonds for immediate repayment independently.

The Trustee shall be entitled to indemnification for its expenses and for damage/loss which it shall incur upon the occurrence

of certain conditions. For details, see Section 3.7.6 in Chapter 3 of the Prospectus. For cases in which the undertaking to

indemnify the Trustee shall apply to the holders of the Offered Bonds, see Section 3.7.6 in Chapter 3 of the Prospectus.

The Company shall be entitled to encumber its property, in whole or in part, by way of any encumbrance and in any manner

whatsoever, in favor of any third party whatsoever, with no need for any consent by the Trustee or by the holders of the

Offered Bonds.

The Company shall be entitled, with the consent of the Comptroller General in advance and in writing, to call in the Offered

Bonds for early redemption (in whole or in part). Should the Comptroller General give his consent to the performance of

early redemption in accordance with that which has been set forth above, the payment which is to be borne by the Company

to the holders of the Bonds, within the framework of the early redemption, shall be backed by the State Guarantee, instead

of the State Guarantee which applies to part of the Company's undertakings with respect to the Bonds, with regard to which

the early redemption is being performed, all provided that the Company has not complied with the duty of payment which is

to be borne by it in early redemption. See Section 3.6.1 in Chapter 3 of the Prospectus.

The State of Israel guarantees the repayment of the Company’s undertakings to pay the unsettled balance of the amount of

the principal of the Offered Bonds, linkage differentials (with respect to (Series 24) and (Series 25)) and interest with respect

thereto (including arrears interest), which the Company hereby undertakes to pay to the holders of the Offered Bonds, and

also guarantees the Trustee’s expenses, and fee and indemnification to the Trustee in accordance with the indemnification

undertaking applying to the Bond Holders only. The right of the Trustee to receive indemnification from the Bondholders

(which, as set forth, is secured by the State Guarantee), shall be limited to NIS 3 million only, for the three (3) series jointly,

as stated in the Deed of Trust of each series, and subject to the terms of each Guarantee Document. The indemnification

limit will not be increased in the case of expansion of the series. See Section 3.6 in Chapter 3 of the Prospectus for details.

The Offered Bonds were rated by Midroog Ltd. at a rating of Aaa, at a scope of up to NIS 3 billion nominal value. For details

with respect to the rating and the considerations in issuing the rating, see Section 3.8 of the Prospectus.

The Company holds licenses pursuant to the Electricity Sector Law and is governed by the provisions of the Electricity Sector

Law. With respect to the highlights of the provisions of the Electricity Sector Law and the licenses which have been issued to

the Company, including provisions with respect to the sanctions which are likely to be imposed upon the Company and its

officeholders in case of breach of the provisions as set forth above, see Section 22.1 of Chapter 6 of the Prospectus. The

validity of the licenses which have been issued to the Company is through January 1, 2013, and the licenses may be extended

by means of an order, for one additional period which shall not exceed one year – that is, through January 1, 2014, as set

forth in Section 1.3.2.2 of Chapter 6 of the Prospectus. An additional extension shall require an amendment to legislation.

See Sections 1.3.2.2 and 22.1.2 of Chapter 6 of the Prospectus.

In the opinion by the auditor with respect to the Company's financial statements as at December 31, 2011, attention was

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called (without expressing a reservation with respect to the opinion) to the following matters: (1) that set forth in Note 1f

with respect to the significant cash flow shortfalls which are expected for the Company in the years 2012‐2013, which stem

mainly from an expected shortage in the supply of natural gas from Egypt, the significant decrease in the ability to extract gas

from the Yam Tethys reservoir and the decision of the Electricity Authority to spread the increase in the electricity charge

rates (for differences in fuel costs that stem from the shortage of natural gas) over a number of years, concerning the steps

that are taken and will be taken by the Company and by the Government of Israel to resolve these cash flow steps in the

years set forth and concerning the assessment of the Management and the Board of Directors of the Company that the

Company, based on the steps set forth, will be able to bridge the expected cash flow gaps in the years set forth; (2) that set

forth in Note 1g with respect to the “assets arrangement”, particularly concerning significant uncertainty and regarding very

material amounts that the Company is likely to be obligated to pay by this arrangement; (3) that set forth in Note 24b

(subsections (1), (4) and (5)) with respect to class actions, a derivative action and other material actions filed against the

Company; (4) that set forth in Note 2a (4) with respect to the aspects in which the rules of financial reporting which are

applied in the financial statements, pursuant to the Government Companies Regulations (Principles for Preparing Financial

Statements of the Israel Electric Corporation Ltd.) (temporary order) ‐ 2004, differ from the International Financial Reporting

Standards (IFRS). (5) That which has been set forth in Note 18 G concerning the conditions in the financing contracts of the

Company that may cause immediate repayment and the estimate of the Management of the Company concerning its

compliance with these conditions.

The auditor’s report, pursuant to the Government Companies Regulations (Additional Reports on the Effectiveness of the

Internal Audit of Financial Statements) ‐ 2007, stated that the evaluation by the Company’s Board of Directors and its

executive management identified and included the following material weaknesses: (1) the Company did not carry out

effective control to ensure that the rights and benefits, pursuant to which salary and pension payments are made, and

pursuant to which actuarial obligations are included, are approved as provided by law; (2) the Company did not carry out

effective control of the proper performance of the examination of the decrease in the value of fixed assets, within the

framework of the application of the provisions of International Accounting Standard No. 36. Accordingly, the Company did

not carry out effective control of its financial reporting as at December 31, 2011. In addition, the auditor called attention to

the fact that the evaluation by the Board of Directors and the executive management had been republished in order to

report on an additional material weakness, besides that which had been reported on March 29, 2012 (see subsection (2)

above). The weakness was identified as the result of an error which had been found and corrected after March 29, 2012, in a

study which examined the decrease in the value of assets, in the course of application of the provisions of International

Financial Reporting Standard No. 36 – an error which attests to a material weakness in the context of the examination of the

decrease in the value of assets, in accordance with that which has been set forth in subsection (2) above. The auditor's report

also noted that the report with respect to the effectiveness of the internal control of financial reporting as at December 31,

2011 replaced his report with respect to the effectiveness of the internal control of financial reporting as at December 31,

2011, which had been given on March 29, 2012.

In the review report by the auditor with respect to the Company's financial statements as at March 31, 2012, attention was

called (without expressing a reservation with respect to the opinion) to the following matters: (1) that set forth in Note 1f

with respect to the significant cash flow shortfalls which are expected for the Company in the years 2012‐2013, which stem

mainly from an expected shortage in the supply of natural gas from Egypt, the significant decrease in the ability to extract gas

from the Yam Tethys reservoir and the decision of the Electricity Authority to spread the increase in the electricity charge

rates (for differences in fuel costs that stem from the shortage of natural gas) over a number of years, concerning the steps

that are taken and will be taken by the Company and by the Government of Israel to resolve these cash flow steps in the

years set forth and concerning the assessment of the Management and the Board of Directors of the Company that the

Company, based on the steps set forth, will be able to bridge the expected cash flow gaps in the years set forth; (2) that set

forth in Note 1g with respect to the “assets arrangement”, particularly concerning significant uncertainty and regarding

material amounts that the Company might be obligated to pay by this arrangement; (3) that set forth in Note 8c (subsections

(1)a‐g, (4) and (5)) with respect to class actions, a derivative action and other material actions filed against the Company; (4)

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that set forth in Note 2a (1) d and Note 2a (2) with respect to the aspects in which the rules of financial reporting which are

applied in the financial statements of the Company, pursuant to the Government Companies Regulations (Principles for

Preparing Financial Statements of the Israel Electric Corporation Ltd.) (Temporary Order) ‐ 2004, differ from the International

Financial Reporting Standards (IFRS); (5) that set forth in Note 7e concerning the conditions in the financing contracts of the

Company that may cause immediate payment and the estimate of the Management of the Company concerning its

compliance with these conditions.

Starting in 2011 and up to the date of the Prospectus, a number of events took place in the Company’s business

environment, whereby the principal event was a severe shortage in the supply of natural gas as a result of repeated

disturbances of the supply of natural gas from Egypt, to the point of complete termination via a notice from the Egyptian

government gas companies to East Mediterranean Gas S.A.E. (which supplies the Company with natural gas from Egypt) of

unilateral cancellation of the agreement with it, as well as a significant decline in the Yam Tethys gas reservoir, which forced

the Company to use a set of fuels that was significantly more expensive than had been planned and led to a material cash

flow shortfall. As a result of requests by the Company to the relevant Government entities, an outline for the solution of the

Company’s cash flow problem, based on Government assistance on the one hand, and measures which must be taken by the

Company on the other hand, was formulated in March 2012. The highlights of the Government assistance are: (a) provision

of the State Guarantee for the issue pursuant to this Prospectus; (b) reduction of the purchase tax on diesel fuel imported

from outside Israel and reduction of the stamp duty on local diesel fuel, subject to certain conditions; (c) spreading of Value

Added Tax payments and withholding tax payments throughout 2012; (d) postponement of deposits to an earmarked

account for the purpose of financing the Company’s emergency program and release of monies to the Company from that

account; (e) the Company shall take measures toward raising funds, in addition to the funds which are backed by the State

Guarantee within the framework of the issue on the Stock Exchange, in order to enable the Company to perform the

recycling of the debt which is required for the years 2012‐2013; and (f) a gradual increase in the electricity rate. As a

prerequisite for the Government assistance, the Company is required: (a) to raise, by the effective date of the State

Guarantee, the missing sources of funds for its activities; (b) to raise, by the date of the issue pursuant to this Prospectus, the

funding for activity which does not result from surplus fuel costs; (c) to carry out the issue pursuant to this Prospectus by and

no later than July 1, 2012, in an amount which shall not be less than the amount of the guarantee. On June 25, 2012, the

Electricity Authority extended this deadline until the end of July 2012; (d) to implement streamlining measures which lead to

savings which shall not be less than the amount determined; (e) to take the measures which are available to it for the release

of funds in the amount determined from an existing trust account with respect to the Company’s actuarial obligations to its

employees (non‐pension components); (f) to implement development program for the transmission network for the purpose

of ensuring the entry of private electricity manufacturers into the electricity sector; (g) to deposit monies into an earmarked

account for fuels. In May 2012, the Company received a letter from the Director General of the Ministry of Finance, on the

matter of implementation of the outline for the cash flow solution for the Company, whereby: (1) the State confirms again

that a guarantee or other financing solutions to the cumulative cash flow deficit of the Company stemming from the surplus

fuel cost that it has sustained, and in accordance with the cash flow needs that stem from the purchase of these fuels, will be

given, and that in accordance with this principle, the Government shall act to provide a State guarantee of NIS 3 billion for

raising bonds by a public issue pursuant to this Prospectus, subject to the approval of the Finance Committee of the Knesset;

(2) the Government shall provide financing solutions in accordance with the principles of the outline above, in the amount of

NIS 1.1 billion, in accordance with the cash flow needs of the Company for financing the surplus fuel purchase cost and taking

into account the required safety net; and (3) the Company shall act to the best of its ability to provide additional financing

sources within the current activity of the Company.

Prior to the adoption of the resolutions and the taking of the measures set forth above, the Company foresaw a cash flow

deficit in the years 2012 and 2013, at a scope in the billions of New Israeli Shekels. Given all of the measures which have

been taken and are expected to be taken in the near future, the Company estimates that it will be possible to overcome the

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cash flow deficit for the years 2012 and 2013 as foreseen as at the date of the Prospectus. In addition, and as described

above, in the estimation of the Company, upon the commencement of supply of gas from the Tamar reservoir in 2013, a

material decrease in the Company’s fuel costs is expected, along with the stabilization of its cash flow situation. There can be

no certainty that the measures set forth above will come to pass or will succeed, in whole or in part, or that there will be no

further exacerbation of the environmental conditions under which the Company operates (inter alia, if and insofar as the

quantity of natural gas in the Yam Tethys reservoir continues to decline or the Tamar reservoir does not begin to operate on

the date planned), and, in such a case, there can be no certainty that the measures which have been approved as at the date

of the Prospectus will be sufficient to overcome the Company’s cash flow shortfall. In addition, the Government assistance

operations are exceptional, and there can be no certainty that these or other operations will be adopted in the future in

cases of insufficient liquidity. For details, see Sections 28 and 29 of Chapter 6 of the Prospectus.

Some of the financing agreements that the Company has executed contain a clause that calls for immediate repayment in the

case of a “material adverse change” (MAC stipulation) as this event is defined in each such agreement. The application of the

stipulation is subject to a test of reasonableness in some of the agreements, subject to the discretion of the lender in some,

which discretion is also subject to reasonableness in some of the agreements. The volume of the financing agreements that

include a MAC stipulation adds up to approximately NIS 16,804 million and approximately NIS 17,188 million, for March 31,

2012, and as of the date of the Prospectus, respectively.

Some of the financing agreements that the Company has executed include clauses whereby if the Company violates its

undertakings towards a certain lender and that lender demands immediate repayment as a result of that violation, this will

lead to a “cross violation” whereby if the other lender whose agreement has not been violated will also have a right to

demand immediate repayment (cross acceleration). As of March 31, 2012, and as of the date of the Prospectus, these loans

come to a total of approximately NIS 19,635 million and approximately NIS 20,567 million, respectively. In addition, in some

of the financing agreements, the fact that a particular lender has a right to demand immediate repayment of the debt (i.e.,

even if the debt has not been called for immediate repayment) grants another lender whose agreement has not been

violated a right to demand immediate repayment (cross default). For March 31, 2012, and for the date of the Prospectus,

these loans come to a total of approximately NIS 17,782 million and approximately NIS 18,646 million, respectively.

In the case of one of these events occurring, this may have material adverse consequences over business affairs, the business

outcomes and the financial status of the Company. See Section 19.5 in Chapter 6 of the Prospectus for details. In view of the

financial state of the Company, the Company has examined whether events that constitute a cause for calling for immediate

repayment, in accordance with the financing agreements that it has executed, are fulfilled, and has reached the conclusion,

inter alia based on legal advice that it has received, that as of the date of the Prospectus the lenders with which it has

executed agreements have no cause for calling the debt towards them for immediate repayment, for a number of reasons,

the primary ones being that the cash flow problem that it now finds itself in is temporary in view of the anticipation for

commencement of the pumping of gas from the Tamar reserve in 2013, the fact that a concrete solution outline for

government aid has been formed for the Company and the support of the Government for it has been proved, and in view of

the status and importance of the Company as an essential service provider in the Israeli national economy. See Sections 28.2‐

28.6 of Chapter 6 of the Prospectus for details concerning the government aid to the Company.

The Company is a “public company” as this term is defined in the Companies Law ‐ 1999. For details, see Section 1.1 of

Chapter 6 of the Prospectus. The shares in the Company are not registered for trading on the Stock Exchange and shall not be

registered for trading on the Stock Exchange pursuant to this Prospectus.

The Company is a “Government company” pursuant to the Government Companies Law ‐ 1975. For details of various

provisions that apply to a Government company, see Sections 22.5 and 22.6 of Chapter 6 of the Prospectus.

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The staff of the Israel Securities Authority has notified the Company that insofar as the Company intends to issue Bonds

which are not secured in their entirety by means of a Guarantee by the State of Israel, as long as uncertainties exist in

accordance with that which has been described in Chapter 6 in the context of the effects of the Asset Arrangement and

the Structural Change on the Company, the Company shall be required to provide greater detail in its description of the

economic exposures with respect to the implications of these subjects for the Company, in a manner which satisfies the

staff of the Israel Securities Authority, with respect to the format of the disclosure. See Sections 15.3 and 29.3.8 in Chapter

6 of the Prospectus for details with respect to the Asset Arrangement; see Sections 1.3 and 29.3.7 in Chapter 6 of the

Prospectus for details with respect to the Structural Change.

Following are the data on profit (loss) from ordinary operations and net profit (loss) for the period of the Company for the

years 2010, 2011 in the first quarter of 2012 (for details, see the Company's financial statements in Chapter 9 of this

Prospectus and the explanations by the Board of Directors with respect to the state of the Company's business in the

Board of Directors Reports which are attached to the Prospectus), in NIS millions:

2010 2011 Q1‐2012

Net profit (loss) for the period (in NIS millions) 2 (788) (1,468)

The Articles of Association of the Company include provisions pursuant to Sections 85 and 307 of the Companies Law ‐ 1999.

For details with respect to the Company’s engagements with the State of Israel, which is the controlling party of the

Company, see Chapter 8 of the Prospectus and Note 13 to the Annual Financial Statements.

The Company estimates that the total expenses involved in the preparation and publication of this Prospectus are likely to

come to approximately NIS 43 million, which constitute approximately 1.43% of the consideration for the issue. The

Company’s estimates with respect to the commissions involved in the distribution, success and other expenses involved in

the preparation and publication of this Prospectus shall be published in the Supplementary Notice.

The Trustee for the Bonds (Series 23), (Series 24) and (Series 25) is: Reznik Paz Nevo Trusts Ltd.

The issue of the Bonds is not secured by underwriting.

A copy of the Prospectus is available to the public for study on the Website of the Israel Securities Authority, the address of

which is www.magna.isa.gov.il, and on the Website of the Tel Aviv Securities Exchange Ltd., the address of which is

hppt://maya.tase.co.il.

Date of the Prospectus: July 2, 2012

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Table of Contents

Chapter Section Page

1 Introduction A‐1

1.1 General A‐1

1.2 Definitions A‐1

1.3 Permits and approvals A‐2

1.4 Share capital, funds and surplus A‐3

1.5 Special disclosure for the holders of the bonds in circulation A‐4

2 Details of the offer of securities B‐1

2.1 The securities offered by the Company B‐1

2.2 Description of the manner of offer to the public B‐3

2.3 Registration for trading on the Stock Exchange B‐8

2.4 Requirements for registration for trading on the Stock Exchange B‐9

2.5 Refraining from making arrangements B‐9

2.6 Refraining from dilution of capital B‐10

2.7 Taxation of the Offered Securities pursuant to this Prospectus B‐10

2.8 Classified Investors B‐17

3 Terms of the Bonds C‐1

3.1 General C‐1

3.2 Definitions C‐1

3.3 Terms of the Bonds (Series 23) C‐4



3.6 Additional terms with respect to the Bonds C‐7

3.7 Highlights of the Deeds of Trust C‐13

3.8 Rating of the Bonds C‐35

3.9 Guarantee Document C‐35

4 Company capital and rights associated with the shares in the Company D‐1

4.1 Registered capital D‐1

4.2 Issued capital D‐1

4.3 The Company’s status as a public company D‐1

4.4 Holdings of the Company’s securities by stakeholders as at the date of the Prospectus D‐1

4.5 Controlling parties of the Company D‐2

4.6 Securities convertible into shares in the Company D‐2

4.7 Rights associated with shares in the Company D‐2

5 Consideration with respect to the issue and intended purpose thereof E‐1

5.1 Consideration with respect to the issue E‐1

5.2 Intended purpose of the consideration E‐1

5.3 Minimum amount E‐1

‐ 2 ‐

6 Description of the Business Affairs of the Corporation F‐1

1. The Company’s operations and a description of the development of its business affairs F‐1

1.1 General F‐1

1.2 Diagram of the holding structure of the Company F‐3

1.3 The nature and the results of each significant structural change, merger or acquisition F‐3

2. Fields of Activity F‐18

3. Investments in the Company’s equity and transactions in its Shares F‐18

4. Distribution of dividends F‐18

5. Financial information of the Company’s fields of activity (in NIS million) F‐22

6. The general environment and the impact of external factors on the Company’s operations F‐25

7. The generation segment F‐32

7.1 General information on the generation segment F‐32

7.2 Products and services F‐54

7.3 The distribution of revenues and profits from products and services: F‐55

7.4 Competition F‐55

7.5 Generating capacity F‐65

7.6 Fixed assets, land and facilities F‐66

7.7 The development of the Electricity Sector – the generation segment F‐69

7.8 Intangible assets F‐75

7.9 Human capital F‐75

7.10 Raw materials and suppliers F‐77

7.11 Working capital; inventory F‐92

7.12 Restrictions on and supervision of the operations of the Company in the generating segment F‐93

7.13 Environmental risks and the ways in which they are managed – the generating segment F‐93

7.14 Material agreements F‐104

7.15 Legal proceedings F‐104

8. The transmission and transformation segment F‐105

8.1 General information on the transmission and transformation segment F‐105


8.3 Segmentation of revenues and profitability of products and services F‐110

8.4 Generation capacity – the transmission and transformation segment F‐111


8.6 Development of the Electricity Sector – the transmission and transformation segment F‐114



8.9 Environmental risks and ways of managing them – the transmission and transformation segment F‐119

8.10 Restrictions and regulation over the activity of the transmission and transformation segment F‐120

‐ 3 ‐



9. The distribution segment F‐121

9.1 General information on the distribution segment F‐121


9.3 Segmentation of revenues and profitability F‐124

9.4 Competition F‐125

9.5 Distribution capacity F‐125


9.7 Development of the Electricity Sector – distribution F‐126




9.11 Environmental risks and their manner of management F‐132

9.12 Restrictions to and regulation of the operations of the Company in the distribution and supply segment F‐135


10. Customers ‐ electricity consumers F‐137

11. Marketing and distribution F‐140

12. Seasonality F‐140

13. Research and development F‐141

14. Human capital F‐142

15. Fixed assets, land and facilities F‐162

16. Intangible assets F‐169

17. Suppliers F‐170

18. Working capital F‐172

19. Financing F‐172

20. Taxation F‐184

21. Environmental risks and environmental regulation – general F‐184

22. Restrictions and control over the operations of the Company F‐186

23. Material agreements F‐221

24. Legal proceedings F‐222

25. Insurance F‐225

26. Objectives and business strategy F‐227

27. Financial information with respect to geographic areas F‐233

28. Event or matter exceeding the ordinary business affairs of the Company F‐233

29. Discussion of risk factors F‐239

30. Additional details in accordance with circular 2011‐5‐1 of the Government Companies Authority F‐256

31. Details with respect to subsidiaries and related companies of the Company F‐261

32. Report by the Board of Directors on the state of the Company's business as at December 31, 2011 F‐263

33. Report by the Board of Directors on the state of the Company's business as at March 31, 2012 F‐341

‐ 4 ‐

7 Management of the Company G‐1

7.1 The Board of Directors of the Company G‐1

7.2 Senior officers in the Company G‐12

7.3 Independent Authorized Signatories G‐17

7.4 Additional details G‐17

7.5 Summary of the provisions of the articles of association of the Company relating to the Board of Directors G‐17

7.6 Subordination of the documents of association to the Government Companies Law G‐28

8 Stakeholders and Senior Officers H‐1

8.1 Compensation to stakeholders and senior officers in the Company H‐1

8.2 Transactions with a controlling shareholder H‐12

8.3 Holdings of stakeholders and senior officers H‐25

9 Stakeholders and Senior Officers I‐1

10 Additional details J‐1

10.1 Opinion by an attorney J‐1

10.2 Opinion by an accountant J‐3

10.3 Professional opinion J‐3

10.4 Expenses in the context of the Issue pursuant to the Prospectus and commission fees J‐3

10.5 Allocation of securities other than at the full consideration for cash J‐3

10.6 Inspection of documents J‐3

11 Signatures K‐1

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ISRAEL ELECTRIC CORPORATION LIMITED (hereinafter: the “Company”)

Chapter 1 – Introduction

1.1 General

The Company was incorporated in Israel on March 29, 1923, as a private limited liability share company, pursuant to the Companies Ordinance ‐ 1921, and was registered under the name of the Palestine Electric Corporation Ltd. In 1961, the Company was renamed to its current name, the Israel Electric Corporation Ltd. The Company is engaged in the generation, transmission, distribution and sale of electricity to the majority of the consumers in Israel. For a certain period of time1, the Company’s shares were traded on the Tel Aviv Stock Exchange Ltd. (hereinafter: the “Stock Exchange”); however, as a result of a purchase offer to the shareholders in the Company which was published by the State of Israel on September 30, 1986, and which was accepted by the majority of the shareholders in the Company from among the public at the time, trading of shares in the Company on the Stock Exchange was ceased and, as at the date of the Prospectus, the State of Israel holds approximately 99.846% of the Company’s issued and paid‐up capital, and accordingly, the Company is a “Government company” as this term is defined in the Government Companies Law ‐ 1975. In addition, the Company is defined as a “public company”2, as this term is used in the Companies Law ‐ 1999 (hereinafter: the “Companies Law”). As at the date of the Prospectus, some of the Company’s bonds are traded on the Stock Exchange, pursuant to a prospectus of the Company dated May 21, 2002 (hereinafter: the “2002 Prospectus”).

With respect to the Company’s positions or evaluations which are included in this Prospectus, it is hereby clarified that the Company’s positions or evaluations which are included in this Prospectus do not restrict the discretion of the State, or of any of its authorities, to act and/or to decide under any law in a manner which is different from the Company’s positions or evaluations as set forth above.

1.2 Definitions

In this Prospectus, each of the terms which is set forth below shall have the meaning which appears beside it, unless expressly stated otherwise:

the “Stock Exchange” – the Tel Aviv Stock Exchange Ltd.

the “Annual Financial Statements” – the Company’s consolidated financial statements as at December 31,

2011

the “Quarterly Financial Statements” – the Company’s consolidated financial statements as at March 31,

2012

the “Company” – Israel Electric Corporation Ltd.

the “Minister” the Minister of Energy and Water

1 The Company currently has no information with respect to the date and the manner in which its shares were offered to the public in the past.

2 For the reason with respect to which the Company is defined as the “public company”, see Section 1.1 of Chapter 6 of the Prospectus.

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the “Ministers” – the Minister of Finance and the Minister of Energy and Water

“Government Subsidiary” – pursuant to Section 1 of the Government Companies Law ‐ 1975, a

company whereby more than half of said company’s voting rights at

its general meetings, or the right to appoint more than half the

number of its Directors, is held by a Government Company, a

Government Subsidiary, or a Government Company jointly with a

Government Subsidiary

the “Government Companies Law” – the Government Companies Law ‐ 1975

the “Electricity Sector Law” – the Electricity Sector Law ‐ 1996

the “Securities Law” – the Securities Law ‐ 1968

the “Companies Ordinance” – the Companies Ordinance ‐ 1921

the “Companies Ordinance [New Version]” – the Companies Ordinance [New Version] ‐ 1983

the “Companies Authority” – the Government Companies Authority

the “Electricity Authority” – the Public Services Authority ‐ Electricity

1.3 Permits and approvals

1.3.1 The Company has obtained all of the permits, approvals and licenses which are required under any law for the offer of the securities which are offered pursuant to this Prospectus, the issue of said securities, and the publication of this Prospectus.

1.3.2 The permit from the Israel Securities Authority to publish the Prospectus does not constitute validation of the details which are set forth therein or confirmation of the reliability or integrity thereof, nor does it constitute the expression of an opinion with respect to the quality of the offered securities.

1.3.3 The Stock Exchange has granted its tentative approval for the Prospectus Subject to Completion, as defined in the Stock Exchange Regulations, confirming that the terms of the bonds (Series 23), the bonds (Series 24) and the bonds (Series 25) (hereinafter together: “the Offered Securities” or “the Offered Bonds”) that are offered to the public and intended for registration for trading pursuant to this Prospectus comply with the conditions prescribed in the Stock Exchange Articles and the directives thereunder (hereinafter: “the Stock Exchange Approval for the Prospectus Subject to Completion”). The Stock Exchange’s granting of approval of the Prospectus Subject to Completion as set forth does not constitute approval for registration for trading of the Offered Securities to the public, and the registration for trading of the Offered Securities to the public pursuant to this Prospectus shall be subject to receipt of approval for registration for trading in accordance with a supplementary notice (hereinafter: the “Supplementary Notice”) that will be published by the Company in accordance with the provisions of the Securities Law and the Securities Regulations (Supplementary Notice and Draft Prospectus) ‐ 2007 (hereinafter: the “Supplementary Notice Regulations”) .

1.3.4 The approval by the Stock Exchange as set forth above shall not be deemed to constitute approval of the details which are set forth in the Prospectus, nor confirmation of the reliability or the integrity thereof, nor does it constitute the expression of an opinion

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with respect to the Company or the quality of the Offered Securities in the Prospectus or the price at which they are offered.

1.3.5 The registration for trading of the bonds which are offered to the public is contingent upon minimum dispersal, minimum value of the holdings of the Offered Bonds by the public and the validity and rating of the Offered Bonds, as set forth in Section 2.4.3 of the Prospectus.

1.3.6 The Stock Exchange Approval for Registration for Trading of the Offered Bonds to the public pursuant to this Prospectus Subject to Completion as set forth in Section 1.3.3 above shall be obtained prior to the publication of a Supplementary Notice concerning the issue pursuant to this Prospectus, as set forth in Section 2.2.5 hereof.

1.3.7 The Stock Exchange’s approval for the Prospectus Subject to Completion does not constitute an undertaking to give approval for registration for trading of the Offered Securities to the public in accordance with the Supplementary Notice. The approval of the application for registration for trading of the Offered Securities to the public pursuant to the Supplementary Notice shall be governed by the provisions of the Stock Exchange Articles and the directives thereunder as will be in effect at the time of submission of the application for registration for trading of the Offered Securities to the public in accordance with the Supplementary Notice prospectus.

1.4 Share capital, funds and surplus

1.4.1 The registered and issued share capital of the Company, at nominal values, as at the date of the Prospectus:

Share type Quantity of shares Issued capital

in NIS Issued and paid‐up capital

in NIS

Ordinary shares 80,167,387 8,016,738.7 8,016,498.6

Class B ordinary shares 40,053,252 4,005,325.2 4,005,325.2

Undefined shares 39,531 3,953.1 0

Total 120,260,170 12,026,017 12,021,823.8

1.4.2 The composition of the Company’s equity capital, as at December 31, 2011, is as follows3:

As at December 31, 2011

(in NIS millions) adjusted to NIS of December 2011

As at December 31, 2011 (in NIS millions)

adjusted to NIS of March 2012

Paid‐up share capital 1,099 1,103

3 All of the financial details which are described in this Prospectus are following the implementation of the provisions of the Government Companies Regulations (Principles for Preparing Financial Statements of the Israel Electric Corporation Ltd.) (temporary order) ‐ 2004, including the amendments thereto (hereinafter: the “Government Companies Regulations – Financial Statements”). The applicability of the Government Companies Regulations – Financial Statements, pursuant to the transition clause set forth therein, as extended from time to time, is up to the statements for the period ended on December 31, 2014. The financial data in New Israeli Shekels as at December 31, 2011, herein are financial data as adjusted to December 31, 2011, and to March 31, 2012, as elaborated in the Prospectus. The financial data in New Israeli Shekels as at March 31, 2012, in this Prospectus are adjusted financial data to March 31, 2012, unless expressly indicated otherwise. See Note 2 of the Annual and Quarterly Financial Statements for details on the accounting policy utilized by the Company.

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Capital funds 996 1,000

Surplus 15,170 15,228

Total equity capital 17,265 17,331

1.4.3 The composition of the Company’s equity capital, as at March 31, 2012 is as follows:

As at March 31, 2012 (in NIS millions)

Paid‐up share capital 1,103

Capital funds 1,000

Surpluses 13,760

Total equity capital 15,863

1.5 Special disclosure for the holders of the bonds in circulation

1.5.1 Description of the Company’s bonds in circulation:

Series Bonds (Series 22)

(Initial) date of issue May 29, 2002, pursuant to the 2002 Prospectus

Total nominal value as at the (initial) date of issue

NIS 500,000,000 nominal value

Nominal value as at the date of the Prospectus, not including linkage

NIS 5,500,000,000 nominal value

Nominal value, revaluated pursuant to the terms of linkage as at the date of the Prospectus

NIS 6,779,753,018

Amount of interest accrued (as at the date of the Prospectus)

NIS 37,947,784

Fair value thereof as included in the most recent Financial Statements4

The fair marketable value of the series is its Stock Exchange value; see below.

Stock Exchange value of the Bonds as at the date of the Prospectus

NIS 7,152,200,000

Type of interest (fixed or variable) and interest rate

Fixed annual interest at the rate of 6.5%

Dates of payment of principal ⅟12 of the principal on May 20, August 20 and November 20 of each of the years 2012‐2014 and on February 20 of each of the years 2013‐2015, starting on May 20, 2012, and up to the date of redemption on February 20, 2015

Dates of payment of interest The interest is paid in quarterly installments on August 20, November 20, February 20 and May 20 of each year, starting on the date of issue and up to the date of redemption

Basis for linkage Linked (principal and interest) to the Consumer Price Index which was published on May 15, 2002, with respect to the month of

4 Market value as at June 21, 2012.

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Series Bonds (Series 22)

April 2002

Are the certificates of obligation convertible to another security?

No

The Corporation’s right to perform early redemption or forced conversion of the certificates of undertaking to other securities, insofar as it exists, and the conditions for exercise thereof

No; at the same time, however, it should be noted that the bonds shall be called in for early redemption, should the Stock Exchange decide to delete bonds which are still in circulation from registration for trading, as the result of a situation whereby the value of the holdings of the certificates of undertaking by the public has become less than the amount set forth in the Stock Exchange directives with respect to deletion from trading

Has a guarantee been given for the payment of the Corporation’s undertaking pursuant to a deed of trust?

No

Encumbered assets The bonds (Series 22) are not encumbered under any encumbrance whatsoever

Rating Yes; see Section 1.5.3

1.5.2 Details with respect to the trustee for the certificates of undertaking – bonds (Series 22)

Name of the trustee: Hermetic Trust (1975) Ltd. (hereinafter: “Hermetic”) Name of the person responsible: Adv. Dan Avnon (e‐mail: avnon@cao‐law.co.il) Address: 113 Hayarkon Street, Tel Aviv 30835 Telephone: 03‐5274867 Fax: 03‐5271451 Website: www.hermetic.co.il

The trustee has been in office since October 10, 2011, replacing Bank Leumi Le‐Israel Trust Co. Ltd., which in August 2011 announced to the Company its resignation from the position of trustee for the holders of the Series 22 bonds, pursuant to the provisions of Section 35N (b) of the Securities Law.

The reason for the resignation, as given by the trustee at the time, was the possible fear that it would find itself in a state of conflict of interest, pursuant to Section 35E of the Securities Law and the Israel Securities Authority directives in this regard, in light of the amount owed to the Bank Leumi Group by the Company and by companies under its control.

Pursuant to the resignation, in September 2011, the General Meeting of the Series 22 bondholders approved the appointment of Hermetic as the trustee for the Series 22 bondholders, instead of Bank Leumi Le‐Israel Trust Co. Ltd., and in October 2011, the Tel Aviv‐Jaffa District Court confirmed the termination of service of Bank Leumi Le‐Israel Trust Co. Ltd. as the trustee for the Series 22 bondholders and the appointment of Hermetic as the trustee to replace it.

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1.5.3 Rating of the bonds (Series 22) by a rating company

Series Rating company

Rating established as at the date of issue of the series for the first time

Rating established for the series

as at the date of the Prospectus

Additional ratings established for the series between the date of issue of the series and the date of the Prospectus

Details with respect to the

rating company’s intention to

consider a change in the existing ratingDate Rating

Bonds (Series 22)

S&P Maalot

No rating was established on that date (see Section 1.5.3.1.a below)

AA‐ outlook negative

Nov. 4, 2002 AAA

Nov. 22, 2006 AA+/Negative

Dec. 30, 2008 Bond rating (AA+) entered into the Credit Watch Negative list

Mar. 24, 2009 AA; bond rating remains on the Credit Watch Negative list

Sept. 30, 2009 Bond rating (AA) removed from the Credit Watch Negative list; outlook negative

Oct. 6, 2010 Bond rating (AA) entered into the Credit Watch Negative list

Jan. 4, 2011 AA‐, outlook stable; bond rating removed from the Credit Watch Negative list

July 13, 2011 Bond rating (AA‐) entered into the Credit Watch Negative list

Sept. 19, 2011 Verification of the bond rating (AA‐), outlook stable; bond rating removed from the Credit Watch Negative list

Apr. 5, 2012 Bond rating (AA‐) entered into the Credit Watch Negative list

May 31, 2012 Verification of the bond rating (AA‐); bond remains on the Credit Watch Negative list

July 1, 2012 Leaving of the rating of the Company (ilAA‐) in the Credit Watch Negative List

Midroog

The bonds were not rated by

Midroog on the date of issue of the series for the first

time

Aa3 outlook stable

Oct. 27, 2011 Aa3, outlook stable

Apr. 5, 2012 Verification of the bond rating (Aa3, outlook stable)

See Section 1.5.3.2 (c).

Aa3 May 24, 2012 Bond rating left See Section 1.5.3.2

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Series Rating company

Rating established as at the date of issue of the series for the first time

Rating established for the series

as at the date of the Prospectus

Additional ratings established for the series between the date of issue of the series and the date of the Prospectus

Details with respect to the

rating company’s intention to

outlook negative unchanged at Aa3, change in the outlook from stable to negative

(d).

Aa3 outlook negative

May 31, 2012 Verification of the bond rating (Aa3, outlook negative)

See Section 1.5.3.2 (e).

1.5.3.1 S&P Maalot5

(a) On the date of the issue, the bonds (Series 22) did not have any rating whatsoever; they have been rated since November 2002. On November 22, 2006, Standard & Poor’s Maalot (hereinafter: “S&P Maalot”) announced the lowering of the rating of the Company’s bonds from AAA (as they had been rated starting in November 2002) to AA+/Negative.

(b) On December 30, 2008, S&P Maalot announced that it was entering the rating of the Company’s bonds into the Credit Watch Negative list. For additional details, see the Immediate Report dated December 31, 2008 (Reference No.: 2008‐01‐376425).

(c) On March 24, 2009, S&P Maalot announced that it was lowering the rating of the Company’s bonds from (ilAA+) to (ilAA) and leaving the rating on the Credit Watch Negative list; on September 30, 2009, S&P Maalot removed the Company from that list. For additional details, see the Immediate Report dated March 25, 2009 (Reference No.: 2009‐01‐066693) and September 30, 2009 (Reference No.: 2009‐01‐244734).

(d) On October 6, 2010, S&P Maalot announced that it was entering the rating of the Company’s bonds (ilAA/Negative) into the Credit Watch Negative list, and announced that in the course of that quarter, it would meet with the management of the Company, relevant Government entities and/or relevant authorities such as the Electricity Authority, and would subsequently formulate its decision with respect to the rating. For additional details, see the Immediate Report dated October 6, 2010 (Reference No.: 2010‐01‐638013).

(e) On January 4, 2011, S&P Maalot announced that it was lowering the rating of the Company’s bonds from (ilAA) to (ilAA‐), outlook stable, and that it was removing the rating from the Credit Watch Negative list. In its announcement, S&P Maalot stated that the Company’s credit rating was limited, in its opinion, by a weak financial profile, uncertainty with respect to the regulatory framework, repeated delays in the implementation of the reform in Israel’s electricity market and weak corporate governance. S&P Maalot explained that the stable outlook reflected its opinion that although the Company’s independent credit profile was not expected to improve in the short term, the “very high” probability that the State of Israel would provide exceptional

5 In January 2008, Maalot Israeli Securities Rating Co., Ltd. sold all of its activity to the international rating company Standard & Poor’s (hereinafter: “S&P”) and changed its name to Standard & Poor’s Maalot.

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support for the Company, in its opinion, stabilized the Company’s credit profile. Within the framework of the negotiations which took place with the rating company, on December 27, 2010, the Company received a letter from the Minister of Finance and the Minister of Energy and Water, in which the Ministers emphasized, inter alia, the special importance which they attributed to the global bonds that the Company issued. For that purpose, in order to enable the Company to finance effectively through the issue of new bonds for the service of its existing global debt, they would take measures, if necessary, to provide Government guarantees of such bonds, which would be issued in 2011 and 2012. In this context, S&P Maalot stated that the letter in question supported the Company’s liquidity relative to the state of the Company’s independent liquidity. For details on the State guarantee of the bonds issued within the framework of this Prospectus, see Section 3.6 of the Prospectus. For additional details, see the Immediate Report dated January 4, 2011 (Reference No.: 2011‐01‐005799).

(f) On July 13, 2011, S&P Maalot announced that it was entering the rating of the Company’s bonds (ilAA‐) into the Credit Watch Negative list, this in light of S&P Maalot’s opinion that the Company’s liquidity, the independent aspect of which (without possible Government support) was weak, was under pressure as a result of disturbances in the supply of natural gas from Egypt, which was causing the Company to purchase more expensive fuels in order to operate the power stations, and thereby imposing an additional burden on its liquidity position. For additional details, see the Immediate Report dated July 13, 2011 (Reference No.: 2011‐01‐212466).

(g) On September 19, 2011, S&P Maalot announced that it was removing the rating of the Company’s bonds (ilAA‐) from the Credit Watch Negative list with a stable outlook, this in light of the support which the State had granted to the Company during a period of financial difficulty which resulted from disturbances in the supply of gas from Egypt, including by means of tax incentives (including retroactive incentives), which had helped to achieve more rapid coverage of its expenses, which had risen sharply, and the declaration by the regulatory authorities of a change in the tariff structures, which would be updated within a shorter period of time in cases of fluctuation in fuel prices, thereby improving the state of the Company’s operating capital. S&P Maalot also stated that the support as set forth above also signaled an improvement in the relationship with the regulatory authorities. In the estimation of S&P Maalot, “there is a very high probability that the State of Israel will provide exceptional, sufficient and timely support to the Company in the event of financial distress.” This estimation was based on the extremely important role played by the Company in the economy of the State of Israel. For additional details, see the Immediate Report dated September 19, 2011 (Reference No.: 2011‐01‐728955).

(h) On April 5, 2012, S&P Maalot announced that it was entering the rating of the Company’s bonds (ilAA‐) into the Credit Watch Negative list, in light, inter alia, of the Company’s liquidity difficulties as a result of the disturbances in the supply of natural gas from Egypt and the decline in the local reservoirs, which

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required it to purchase more expensive fuels. For additional details, see the Immediate Report dated April 5, 2012 (Reference No.: 2012‐01‐096093).

(i) On May 31, 2012, S&P announced that it was verifying the rating of the Company’s bonds (ilAA‐) and leaving the bonds on the Credit Watch Negative list. S&P Maalot stated in its notice, inter alia, that the rating reflected its estimate of a very high probability that the State of Israel would provide extraordinary, sufficient and timely support to the Company in the event of financial distress. For additional details, see the Immediate Report dated May 31, 2012 on the Stock Exchange website.

(j) On June 29, 2012, the international rating company Standard & Poor's (“the Rating Company”) published a notice whereby it was leaving the rating of the Company in the Credit Watch Negative List due to the time and volume of financing needs of the Company as early as July 2012 and in view of the fact that the Government of Israel had realized its undertaking to secure financing for surplus fuel costs to an amount of only NIS 4.5 billion. The Rating Company states that the meaning of leaving of the Company in the Credit Watch Negative List as set forth is because there is a possibility of lowering of the rating by the Rating Company estimates that the Company has not implemented adequate, timely steps to improve liquidity. The Rating Company further stated that it intends to settle the issue of the Watch List in the next two weeks, during which it will conduct tracking of the completion of the issue to an amount of NIS 3 billion with State Guarantee and an evaluation will be made as to the question of how the State and the Company intend to finance any additional cash flow deficit that may arise in 2012. The Rating Company further states that it may remove the Company from the Watch List if the Company completes the issue to the public pursuant to this prospective during July 2012 and if at that time the financing sources for amounts that exceed the amount secured by the state guarantee become clear. See immediate report of July 1, 2012 (reference number 2012‐01‐171489).

Accordingly, on July 1, 2012, the local rating company Standard & Poor’s Maalot (“the Local Rating Company”) published a notice whereby it was keeping the rating of ‘‐ilAA’ of the Company in the Credit Watch Negative List due to the time and volume of the financing needs of the Company as early as July 2012 and in view of the fact that the Government of Israel had ratified its commitment to securing financing for the additional fuel expenses, but consented to guarantee only NIS 4.5 billion of new debt. The Local Rating Company states that the meaning of keeping the Company in the Watch List as set forth is that there is a possibility or decreasing of its rating if the Local Rating Company’s assessment is that moves will not be implemented to improve liquidity in full and on time. The Local Rating Company further stated that it intends to remove the rating of the Company from the Credit Watch List within two weeks. During this period, the Local Rating Company will examine whether the Company has completed the issue of the Bond secured by Government guarantee to an amount of NIS 3 billion. In addition, the Local Rating Company will examine how the State and the Company intend to finance any additional cash flow shortage that may arise through to the end of 2012. The Local Rating Company further states that it may remove the Credit

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Watch and ratify the rating of the Company completes the issue of the planned Bond in July to an amount of NIS 3 billion while it is also convinced as to the way in which the sources for financing the missing amounts beyond this issue will be obtained. See immediate report of July 1, 2012 (reference number 2012‐01‐172908).

For additional details concerning the letter of the Director General of the Ministry of Finance as set forth that stated, inter alia, that the Company had again confirmed that it would give a guarantee or other financing solutions for the cumulative cash flow deficit of the Company stemming from its surplus fuel activity and in accordance with the cash flow needs stemming from the purchase of this fuel, see Section 28.8 of Chapter 6 of the Prospectus. It is noted that the letter set forth did not include details of the financing solutions as set forth, and that the Company is not aware what alternative financing solutions the Ministry of Finance intends to extend to it and whether these will be determined during the next two weeks.

1.5.3.2 Midroog

(a) On June 30, 2010, the period of the engagement between the Company and S&P Maalot with respect to the rating of the bonds came to an end, with the exception of the bonds issued by the Company up to and including June 30, 2010 (hereinafter: the “Existing Debt”), which will continue to be rated by S&P Maalot until the maturity date of all of the series of bonds which are in circulation as at the date of the Prospectus and which were issued up to June 30, 2010, as set forth above. In July 2010, the Company engaged the Israeli credit rating company Midroog Ltd. (hereinafter: “Midroog”), which was the winner of a competitive proceeding held by the Company by virtue of the Obligation for Tenders Law ‐ 1992; starting at that time, all of the bonds which shall be issued by the Company between July 1, 2010, and June 30, 2015 (hereinafter: the “New Debt”), shall be rated by Midroog.

(b) On October 27, 2011, Midroog announced the issuance of a rating of Aa3 for the Series 22 bonds and for the expansion of that series, which was planned by the Company, in a total amount of up to NIS 1.5 billion (nominal value), subject to the approval of the General Meeting of the bondholders and the amendment of the deed of trust for the bondholders, but which was not implemented. For details with respect to the planned expansion of Series 22, see the Immediate Report dated October 6, 2011 (Reference No.: 2011‐01‐296292); for details with respect to the withdrawal from the agenda of the General Meeting of the bondholders of the resolution to amend the deed of trust for the bondholders, see the Immediate Report dated December 26, 2011 (Reference No.: 2011‐01‐375042); for additional details with respect to the rating, see the Immediate Report dated October 27, 2011 (Reference No.: 2011‐01‐309765).

(c) On April 5, 2012, Midroog announced that the rating of the bonds (Series 22) had been left unchanged at Aa3, outlook stable; for additional details with respect to the rating, see the Immediate Report dated April 5, 2012. Midroog stated that the Company’s rating is affected, inter alia, by the significant and consistent erosion in the cash flow and the low level of liquidity, which are

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expected to continue, against the background of the lack of a regular and full supply of gas from Egypt and the decline in the Yam Tethys gas reservoir. It further stated that the support of the Company by the State and the dependency between the State and the Company are significant elements of the rating, and Midroog estimates the level of the dependency and support as very high. Midroog will continue to monitor the degree of support and dependency and emphasizes that erosion in the estimate of the support and dependency might lead to a significant lowering of the rating.

(d) On May 24, 2012, Midroog announced that the rating of the Bonds (Series 22) had remained unchanged at Aa3, and that the rating outlook had changed from stable to negative; for additional details with respect to the rating, see the Immediate Report dated May 24, 2012 (Reference No.: 2012‐01‐135222). According to the announcement by Midroog, the rating of the Bonds is affected, inter alia, by the significant and consistent erosion in the cash flow and the low level of liquidity, which are expected to continue, against the background of the lack of a regular and full supply of gas from Egypt and the decline in the Yam Tethys gas reservoir. The erosion results, inter alia, from timing differences between the current cost of the purchase of fuels and receipts from the electricity rate, which are to be spread over a period of three (3) years. The negative outlook of the Bonds results, inter alia, from the Company’s inability to finance its ongoing activity other than through the issue of additional bonds, primarily against the background of the fuel crisis and the uncertainty with respect to the quantity and timing of gas supply. At the same time, according to the evaluation by Midroog, this situation is not a permanent one, and it is backed by support of the State. Midroog will continue to monitor the developments which surround the Company’s activity.

(e) On May 31, 2012, Midroog announced that the rating of the Bonds (Series 22) had remained unchanged at Aa3, and that the rating outlook had remained negative; for additional details with respect to the rating, see the Immediate Report dated May 31, 2012, on the Stock Exchange website. According to the announcement by Midroog, the rating of the Bonds was affected, inter alia, by the significant and consistent erosion in the cash flow and the low level of liquidity, which were expected to continue against the background of the cessation of the supply of gas from Egypt and the decline in the Yam Tethys gas reservoir. The erosion resulted, inter alia, from timing differences between the current cost of purchasing the fuels and the receipts from the electricity tariff, which would be spread over three years. The negative outlook for the Bonds resulted, inter alia, from the Company’s inability to finance its ongoing activity other than through the issue of additional bonds, primarily against the background of the fuel crisis and the uncertainty with respect to the quantity and timing of gas supplies; at the same time, according to the evaluation by Midroog, this situation is not a permanent one, and it is backed by support from the State. Midroog will continue to monitor the developments which surround the Company’s activity.

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1.5.4 Fulfillment of the terms of the bonds (Series 22)

As at the date of the Prospectus and throughout the three (3) years which preceded the date of publication of the Prospectus, the Company complied with all of the terms and undertakings pursuant to the deed of trust for the bonds (Series 22), and there has been no cause to call in the bonds (Series 22) for immediate repayment, and the Company has received no notice from the trustee for the bonds (Series 22) with respect to non‐compliance with the terms and undertakings pursuant to the deed of trust as set forth above.

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Chapter 2 – Details of the offer of securities

2.1 The securities offered by the Company

2.1.1 NIS 1,500,000,000 (nominal value) of bonds (Series 23) of the Company (hereinafter: the “Bonds (Series

23)”), which are registered bonds, secured by a guarantee by the State of Israel (as set forth below)

(hereinafter: the “State Guarantee”), and bear fixed annual interest, whose rate shall be established by way

of a tender and shall not exceed the rate of interest which shall be set forth in a Supplementary Notice (as

this term is defined below in Section 2.2.5) which shall be published by the Company (hereinafter: the

“Interest with Respect to the Bonds (Series 23)”). The Bonds (Series 23) are not linked (principal and interest)

to any linkage basis whatsoever. The principal of the Bonds (Series 23) shall be repaid in one (1) installment

on July 9, 2013. The Interest with Respect to the Bonds (Series 23) shall be repaid on the date of repayment

of the principal of the Bonds (Series 23), with respect to the period which begins on the first trading day after

the date of the Tender and ends on the date of repayment of the principal of the Bonds (Series 23), and shall

be based on fixed annual interest, calculated on the basis of 365 days per year, as shall be reported by way of

an Immediate Report which shall be published by the Company with respect to the outcome of the issue of

the Bonds (Series 23). For additional details, see Chapter 3 of the Prospectus.

2.1.2 NIS 1,000,000,000 (nominal value) of bonds (Series 24) of the Company (hereinafter: the “Bonds (Series

24)”), which are registered bonds, secured by the State Guarantee, and bear fixed annual interest, which shall

be established by way of a tender and shall not exceed the rate of interest which shall be set forth in a

Supplementary Notice (as set forth in Section 2.2.5) which shall be published by the Company (hereinafter:

the “Interest with Respect to the Bonds (Series 24)”). The Bonds (Series 24) are linked to the Consumer Price

Index (principal and interest), whereby the base index is the Consumer Price Index which was published on

June 15, 2012, with respect to May 2012 (hereinafter: the “Base Index”). Should it transpire that on the date

of payment of the principal and the interest for the Bonds, the Payment Index is higher than the Base Index,

the Company shall pay that payment of principal and interest, increased in proportion to the rate of increase

in the Payment Index compared to the Base Index. Should it transpire that the index which is known on the

date of the payment of principal and/or interest has decreased relative to the Base Index, the Base Index shall

be the index of payment. The principal of the Bonds (Series 24) shall be repaid in one installment on July 9,

2015. The Interest with Respect to the Bonds (Series 24) shall be paid in annual installments, on July 9 of each

of the years 2013 through 2015 (inclusive) with respect to the twelve-month (12) period which begins on the

first day after the interest period immediately before it. The first payment of Interest with Respect to the

Bonds (Series 24) shall be paid on July 9, 2013, with respect to the period which begins on the first trading

day after the Date of the Tender, and which ends on the date of payment in accordance with that which has

been set forth above, and shall be based on fixed annual interest, calculated on the basis of 365 days per

year, as shall be reported by way of an Immediate Report which shall be published by the Company with

respect to the outcome of the issue of the Bonds (Series 24). The last payment of Interest shall be paid on July

9, 2015, on the date of repayment of the principal of the Bonds (Series 24). For additional details, see Chapter

3 of the Prospectus.

2.1.3 NIS 500,000,000 (nominal value) of bonds (Series 25) of the Company (hereinafter: the “Bonds (Series 25)”),

which are registered bonds, secured by the State Guarantee, and bear fixed annual interest, which shall be

established by way of a tender and shall not exceed the rate of interest which shall be set forth in a

Supplementary Notice (as set forth in Section 2.2.5) which shall be published by the Company (hereinafter:

the “Interest with Respect to the Bonds (Series 25)”). The Bonds (Series 25) are linked to the Base Index.

Should it transpire that on the date of payment of the Principal and the Interest for the Bonds, the Payment

Index is higher than the Base Index, the Company shall pay that payment of principal and interest, increased

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in proportion to the rate of increase in the Payment Index compared to the Base Index. Should it transpire

that the index which is known on the date of the payment of principal and/or interest has decreased relative

to the Base Index, the Base Index shall be the index of payment. The principal of the Bonds (Series 25) shall be

repaid in one installment on July 9, 2017. The Interest with Respect to the Bonds (Series 25) shall be paid in

annual installments, on July 9 of each of the years 2013 through 2017 (inclusive) with respect to the twelve-

month (12) period which begins on the first day after the interest period immediately before it. The first

payment of Interest with Respect to the Bonds (Series 25) shall be paid on July 9, 2013, with respect to the

period which begins on the first trading day after the Date of the Tender, and which ends on the date of

payment in accordance with that which has been set forth above, and shall be based on fixed annual interest,

calculated on the basis of 365 days per year, as shall be reported by way of an Immediate Report which shall

be published by the Company with respect to the outcome of the issue of the Bonds (Series 25). The last

payment of Interest shall be paid on July 9, 2017, on the date of repayment of the principal of the Bonds

(Series 25). For additional details, see Chapter 3 of the Prospectus.

The Bonds (Series 23), the Bonds (Series 24) and the Bonds (Series 25), which are offered pursuant to the Prospectus

(which is yet to be supplemented) and the Supplementary Notice, shall hereinafter be referred to as: the “Offered

Bonds” or the “Offered Securities”.

The Offered Securities are offered to the public by the Company in three (3) separate tenders (Tender A - for the

purchase of Bonds (Series 23); Tender B - for the purchase of Bonds (Series 24); and Tender C - for the purchase of

Bonds (Series 25)), which are not contingent upon each other, as follows:

2.1.4 Tender A – NIS 1,500,000,000 (nominal value) of Bonds (Series 23) of the Company are offered to the public

at 100% of their nominal value by means of 1,500,000 units of NIS 1,000 nominal value per Bond, by way of a

tender for the interest rate, whereby the annual interest rate which shall be determined in the tender shall

not exceed the interest rate which shall be set forth in a Supplementary Notice which shall be published by

the Company (hereinafter: the “Bonds 23 Units”), whereby the period for submission of orders for the

purchase of Bonds 23 Units shall be set forth in the Supplementary Notice (as set forth below).

2.1.5 Tender B – NIS 1,000,000,000 (nominal value) of Bonds (Series 24) of the Company are offered to the public

at 100% of their nominal value by means of 1,000,000 units of NIS 1,000 nominal value per Bond, by way of a





2.1.6 Tender C – NIS 500,000,000 (nominal value) of Bonds (Series 25) of the Company are offered to the public at

100% of their nominal value by means of 500,000 units of NIS 1,000 nominal value per Bond, by way of a





The units of Bonds Series 23, the units of Bonds Series 24 and the units of Bonds Series 25 shall hereinafter be

jointly referred to as the “Offered Units”.

2.1.7 Tender A, Tender B and Tender C shall hereinafter be jointly referred to as: the “Tenders”, unless expressly

stated otherwise.

2.1.8 Tenders A, B and C shall be opened on the dates and at the times which shall be set forth with respect to each

one thereof in the Supplementary Notice (hereinafter: the “Date of the Tender”) as set forth in Section 2.2.1.

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Following the publication of this Prospectus, the Company shall publish a Supplementary Notice pursuant to Section

16(A1)(2) of the Securities Law and the Supplementary Notice Regulations. Within the framework of the

Supplementary Notice, the details which are missing in this Prospectus shall be completed and/or the details which

can be updated in this Prospectus shall be updated, pursuant to the provisions of the Supplementary Notice

Regulations. For details with respect to the Supplementary Notice, see Section 2.2.5.

2.2 Description of the manner of offer to the public

That which is set forth in this Section 2.2 refers to each of the Tenders separately and with respect to each series of

the Offered Units.

2.2.1 Period for submission of orders for units

Following the receipt of the preliminary undertaking for the purchase of the Offered Securities pursuant to

this Prospectus from the Classified Investors, the Company shall publish a Supplementary Notice, which shall

set forth the deadline for submission of orders on behalf of the public for the purchase of Offered Securities

pursuant to this Prospectus. In any event, the deadline for submission of orders on behalf of the public for

the purchase of securities in accordance with that which has been set forth above shall not precede the

expiry of five (5) business days after the date of publication of this Prospectus Subject to Completion, and not

later than five (5) business days after the end of the quarter in which the Israel Securities Authority issues the

permit for publication of this Prospectus. The period for submission of orders for the purchase of Offered

Securities pursuant to this Prospectus (hereinafter: “Orders”) by the public shall begin no earlier than five (5)

trading hours after the time of publication of the Supplementary Notice (hereinafter: the “Date of the

Tender” or the “Start of the Period for Submission of Orders”).

2.2.2 Submission of Orders for the purchase of units

a. The Orders for the purchase of the Offered Units shall be submitted to the Company by means of Clal

Finance Underwriting Ltd. and/or by means of Clal Finance Betuha Investment Management Ltd.

(hereinafter: the “Issue Coordinator”) or through the banks or the other members of the Stock Exchange

(hereinafter jointly: the “Members of the Stock Exchange”), on the dates which shall be set forth in the

Supplementary Notice in accordance with that which has been set forth in Section 2.2.5.

b. Orders for purchase of the Offered Units shall be submitted to the Company on forms which may be

obtained from the Members of the Stock Exchange. The Orders for purchase of the Offered Units are

irrevocable. An Ordering Party shall be deemed to have undertaken, in his Order, to purchase the

securities which shall be allocated to him as a result of complete or partial response to his Order,

pursuant to the terms of this Prospectus, and shall be deemed to have undertaken to pay the

consideration, in its entirety, for the Offered Units which he is entitled to receive in accordance with the

outcome of the Tender, as said outcome shall be announced by the Company, as set forth below.

c. The Members of the Stock Exchange shall be responsible and liable vis-à-vis the Company and vis-à-vis

the Issue Coordinator for the payment of the consideration, in its entirety, which shall be due to the

Company with respect to applications which were filed through them and which were approved, in

whole or in part.

d. Orders may be filed for the purchase of whole Offered Units only. Should an Order be filed for any part of

a unit, the Order shall be considered as an Order which has been filed for the number of whole Offered

Units which is specified therein, and that number only, and any part of a unit which is specified therein

shall be deemed a priori not to have been included therein. An Order in which the number of Offered

Units specified therein is less than one shall not be accepted.

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e. Each Ordering Party in the Tender shall state, in his Order, the number of Offered Units which he wishes

to purchase and the interest rate proposed by him, which shall not exceed the Maximum Interest Rate.

f. Each Ordering Party in the Tender shall be entitled to submit up to three (3) orders at different interest

rates, which shall not exceed the Maximum Interest Rate which shall be set forth in the Supplementary

Notice with respect to the relevant tender, at interest increments that will be detailed in the

Supplementary Notice published by the Company. Should an Order specify an interest rate which is not

equivalent to one of the interest increments detailed as stated, the Order shall be deemed to have

specified the interest rate at the closest interest increment which is higher.

For the purposes of this chapter, an “Ordering Party” shall include his relative who lives with him, as well

as a “Classified Investor” as this term is defined in Section 15A (b)(1) or (2) of the Securities Law, and in

accordance with that which has been set forth in Section 2.8.

g. An Order which shall be received by the Members of the Stock Exchange, or which shall be received by

the Issue Coordinator, more than one (1) hour after 4:30 p.m. on the Date of the Tender, or which shall

be received by the Issue Coordinator after the hour to be specified in the Supplementary Notice, shall not

be accepted by the Company. The Orders for the purchase of the Offered Units shall be transferred to

the Order Coordinator by the Members of the Stock Exchange on the Date of the Tender, by the time to

be specified in the Supplementary Notice, in closed envelopes, which shall be kept closed until the last

deadline for filing applications, and shall be placed in a closed box by the Issue Coordinator together with

the applications which were submitted to him directly.

h. Applications which shall be submitted in the Tender without stating an interest rate shall be deemed not

to have been submitted at all.

i. An Order in which the proposed interest rate exceeds the Maximum Interest Rate shall be null and void

and shall be deemed not to have been submitted.

2.2.3 Tender procedures

a. Opening the envelopes

On the Date of the Tender, at the times to be specified in the Supplementary Notice in accordance with

that which has been set forth in Section 2.2.5, the order box shall be opened and the envelopes shall be

opened in the presence of the Company’s comptroller, who shall supervise the propriety of the Tender

procedures, and the outcome of the Tender shall be summed up and processed.

b. Manner of determining the interest rate in the Tender and allocating the units

1. The Bonds which shall be included in the Offered Units in purchase orders which shall be accepted

within the framework of the Tender shall bear interest at a uniform rate (hereinafter: the “Uniform

Interest Rate”), which shall be determined in accordance with the outcome of the Tender, and the

manner of allocating the Offered Units shall be carried out as follows: should the total quantity of

the Offered Units for which Orders were submitted (including Orders which shall be received from

Classified Investors who engaged in a preliminary engagement with the Company, in accordance

with that which has been set forth in Section 2.8) be less than the quantity of units offered to the

public – all of the Orders shall be accepted in their entirety, subject to compliance with the directives

of the Stock Exchange, in accordance with that which has been set forth in Section 2.4. In such a

case, the Uniform Interest Rate shall be the Maximum Interest Rate. The balance of the Offered

Units, for which no Orders were received, shall not be issued.

2. Should the total quantity of the Offered Units for which Orders were submitted (including Orders

which shall be received from Classified Investors who engaged in a preliminary engagement with the

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Company, in accordance with that which has been set forth in Section 2.8) be equal to or greater

than the quantity of units offered to the public, the Uniform Interest Rate shall be equal to the

lowest interest rate at which (and/or at rates lower than which) Orders for the purchase of all of the

units offered to the public (including Orders which were received from the Classified Investors) were

submitted.

3. The Company shall accept Orders for the purchase of units offered to the public pursuant to the

Prospectus, whereby the Bonds shall bear interest at the Uniform Interest Rate, and each Ordering

Party shall be deemed to have undertaken, in his Order, to purchase all of the Offered Units which

shall be allocated to him as the result of the acceptance of his Order, whereby the Offered Bonds

pursuant to this Prospectus shall bear the Uniform Interest Rate, pursuant to the following rules:

(a) Orders which specify an interest rate lower than the Uniform Interest Rate shall be accepted in

their entirety.

(b) Orders which specify an interest rate higher than the Uniform Interest Rate shall not be

accepted.

(c) Orders which specify the Uniform Interest Rate shall be accepted proportionally, so that each

Ordering Party shall receive, out of the number of units offered to the public which shall remain

for distribution, after the allocation with respect to Orders which specify an interest rate lower

than the rate set as the Uniform Interest Rate, and after the allocation of the Offered Units to

which the Classified Investors who engaged in a preliminary engagement with the Company, in

accordance with that which has been set forth in Section 2.8.3 (to the extent that the Company

has engaged in a preliminary engagement with classified investors), are entitled, a portion which

is equal to the ratio between the number of units included in the Order which he submitted,

which specified the Uniform Interest Rate, and the total number of units included in all of the

Orders which specified the Uniform Interest Rate, less the Orders which were submitted by

Classified Investors and which specified the Uniform Interest Rate, rounded down to the nearest

whole unit. The allocation to the Classified Investors shall take place in accordance with that

which has been set forth in Section 2.8.3.

4. Notwithstanding that which has been set forth above, should the allocation in accordance with that

which has been set forth in Section 2.2.3 (b)(3) not result in a minimum dispersal of the Bonds, in

accordance with that which has been set forth in Section 2.4.3, the preferential allocation to the

Classified Investors shall be canceled and the allocation of the units shall take place in accordance

with that which has been set forth in Section 2.2.3 (b)(3), and the units to Classified Investors who

submitted orders which specified the Uniform Interest Rate shall be allocated in the same manner as

the allocation to the public, and the provisions of Section 2.8.3 shall not apply.

5. Should the allocation in accordance with that which has been set forth in Section 2.2.3 (b)(4) not

result in a minimum dispersal of the Bonds in accordance with that which has been set forth in

Section 2.4.3, the Company shall allocate to all of the Ordering Parties, including to Classified

Investors who engaged in a preliminary engagement with the Company, pursuant to this Section as

set forth below:

(a) Orders which specify an interest rate higher than the Uniform Interest Rate shall not be

accepted.

(b) Orders which specify the Uniform Interest Rate or an interest rate lower than the Uniform

Interest Rate (including Orders which were received from Classified Investors to engaged in a

preliminary engagement with the Company) shall be accepted proportionally, so that with

respect to each such Order (including Orders which were received from Classified Investors), out

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of the total amount of Offered Units, a number of units shall be allocated which is equal to the

ratio between the number of units included in the Order which specified the Uniform Interest

Rate or a lower price and the total number of Offered Units included in all of the Orders in the

Tender (including Orders from Classified Investors) which specified the Uniform Interest Rate or

a lower interest rate.

6. Should the allocation in accordance with that which has been set forth in Section 2.2.3 (b)(5) not

result in a minimum dispersal of the Bonds in accordance with that which has been set forth in

Section 2.4.3, a reallocation shall be carried out for the purpose of determining a new interest rate,

which shall not exceed the Maximum Interest Rate and which shall be different from the Uniform

Interest Rate which was determined in the Tender (hereinafter: the “New Uniform Interest Rate”).

The New Uniform Interest Rate shall be the lowest interest rate at which it shall be possible to

allocate the Offered Units in such a way as to comply with the requirements for minimum dispersal

according to the directives of the Stock Exchange, in accordance with that which has been set forth

in Section 2.4.3, and provided that no Ordering Party shall be allocated a number of units greater

than that which he ordered, or at an interest rate lower than that which he specified in his Order.

Should the New Uniform Interest Rate have been determined in accordance with that which has

been set forth in this Section, the allocation shall be carried out pursuant to that set forth in Section

2.2.3 (b)(5), and the words “Uniform Interest Rate” shall be deemed to have been replaced by the

words “New Uniform Interest Rate”.

7. Should the allocation in accordance with that which has been set forth in Section 2.2.3 (b)(6) also not

result in a minimum dispersal of the Bonds, in accordance with that which has been set forth in

Section 2.4.3, the issue pursuant to this Prospectus shall be canceled, and no monies whatsoever

shall be collected from the Ordering Parties. Notice with respect to the cancellation of the issue in

accordance with that which has been set forth above shall be given by the Company in an Immediate

Report on the first trading day after the Date of the Tender and in an announcement which the

Company shall publish in two (2) widely circulated Hebrew-language daily newspapers in Israel.

8. Should fractions of units be created as a result of the issue in accordance with that which has been

set forth above, they shall be rounded as the Issue Coordinator shall determine. Surplus units which

shall remain as a result of rounding in accordance with that which has been set forth above shall be

purchased by the Issue Coordinator.

2.2.4 Special trust account

a. Shortly before the Date of the Tender, the Issue Coordinator shall open a special trust account for the

Company (hereinafter: the “Special Account”) at a banking corporation, in the name of the Company, in

the context of the offer of the Offered Units pursuant to this Prospectus and shall provide the Members

of the Stock Exchange with the details thereof. The Special Account shall be managed by the Issue

Coordinator exclusively for the Company and in its name, pursuant to the provisions of Section 28 of the

Securities Law. The Special Account shall be used to deposit the monies which shall be paid, inter alia, for

the Orders which were submitted by the Members of the Stock Exchange and were accepted by the

Company, in whole or in part. As long as the consideration for the issue has not been transferred to the

Company, the consideration shall be kept in the Special Account and shall be invested in deposits in New

Israeli Shekels which bear interest on a daily basis.

b. On the first trading day after the Date of the Tender, by 12:30 p.m., the Members of the Stock Exchange

through whom the Orders which were completely or partially accepted were submitted, shall deposit the

entire amount of the consideration which is due from them for the accepted Orders into the Special

Account.

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c. Should all of the requirements of the Stock Exchange for registration for trading, in accordance with that

which has been set forth in Sections 2.4.1 through 2.4.3, have been met, the Issue Coordinator, on the

second trading day after the Date of the Tender, shall transfer all of the monies and the earnings thereon

which shall accumulate in the Special Account, against the receipt of certificates with respect to the

Offered Bonds, to the name of the recording company, Bank Leumi Le-Israel Recording Co. Ltd.

(hereinafter: the “Recording Company”).

d. Should all of the requirements of the Stock Exchange for registration for trading not have been met with

respect to the Bonds, the provisions of Sections 2.4.4 and 2.4.5 shall apply. It is hereby clarified that

compliance with the requirements of the Stock Exchange for the registration of the Offered Securities for

trading shall be examined with respect to each of the series separately and unconditionally.

2.2.5 Supplementary Notice

a. Following the publication of this Prospectus, the Company publish a Supplementary Notice pursuant to

Section 16 (A1)(2) of the Securities Law. Within the framework of the Supplementary Notice, all of the

details which are missing in this Prospectus (if any) shall be completed and/or updated, including, but not

only, details with respect to the Company’s preliminary engagement with Classified Investors, (to the

extent that the Company decides to engage in a preliminary engagement with classified investors) details

with respect to the Maximum Interest Rate in each of the Tenders, as well as changes (if any) in the

quantity and terms of the Offered Securities. In the Supplementary Notice, the Company shall include

any detail which may be included under the Supplementary Notice Regulations, including the following

data:

1. Determining the Date of the Tender and the Period for Submission of Orders.

2. Approval by the Stock Exchange for registering the securities which are offered to the public

pursuant to this Prospectus for trading.

3. With respect to each of the Tenders separately, the Maximum Interest Rate of the Offered Bonds,

change in the quantity of the Offered Securities at a percentage which shall not exceed 20% of the

quantity which is set forth in Section 2.1, and provided that the product of the quantity times the

price shall not be changed by more than 30% of the aforesaid product, which is derived from the

quantity and the price which were mentioned in the Prospectus. The quantity and the Maximum

Interest Rate shall be set forth in the Supplementary Notice.

4. A listing of all of the preliminary undertakings which were given, to the extent that the Company has

engaged in a preliminary engagement with classified investors, including the names of the Classified

Investors, as this term is defined in the Manner of Offer Regulations, the quantity and the interest

rate to which the Classified Investors undertook.

5. A listing of the commissions which the Company shall pay for the preliminary undertaking,

coordination and distribution.

b. The Supplementary Notice shall be submitted to the Israel Securities Authority by means of the MAGNA

system and shall be distributed in the manner and in the places in which this Prospectus was published.

Upon the publication thereof, the Supplementary Notice shall become an integral part of this Prospectus.

2.2.6 Notice of the outcome of the issue, splitting and waiver

a. By 10:30 a.m. on the first trading day after the Date of the Tender, the Issue Coordinator shall give the

Ordering Parties, through the Members of the Stock Exchange through whom the Orders were

submitted, notice of the extent of acceptance of their respective Orders. The notice shall set forth the

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interest rate which was determined in the Tender, the quantity of units which shall be allocated and the

consideration which the respective Ordering Party shall be required to pay with respect thereto.

b. By 12:30 p.m. on the first trading day after the Date of the Tender, the Ordering Parties whose Orders for

the purchase of securities in the issue were accepted (in whole or in part) shall transfer, through the

distributors to the Issue Coordinator, the entire amount of the consideration which is due from them for

the Offered Units, with respect to which the offer was accepted, into the Special Account in accordance

with that which has been set forth in Section 2.2.4.

c. On the first trading day after the Date of the Tender, the Company shall give notice of the outcome of the

Tender to the Israel Securities Authority and the Stock Exchange, in an Immediate Report, and within

three (3) additional business days after, shall publish an announcement to that effect in two (2) widely

circulated Hebrew-language daily newspapers in Israel.

2.2.7 Certificates for the Offered Bonds

On the date on which the conditions for the transfer of the monies which were deposited in the Special

Account by the Issue Coordinator to the Company, in accordance with that which has been set forth in

Section 2.4, are fulfilled, and against the transfer of the monies in accordance with that which has been set

forth above, the Company shall allocate to the Ordering Parties, through the Recording Company, the Offered

Bonds which are included in the Offered Units, the Orders for which were accepted, in whole or in part, and

the consideration for which was paid in full. The allocation of the Offered Bonds shall be implemented by

sending Certificates for the Offered Bonds to the Recording Company. The trading in the Offered Bonds shall

begin shortly after their registration for trading on the Stock Exchange.

The Bond Certificates may be transferred, split or waived in favor of others, subject to the completion and

signing of a deed of transfer and/or split and/or waiver and the delivery thereof, by the applicant for the

performance of the transfer, split or waiver, along with a certificate, to the Company, and subject to the

payment of all of the expenses, taxes and imposts involved, by the aforesaid applicant. All of the expenses

involved in the transfer, split or waiver, in accordance with that which has been set forth above, and the

other imposts, if any, shall be borne and paid by the applicant.

The Company’s operations in accordance with that which has been set forth in this Section, at the time of

performance thereof, shall be in accordance with the provisions of the Articles of Association of the Stock

Exchange and the directives issued by the Stock Exchange.

2.3 Registration for trading on the Stock Exchange

The Stock Exchange has given its approval in principle for the Prospectus Subject to Completion, as this term is defined

in the Articles of Association of the Stock Exchange, which confirms that the securities which are intended for trading

on the Stock Exchange pursuant to this Prospectus comply with the terms set forth in the Articles of Association of the

Stock Exchange and the directives issued pursuant thereto.

Prior to the publication of the Supplementary Notice, the Company shall approach the Stock Exchange with an

application to register the Offered Securities for trading on the Stock Exchange for trading. Subject to the receipt of

approval by the Stock Exchange for registration for trading in accordance with that which has been set forth above,

the Company shall file an application to register the Offered Securities for trading on the Stock Exchange within three

(3) business days after the Date of the Tender. Approval by the Stock Exchange in accordance with that which has

been set forth above is subject to the requirements of the Stock Exchange in accordance with that which has been set

forth in Sections 2.4.1 through 2.4.3.

The Offered Bonds have been rated by Midroog Ltd. with a rating of Aaa, at a scope of up to NIS 3 billion nominal

value. For details, see Section 3.8.

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2.4 Requirements for registration for trading on the Stock Exchange

2.4.1 Pursuant to the directives of the Stock Exchange, the registration of the Offered Bonds for trading on the

Stock Exchange is contingent upon the condition that the value of holdings of each series by the public shall

not be less than NIS 36 million.

2.4.2 As set forth in Section 2.3, the Offered Bonds have been rated by Midroog Ltd. with a rating of Aaa,

contingent upon the conditions which are listed in the rating report, in accordance with that which has been

set forth in Section 3.8. The Company shall give notice, by way of an Immediate Report prior to the issue, of

the fulfillment of the terms in accordance with that which has been set forth above and the validity of the

rating. Subject to the validity of the rating in accordance with that which has been set forth above, the

registration of the Offered Bonds is not subject to the requirement for minimum equity capital.

2.4.3 According to the directives of the Stock Exchange, the registration on the Stock Exchange of the Offered

Securities pursuant to this Prospectus for trading is contingent upon minimum dispersal of the holdings of the

Bonds by the public, in accordance with that which has been set forth in the following table (the minimum

dispersal as set forth above shall be examined with respect to each series separately, and, should any of the

series not comply with the requirements of the Stock Exchange for registration for trading, this shall not

constitute prejudice to the registration of the other series for trading, subject to the compliance of each of

said series with the requirements of the Stock Exchange for registration for trading):

Type of security Minimum number of holders Minimum holding value per user

Bonds 35 NIS 200,000

In this Section, a “Holder” – one (1) holder, the value of whose holdings exceeds the minimum holding value

per user which is required pursuant to this Section 2.4.3, or a holder, together with others, the joint value of

whose holdings exceeds the minimum holding value per user in accordance with that which has been set

forth above.

2.4.4 Should the requirements for value of holdings of the Offered Bonds by the public not have been met, or

should the requirement for minimum dispersal of the Bonds not have been met, the issue pursuant to this

Prospectus shall be canceled with respect to the series which does not comply with the requirements of the

Stock Exchange for registration for trading, and that series shall not be registered for trading on the Stock

Exchange, and no money shall be collected from the Ordering Parties with respect to Bonds of that series.

2.4.5 Should the issue have been canceled in accordance with that which has been set forth above, in the context

of any of the series of the Offered Bonds, the Company shall take measures pursuant to the provisions of

Section 2.2.3 (b)(7) in the context of that series.

2.5 Refraining from making arrangements

2.5.1 The Company and the Directors undertake, by signing this Prospectus, to refrain from making arrangements

which are not written in the Prospectus in the context of the offer of the Offered Securities, the distribution

thereof and the dispersal thereof among the public, and undertake to refrain from granting to the purchasers

of the Offered Securities pursuant to this Prospectus the right to sell the securities which they have

purchased over and above that set forth in the Prospectus.

2.5.2 The Company and the Directors undertake, by signing this Prospectus, to inform the Israel Securities

Authority of any arrangement which is known to them with any third party whatsoever in the context of the

offer of the Offered Securities, the distribution thereof and the dispersal thereof among the public, which

runs counter to the undertaking set forth in Section 2.5.1.

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2.5.3 The Company and the Directors undertake, by signing this Prospectus, to refrain from engaging, in the

context of the offer of the Offered Securities, in the distribution thereof and the dispersal thereof among the

public, with any third party whatsoever which, to the best of their knowledge, has made arrangements in

contravention of that set forth in Section 2.5.1.

2.5.4 The Company and the Directors shall not accept Orders for securities from this issue from a distributor who

has not undertaken in writing to act in accordance with the provisions of this Section.

2.5.5 The Company provided to the Securities Authority an undertaking signed by the State – it is the controlling

shareholder of the Company – whereby the controlling shareholder is to act also in accordance with that

which has been set forth in Sections 2.5.1 through 2.5.3.

2.6 Refraining from dilution of capital

During the period which begins on the date of publication of the Prospectus and ends on the date of allocation of the

securities pursuant to this Prospectus, the Company shall not carry out any operation, with the exception of the issue

pursuant to this Prospectus, which entails a dilution of capital, as this term is defined in the Securities Regulations

(Details, Structure and Form of the Prospectus) - 1969.

2.7 Taxation of the Offered Securities pursuant to this Prospectus

As is customary when making decisions on the investment of monies, it is necessary to take into account the tax

implications related to investment in the Offered Securities. The provisions which are included in this Prospectus with

respect to the taxation of the Offered Securities do not purport to constitute an authorized interpretation of the legal

provisions which are mentioned in the Prospectus, or an exhaustive description of the tax provisions which concern

the Offered Securities, nor do they represent a substitute for professional advice in that context, in accordance with

the special data and circumstances which are unique to each investor. It is recommended for each purchaser of the

Offered Securities to seek professional advice in accordance with the data which are unique to him.

It is hereby clarified that that set forth below is based on the tax laws as they stand on the date of the Prospectus, and

that any change in the tax laws may give rise to different results.

On January 1, 2006, the Income Tax Ordinance Amendment Law (No. 147) - 2005 (in this Section: “Amendment No.

147” or the “Amendment”) entered into force. Pursuant to the Amendment, significant changes took place in the

provisions of the Income Tax Ordinance (New Version) - 1961 (hereinafter: the “Ordinance”), which have to do with

the taxation of securities traded on the Stock Exchange. In addition, on July 23, 2009, the Economic Efficiency Law

(Amendments of Legislation for Implementation of the Economic Program for the Years 2009 and 2010) - 2009

(hereinafter: the “Efficiency Law”), which gave rise to additional changes with respect to the taxation of securities,

was enacted by the Knesset. As at the date of the Prospectus, not all of the regulations which are expected to be

published pursuant to the Amendment have yet been published. In addition, as at the date of the Prospectus, there is

no generally accepted practice with respect to some of the provisions of the Amendment, and there is no case law

which interprets all of the new tax provisions in the Amendment.

On December 6, 2011, the Change in the Tax Burden Law (Amendments of Legislation) - 2011, was published in the

Official Gazette and generated additional changes to the Ordinance (hereinafter: “Amendment No. 187 to the

Ordinance”), including the following changes, which entered into force on January 1, 2012: an increase in the marginal

tax rate which applies to individuals; an increase in the corporate tax rate to 25%; an increase in the tax on interest,

dividends and real capital gains for individuals from 20% to 25%, and to an individual who is a material shareholder

with respect to a dividend and real capital gain from 25% to 30%. It was further determined that it would not be

possible to request a retroactive spreading of capital gains resulting from the sale of securities traded on the Stock

Exchange.

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The manner of taxation of the Bonds (Series 23), which are non-index-linked bonds secured by State Guarantee and

valid for a year from the day of their issue, is different from the manner of taxation of the Bonds (Series 24) and

(Series 25), which are index-linked bonds (secured by a State Guarantee) that are valid for more than 13 months from

their day of issue, as set forth below.

According to existing law as at the date of the Prospectus, the tax arrangements which are briefly described below

apply to the Offered Securities pursuant to this Prospectus:

2.7.1 Tax rate on capital gains from the sale of marketable securities

a. Pursuant to the provisions of Section 91 of the Ordinance, real capital gains1 from the sale of securities

by an individual domiciled in Israel are taxable at the marginal tax rate which applies to individuals,

pursuant to Section 121 of the Ordinance, but at a rate which shall not exceed 25%, and the capital gains

shall be deemed to constitute the highest level on the scale of his taxable income. That set forth above

shall not apply to the sale of securities by an individual who is a “material shareholder” in a company –

that is, the holder, directly or indirectly, alone or jointly with another2, of at least 10% of one or more of

the “Means of Control”3 of the company – on the date of sale of the securities, or on any date in the

twelve (12) months which preceded the sale in accordance with that which has been set forth above, and

the tax rate with respect to real capital gains by such an individual shall be a rate which shall not exceed

30%. Notwithstanding that which has been set forth above, capital gains from the sale of a bond which is

not linked to the Consumer Price Index4 (or the value of which is not expressed in foreign currency, or the

value of which is not linked to foreign currency) shall be taxable at a rate which shall not exceed 15%, or

20% in the case of a material shareholder, and all of the capital gains shall be deemed to constitute real

capital gains. Accordingly, an individual who sells Series 23 Bonds shall be charged tax at the rate of a

bond that is not linked to the Consumer Price Index. For the purpose of calculating real capital gains from

the sale of a security including a bond, an individual, as a foreign resident who lawfully purchased the

Bond in foreign currency, is allowed to consider for the purpose of calculating the inflationary amount

the foreign currency exchange rate as the index. The reduced tax rate in accordance with that which has

been set forth above shall not apply to an individual whose income from the sale of the securities is in

the nature of income from a “Business”, pursuant to the provisions of Section 2 (1) of the Ordinance, and

such an individual shall be charged marginal tax in accordance with that which has been set forth in

Section 121 of the Ordinance.

A body of persons shall be liable for tax on real capital gains from the sale of securities at the corporate

tax rate, which is set forth in Section 126 of the Ordinance.

b. In addition to that which has been set forth above, it was determined in Section 101A (A)(9) of the

Ordinance that the Minister of Finance, with the approval of the Finance Committee of the Knesset, is

entitled to establish provisions and terms with respect to capital gains from the sale of a security,

whereby, upon the fulfillment of said provisions and terms, the deduction of expenses of real interest

and linkage differentials shall be permitted; the method for the calculation thereof; the limitation of the

real interest rate, the deduction of which shall be permitted when a special relationship exists between

the borrower and the lender; and ways of proof of the attribution of the loan and the expenses of real

interest and linkage differentials for the security, and in accordance with Section 101A (B) of the

Ordinance, pending the establishment of provisions in accordance with that which has been set forth

above, should the individual have claimed expenses of real interest and linkage differentials, the capital

gains which he obtained from the sale of the securities shall be taxed at the rate of 30%.

1 As this term is defined in Section 88 of the Ordinance.




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c. A mutual fund shall be taxed, with respect to real capital gains from the sale of the securities, at the rates

which apply to an individual for whom the income from the sale does not constitute “Income from a

Business” or from a “Profession”, unless expressly otherwise determined. An exempt mutual fund, a

provident fund and tax-exempt entities, pursuant to the provisions of Section 9 (2) of the Ordinance, are

exempt from tax on capital gains from the sale of the securities in accordance with that which has been

set forth above.

d. As a general rule, a foreign resident5 (an individual or a body of persons) is exempt from tax on capital

gains from the sale of securities which are traded on the Stock Exchange in Israel, if the capital gains are

not to a location that is his permanent enterprise in Israel, and provided that the securities were

purchased after having been registered for trading on the Stock Exchange. That set forth above shall not

apply with respect to a company which is a foreign resident if residents of Israel are the controlling

parties thereof, or are the beneficiaries of or are entitled to 25% or more of the foreign resident’s income

or profits, directly or indirectly, pursuant to the provisions of Section 68A of the Ordinance. This

exemption does not apply to the sale of a bond or State of Israel bond or the guarantee thereof, which is

registered for trade on the Stock Exchange in Israel and whose redemption date does not exceed 13 full

months from the day of issue (in that section – a short-term bond) or a future transaction whose

underlying asset is directly or indirectly a short-term State bond. Should the exemption in accordance

with that which has been set forth above not apply, the provisions of the tax convention (if any) between

Israel and the foreign resident’s country of residence shall apply, subject to the provision in advance of

an appropriate certificate from the tax authorities. In addition, tax shall not be withheld at source from a

foreign resident by a banking corporation or a Member of the Stock Exchange, subject to the fulfillment

of certain conditions; therefore, the exemption for a foreign resident shall not apply to the Series 23

Bond.

2.7.2 Withholding tax on capital gains from the sale of marketable securities

a. Pursuant to the Income Tax Regulations (Withholding from Consideration, Payment or Capital Gains from

the Sale of a Security, the Sale of a Mutual Fund Unit, or a Future Transaction) - 2002 (hereinafter: the

“Withholding Regulations”), a Taxable Entity (as this term is defined in the aforesaid Regulations), which

is paying a consideration in the sale of a marketable security to a seller who is an individual, shall

withhold tax at source at the rate of 25% of the real capital gains and, for a security which is not linked to

the Index6 (such the Series 23 Bond), at the rate of 15% of the capital gains. That set forth above is

subject to a certificate of exemption from (or a reduced rate of) withholding tax at source and subject to

the offset of losses which the entity withholding the tax at source is entitled to carry out. In addition, a

Taxable Entity which is paying a consideration in the sale of a security to a seller which is a body of

persons must withhold, from the real capital gains, tax at the corporate tax rate pursuant to Section

126 (a) of the Ordinance.7 The withholding tax above is subject to a certificate of exemption from (or a

reduced rate of) withholding tax at source, which was issued by the Assessment Clerk, and subject to the

offset of losses which the entity withholding the tax at source is entitled to carry out.

b. Payment to a foreign resident because of the sale of a negotiable security shall be exempt from

withholding tax at source in accordance with that which has been set forth above, on the fulfillment of

certain conditions which are set forth in the Withholding Regulations.

c. Should the Offered Securities pursuant to this Prospectus be deleted from trading on the Stock Exchange,

the percentage of tax which shall be withheld at source upon the sale thereof (following the deletion)



7 Pursuant to the directive which was issued by the Tax Authority on January 27, 2011.

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shall be 30% of the consideration, as long as no certificate issued by the Assessment Clerk and attesting

to a different rate of withholding tax at source (including an exemption from withholding tax at source)

has been produced.

d. Mutual funds, provident funds and additional entities which are listed in the Addendum to the Income

Tax Regulations (Withholding from Interest, Dividends and Certain Profits) - 2005 (hereinafter: the

“Withholding from Interest Regulations”), are exempt from withholding tax at source by law.

2.7.3 Tax rate which shall apply to income from interest from the sale of bonds

a. Pursuant to Section 125C (b) of the Ordinance, an individual shall be taxable at a rate which shall not

exceed 25% with respect to interest or discounting fees which originate in bonds fully linked to the Index,

and this income shall be deemed to constitute the highest level on the scale of his taxable income. The

Consumer Price Index which is published by the Israel Central Bureau of Statistics shall be deemed to

constitute the Index for the purposes of Section 125C of the Ordinance.

b. In cases where the bonds are fully linked to the Consumer Price Index, and pursuant to the terms which

are set forth in Section 9 (13) of the Ordinance, an individual shall be exempt from tax on the linkage

differentials which have accrued with respect to the principal of the bonds. Linkage differentials which

have accrued with respect to the interests constitute interest for tax purposes.

c. Pursuant to Section 125C (c) of the Ordinance, an individual shall be taxable at the rate of 15% with

respect to interest (including Partial Linkage Differentials, as this term is defined in Section 3 (e6) of the

Ordinance) or discounting fees, which originate in a bond which is partly linked to the Index (including

currency exchange rate), or which is not linked to the rate of increase of the Index, in whole or in part, or

which is not linked to the Index until its redemption. Accordingly an individual shall be charged tax for

interest from an unlinked bond (such as the Series 23 Bond) at a rate of 15%, subject to the other

qualifications below.

d. The tax rates in accordance with that which has been set forth above shall not apply in cases where, inter

alia, one of the following conditions has been met: (1) the interest constitutes income from “Business”,

pursuant to Section 2 (1) of the Ordinance, or is recorded in the individual’s account ledgers or is

required to be so recorded; (2) the individual has claimed the deduction of expenses of interest and

linkage differentials for the bonds; (3) the individual is a material shareholder, as this term is defined in

Section 88 of the Ordinance, in accordance with that which has been set forth above, in the company

which pays the interest; (4) the individual is an employee of the body of persons which paid the interest,

or provides it with services or sells products to it or is engaged in another special relationship with it,

unless it has been proved, to the satisfaction of the Assessment Officer, that the interest rate was set in

good faith and was not affected by the existence of a relationship in accordance with that which has

been set forth above between the individual and the body of persons; (5) another condition, which was

established by the Minister of Finance with the approval of the Finance Committee of the Knesset, has

been met. In such cases, the individual shall be taxed on the interest or discounting fees at the marginal

tax rate which applies to the individual pursuant to Section 121 of the Ordinance.

e. The tax rate which applies to the income consisting of interest (including linkage differentials) or the

discounting fees of a body of persons domiciled in Israel, which is not a body of persons to which the

provisions of Section 9 (2) of the Ordinance apply in determining the income thereof, except in the

context of Section 3 (h) of the Ordinance with respect to accrued interest which originates in bonds

traded on the Stock Exchange, is the corporate tax rate pursuant to Section 126 (a) of the Ordinance.

Within the framework of Amendment No. 187 to the Ordinance, the outline for the reduction of

corporate tax rates, which had been planned, was halted, and it was determined that starting in 2012,

the corporate tax rate would be 25%.

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f. Pursuant to Section 9 (15d) of the Ordinance, interest, discounting fees or linkage differentials which are

paid to a foreign resident on a bond which is traded on the Stock Exchange in Israel issued by a body of

individuals domiciled in Israel is tax-exempt, provided that the income is not from the foreign resident’s

permanent enterprise in Israel. A foreign resident is a person who is a foreign resident of the date of

receipt of the interest, discounting fees or linkage differentials. The exemption shall not apply in the

following cases:

(1) The foreign resident is a material shareholder in the issuing body of persons, or

(2) The foreign resident is a relative, as this term is defined in paragraph (3) of the definition of

“Relative” in Section 88 of the Ordinance, of the issuing body of persons, or

(3) The foreign resident is an employee of the issuing body of persons, provides services or sells

products to it, or is engaged in a special relationship with it (unless it has been proved that the rate

of the interest or the discounting fees was set in good faith and was not affected by the existence of

a special relationship).

In cases where the exemption in accordance with that which has been set forth above does not apply,

the tax rate which shall apply to income from interest of foreign residents (an individual or a body of

persons), which originates in the securities, shall be charged pursuant to the provisions of the

Ordinance or pursuant to the provisions of conventions for prevention of dual taxation which were

concluded between the State of Israel and the foreign resident’s country of residence shall apply,

subject to the receipt of an appropriate certificate from the tax authorities.

The Income Tax Authority Regulations (Exemption from Tax for Interest Paid on a State Bond) - 2004

(hereinafter: the “Bond Exemption Regulations”) state that interest, discount fees or linkage

differentials for a State bond (as defined in the Bond Exemption Regulations) that are paid to a foreign

resident to a location that is not a permanent enterprise of the foreign resident in Israel and that does

not constitute an income for him pursuant to Section 2(1) of the Ordinance shall be exempt from tax.

“State bond” is defined in the Bond Exemption Regulations as a bond or a State bond that has been

issued by or with the guarantee of the State, registered for trading on the Stock Exchange in Israel,

whose redemption time does not exceed 13 full months from their day of issue. The provision of the

exemption does not apply prima facie to a bond or State bond that has been issued by or with the

guarantee of the State, which is registered for trading on the Stock Exchange in Israel, and whose

redemption time does not exceed 13 full months from its day of issue.

In light of the prima facie contradiction that has occurred between the provisions of the exemption for

interest for a foreign resident pursuant to Section 9 (15D) of the Ordinance and the Bond Exemption

Regulations, there is a question as to the applicability of the tax exemption, in accordance with that

which has been set forth above, to Bonds (Series 23) held by a foreign resident. In the answer to the

query of the Company, the Tax Authority clarified on June 27, 2012, that the amendment dated June

16, 2011, to the Bond Exemption Regulations did not contradict or change the terms of the exemption

pursuant to Section 9 (15D) of the Ordinance. Therefore it indicates that the exemption for a foreign

resident as set forth also applies to the Bonds (Series 23).

That which has been set forth above shall not apply to a foreign company in which residents of Israel

are controlling shareholders or are beneficiaries or are entitled to 25% or more of the incomes or

profits of a foreign resident, directly or indirectly, in accordance with the provisions of Section 68A of

the Ordinance.

g. In the redemption of a bond which is linked to the Index, the linkage differentials shall be deemed to

constitute part of the consideration, and the provisions of the Ordinance which concern the calculation

of capital gains, in accordance with that which has been set forth above, shall apply thereto. That set

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forth above shall not apply if the income from the linkage differentials constitutes income from a

“Business” or from a “Profession”.

h. An exempt mutual fund, and provident funds and tax-exempt entities pursuant to Section 9 (2) of the

Ordinance, to which the special terms of the exemption with respect to interest pursuant to this Section

apply, shall be exempt from tax with respect to income from interest or discounting fees in accordance

with that which has been set forth above, subject to the provisions of Section 3 (h) of the Ordinance with

respect to interest or discounting fees which accrued during the period of holding by another. The

income of a taxable mutual fund from interest or discounting fees shall be taxed at the rate which applies

to the income of an individual, when the income in question does not constitute income from “Business”,

unless expressly stated otherwise.

i. Pursuant to the Interest Withholding Regulations, the tax rate which is to be withheld at source on

interest (as this term is defined in the aforesaid Regulations8), which is paid on the securities issued

pursuant to this Prospectus, is as follows:

(1) With respect to securities linked to the Index – 25% in the case of an individual who is not a material

shareholder in the body of persons which pays the interest; with respect to interest for bonds which

are not linked to the Index or to foreign currency – 15% in the case of an individual who is not a

material shareholder in the body of persons that pays the interest (such as a Series 23 Bond). In the

case of an individual who is a material shareholder, or an individual who works for the body of

persons or provides it with services or sells products to it, withholding tax at source at the maximum

rate set forth in Section 121 of the Ordinance, in accordance with that which has been set forth

above, shall apply.

(2) With respect to a body of persons (domiciled in Israel), tax shall be withheld at the corporate tax rate

set forth in Section 126 (a) of the Ordinance in accordance with that which has been set forth above.

(3) The duty of withholding tax at source as set forth above, with respect to individuals or a body of

persons, shall not apply to foreign residents if the Exemption Regulations or the provisions of the

Income Tax Order (General Exemption from Tax for a Foreign Currency Bond that the State Receives)

- 1991, or the provisions of Section 9 (15d) of the Ordinance apply to the interest. Pursuant to the

clarification issued in January 2009 by the Capital Market Department of the Tax Authority, with

respect to withholding tax at source from foreign residents, starting on January 1, 2009, it is required

to report on foreign residents, as this term is defined in Section 9 (15d) of the Ordinance, whose

accounts are defined and classified as foreign residents pursuant to the Withholding Regulations,

who hold bonds that are traded on the Stock Exchange in Tel Aviv, as tax-exempt holders.

Accordingly, no tax should be withheld at source from the amount of the interest which is to be paid

to any foreign resident. Notwithstanding that which has been set forth above, the rate of

withholding tax at source in the case of foreign residents (an individual and a body of persons) is

likely to be reduced, in accordance with the approval of the Assessment Officer, subject to

conventions for prevention of dual taxation which were concluded between the State of Israel and

the foreign resident’s country of residence.

(4) Pursuant to the provisions of Section 2 (4) of the Ordinance and additional relevant provisions of

applicable law, discounting with respect to a bond is deemed to be equivalent to interest which is

taxable and liable for withholding at source in accordance with that which has been set forth above.

The tax with respect to the discounting fees shall be withheld at source on the dates of redemption

of the principal of the bond.

8 “Interest” – interest, linkage differentials which are not exempt under any law, including partial linkage differentials in accordance with

Section 9(13) of the Ordinance and discounting fees.

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(5) The payment of interest to provident funds, mutual funds and additional entities which are listed in

the Addendum to the Withholding from Interest Regulations, is exempt from withholding tax at

source.

(6) Regulation 4 of the Income Tax Regulations (Calculation of Capital Gains in the Sale of a Security

Traded on the Stock Exchange, a State Loan or a Mutual Fund Unit) - 2002, states that in the

redemption of a bond which is traded on the Stock Exchange, in which discounting fees are also paid,

the consideration from the redemption shall be deemed to include the consideration plus the

discounting fees, provided that all of the following have been met: (1) the capital gains from the sale

of the bond are not tax-exempt; (2) on the date of the redemption, a capital loss was created; and

(3) the redemption is not by the controlling party or by the person or entity which held the bond

from the date on which it was allocated or issued – all up to the amount of the capital loss. The

discounting fees which are deemed to constitute consideration pursuant to these provisions shall

not be considered as income pursuant to Section 2 (4) of the Ordinance. According to the guideline

issued by the Tax Authority on December 27, 2010, starting on January 1, 2011, the tax to be

withheld at source from interest which is paid with respect to a Security traded on the Stock

Exchange shall be withheld and transferred to the Tax Authority by the Member of the Stock

Exchange, rather than by the issuing companies. In cases where interest is paid to a material

shareholder or to an individual who is an employee of the body of persons which pays the interest or

who provides services or sells products to the body of persons which pays the interest, the Company

shall be responsible for supplementing the tax withheld at source, up to the maximum tax rate in

accordance with that which has been set forth in the Income Tax Regulations (Withholding from

Interest, Dividends and Certain Profits) - 2005.

2.7.4 Manner of calculating the discounting for the purpose of withholding tax at source with respect to bonds

The Bonds shall be issued at least according to the nominal value thereof, and accordingly, with no

discounting.

2.7.5 Issuance of additional Bonds by way of extension of the series

a. Subject to receipt of approval from the State of Israel for expanding any of the series of the Offered

Bonds pursuant to this Prospectus (and subject to the Additional Bonds that are to be issued by the

Company being backed by a guarantee of the State of Israel, to the effect that the total amount of the

guarantee for the backed liabilities (as defined in Section 3.2) will increase to reflect fully the increase in

the amount of the nominal value of the Bonds) should the Company, in the future, issue additional Bonds

of any of the series which are issued pursuant to this Prospectus by way of extension of the Series, the

Company shall contact the Tax Authority prior to the extension of the Series in order to obtain its

approval, in the context of withholding tax at source on the discounting fees with respect to the Bonds of

that Series, for the determination of a uniform discounting rate for the Bonds of that Series according to

a formula which assigns weights to the various discounting rates in the relevant series, if any

(hereinafter: the “Weighted Discounting Rate”). Should approval in accordance with that which has been

set forth above be obtained, the Company, before expanding the relevant series, shall calculate the

Weighted Discounting Rate with respect to all of the Bonds of that series, pursuant to the aforesaid

approval, and shall give notice, in an Immediate Report on the outcome of the issue, of the Weighted

Discounting Rate for the entire series which was extended as set forth above, and shall withhold tax on

the dates of redemption of the relevant series of the Bonds according to the Weighted Discounting Rate

in accordance with that which has been set forth above and pursuant to the provisions of applicable law.

In such cases, all of the remaining provisions of applicable law with respect to the taxation of discounting

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fees shall apply. Should the Bonds be issued by way of extension of the series in a package, together with

additional securities, the Company shall give notice of the Weighted Discounting Rate no later than the

fourth trading day after the registration thereof for trading on the Stock Exchange. Should approval in

accordance with that which has been set forth above not be obtained from the Tax Authority, the

Company shall withhold tax at source from the discounting fees with respect to all of the Bonds of the

series which was extended as set forth above at the highest discounting rate which arose with respect to

that series. In such a case, the Company shall file an Immediate Report prior to the extension of the

series, in which it shall give notice of the discounting rate which was set with respect to the entire series

in accordance with that which has been set forth above, and all of the remaining provisions of applicable

law with respect to the taxation of discounting fees shall apply. Tax shall be withheld tax at source at the

time of redemption of the series which was extended, in accordance with the rate which shall be

reported in accordance with that which has been set forth above.

b. In any case of extension of the Series of the Bonds, for any reason whatsoever, including as a result of

exercise of options for Bonds in accordance with that which has been set forth above, should the

discounting rate which shall be determined within the framework of the issue of Bonds be higher than

the discounting rate of the series prior to the extension of the series (including the absence of

discounting), there may be cases in which tax will be withheld at source with respect to discounting fees

at a rate which is higher than the discounting fees which were determined for the holders of Bonds from

the series prior to the expansion of the series (hereinafter: the “Surplus Discounting Fees”), whether or

not approval has been obtained from the Tax Authority for the determination of a uniform discounting

rate for the series which was extended. An assessee who held the Bonds prior to the extension of the

series and up to the redemption of the Bonds held by him shall be entitled to file a tax report to the Tax

Authority and to receive a tax refund in the amount of the tax which was withheld from the Surplus

Discounting Fees, insofar as he is entitled to a refund in accordance with that which has been set forth

above under any law.

In light of the material changes which have taken place in the taxation of the Capital Market pursuant to the Income

Tax reform, appropriate practice with respect to the application of its provisions has not yet been finalized, and

there may even be more than one interpretation of the manner of application thereof. Furthermore, there may be

legislative changes in the provisions of the reform. By the very nature of things, it is not possible to predict the

content and influence of the changes in question, including with respect to the tax arrangements which the

Company received.

In accordance with that which has been set forth above, as is customary with respect to decisions on investments,

investors should take into account the tax implications related to investment in the Offered Securities. That set

forth in this Prospectus does not purport to constitute an authorized and/or complete interpretation of the above-

mentioned provisions of applicable law or an exhaustive description of the tax provisions with respect to the

Offered Securities, and is not intended as a substitute for professional consultancy in this regard, which should be

obtained in accordance with the individual data of each investor. It is recommended for anyone who wishes to

purchase the Offered Securities pursuant to this Prospectus to seek professional consultancy in accordance with the

data which are unique to him.

2.8 Classified Investors

2.8.1 The Company shall be entitled to engage in a preliminary engagement with classified investors in the context

of each of the series of the Offered Bonds, pursuant to which the classified investors shall submit orders at

quantities and prices which shall be published in the Supplementary Notice which shall be published by the

Company. The Company shall publish an Immediate Report on its decision to engage or not engage in a

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preliminary engagement with classified investors. Insofar as the Company decides to engage in a preliminary

engagement with classified investors as set forth, the provisions of Section 2.8.1 below shall apply:

During the period prior to the publication of the Supplementary Notice, the Company shall approach

Classified Investors with a view to obtaining undertakings from them for the submission of orders for the

purchase of the Offered Units pursuant to this Prospectus. All of the undertakings by the Classified Investors

shall be submitted to the Company on order forms through the Issue Coordinator and shall state the desired

number of the Offered Units and the interest rate. “Classified Investor”: as this term is defined in Section 1 of

the Manner of Offer Regulations.

Following the receipt of the preliminary undertakings for the purchase of the Offered Units pursuant to this

Prospectus from the Classified Investors, the Company shall publish a Supplementary Notice. For details, see

Section 2.2.5.

In this Section:

“Oversubscription” – the ratio between the quantity of securities for which orders were filed at the interest

rate to be established in the Tender and the Quantity Remaining for Distribution, provided that it is greater

than one (1).

The “Quantity Remaining for Distribution” – the quantity of securities which was offered in the Prospectus in

the Tender, less the quantity of securities for which orders were filed at an interest rate lower than the

interest rate to be established in the Tender.

2.8.2 The total of the orders by the Classified Investors shall not exceed the percentage which is set forth in the

Manner of Offer Regulations.

2.8.3 Pursuant to the Manner of Offer Regulations, in case of oversubscription, the allocation to a Classified

Investor, pursuant to the preliminary undertaking given by him, shall be carried out as follows:

a. Should the Oversubscription be up to five (5) times the quantity of units offered, each Classified Investor

shall be allocated a quantity at the rate of one hundred percent (100%) of the quantity which he

undertook to purchase.

b. Should the Oversubscription be more than five (5) times the quantity of units offered, each Classified

Investor shall be allocated a quantity at the rate of fifty percent (50%) of the quantity which he

undertook to purchase.

c. Should the Quantity of Securities Remaining for Distribution not be sufficient for an allocation in

accordance with that which has been set forth above, the quantity which shall be allocated to the

Classified Investors shall be based on a ratio equal to the applications by the Classified Investors at the

interest rate established in the Tender. The orders by the Classified Investors shall be deemed to

constitute orders which were submitted by the public for the purpose of determining the interest rate.

The allocation to the Classified Investors shall be at the interest rate established in the Tender.

Should there be no Oversubscription, the orders by the Classified Investors within the framework of the

Tender shall be deemed to constitute orders which were submitted by the public for the purpose of

distribution of the securities to the Ordering Parties.

2.8.4 The receipt of preliminary undertakings from the Classified Investors and the allocation to the Classified

Investors prior to the publication of the Supplementary Notice shall be carried out according to the principles

set forth in the Manner of Offer Regulations.

2.8.5 The Classified Investors shall be able to order and to purchase units in a quantity which exceeds that set forth

in their preliminary undertaking; however, surplus units which shall be ordered and purchased shall not be

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considered as orders by Classified Investors for the purposes of the Prospectus, but rather, as applications

which were submitted by the public for all intents and purposes.

2.8.6 The consideration which shall be paid by the Classified Investors shall be transferred to the Issue Coordinator

through the Members of the Stock Exchange one (1) trading day after the Date of the Tender, by 12:30 p.m.,

and shall be deposited by him in the Special Account in accordance with that which has been set forth in

Section 2.2.4.

2.8.7 The Classified Investors who have engaged with the Company in a preliminary engagement in accordance

with that which has been set forth above may be paid a preliminary undertaking commission, at the rate

which shall be published in the Supplementary Notice, with respect to the units which shall be actually

purchased by them in accordance with the orders which shall be submitted by virtue of their preliminary

undertaking in accordance with that which has been set forth in this Section. The rate of the commission to

be paid shall be reasonable, acceptable and identical for all of the Classified Investors. The Supplementary

Notice shall list the Classified Investors, the quantity of the Offered Units which each of them undertook to

order within the framework of the Tender, and the interest rate which was specified in his order.

2.8.8 The Classified Investors shall be entitled to sell the securities included in the units which shall be allocated to

them, starting from the date of their registration for trading on the Stock Exchange, and they shall not be

subject to blocking provisions.

2.8.9 Pursuant to the Manner of Offer Regulations, Classified Investors who have undertaken, by means of a

preliminary undertaking, to submit an order for the purchase of the Offered Units pursuant to this

Prospectus, are entitled, on the Date of the Tender, to reduce the interest rate relative to the interest rate in

accordance with that which has been set forth in their preliminary undertaking.

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Chapter 3 – Terms of the Bonds

3.1 General

Bonds (Series 23), (Series 24) and (Series 25) of the Company (hereinafter: the “Offered Bonds”) are hereby offered,

pursuant to resolutions by the Company’s Board of Directors, dated June 24, 2012 and July 2, 2012, and pursuant to

the Deeds of Trust which were signed between the Company, of the first part, and Reznik Paz Nevo Trusts Ltd.

(hereinafter: the “Trustee”), of the second part, on June 25, 2012 (and Amendment No. 1 to the deeds of trust of July

2, 2012), with respect to each of the series of the Offered Bonds (hereinafter: the “Deed of Trust”). The complete

wording of the Deeds of Trust with respect to (Series 23), (Series 24) and (Series 25) is attached as Appendices A-1, A-

2 and A-3 to the Prospectus.

The Trustee is a limited share company, which was incorporated in Israel pursuant to the Companies Law, and is

primarily engaged in the management of businesses and enterprises in trust and additional operations which are

generally carried out by a trust company.

In the Deed of Trust, the Trustee declared that there is no impediment, pursuant to the Securities Law or any other

law, which precludes its engagement with the Company pursuant to the Deed of Trust, and that it complies with the

requirements and the terms of qualification which are set forth in the Securities Law for serving as a trustee for the

issue of the Offered Bonds.

3.2 Definitions

In this Chapter 3, each of the following terms shall have the meaning which appears beside it:

“Approval by the State of Israel” a written approval document signed by the Comptroller General in

the Israel Ministry of Finance or by anyone who has been empowered

by him to sign any approval document.

“Notice of Non-Payment” as this term has been defined in Section 3.9.3 (b) below.

“Notice of Complete Forfeiture” as this term has been defined in Section 3.9.3 (d) below.

A Notice of Non-Payment and a Notice of Complete Forfeiture shall hereinafter be referred to jointly as: a “Notice of

Forfeiture”.

(the) “Backed Undertakings” the Company’s undertakings to pay the unsettled balance of the

amount of the principal of each of the series of the Offered Bonds, in

an amount which shall not exceed NIS 1.5 billion with respect to the

Bonds (Series 23); NIS 1 billion with respect to the Bonds (Series 24);

and NIS 0.5 billion with respect to the Bonds (Series 25), and the

linkage, insofar as it applies pursuant to the terms of the relevant

series of Bonds, and the interest, including arrears interest, at the

rate set forth in each of the Deeds of Trust relevant to the series,

insofar as it applies, up to the actual date of payment of each of the

series of the Offered Bonds, pursuant to the terms thereof and the

terms of the Guarantee Documents of each one thereof, and

including an undertaking by the Company to the payment of

additional amounts to the Holders of the Bonds within the framework

of early redemption (in whole or in part), instead of the future Backed

Undertakings which were intended to be paid to the Holders after the

date of early redemption, insofar as the Comptroller General’s

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consent has been given thereto, and the Trustee’s expenses, fee and

indemnification in accordance with the Deed of Trust and

indemnification to the Trustee in accordance with the undertaking for

indemnification applying to the Bondholders only, and subject to the

limit to the indemnification amount from the Bondholders, as defined

in Section 3.7.6 (b) below for the relevant series, in accordance with

that which has been set forth in the Deed of Trust for each series, all

subject to the terms of each Guarantee Document.

“Business Day” as this term has been defined in Provision 402 of the Good Banking

Management Provisions – a Business Day in banking corporations1.

the “Guarantee Document” the guarantee documents which are attached as Appendix C to each

of the Deeds of Trust, the essential details of which are in accordance

with that which has been set forth in Section 3.9.

“Bondholder” or “Holder” a holder of a bond, by way of Holding, as this term has been defined

in the Securities Law; however, in any matter which requires the

identification of a person as a Bondholder, the definition shall include

only a Registered Holder and an Unregistered Holder.

“Unregistered Holder” a person in whose name the Bonds (with respect to which said person

is hereby defined as an Unregistered Holder) are registered in an

account with a Member of the Stock Exchange, whereby the same

Bonds are registered in the name of a Recording Company in the

Bondholders’ Ledger of the Company.

“Registered Holder” a person whose name is registered, at the relevant time, in the

Bondholders’ Register, and, in cases where a number of Holders are

jointly registered in the Register, the joint Holder who is registered

first in the Register, with the exception of a Recording Company.

the “Principal of the Bonds” or

the “Principal”

the total nominal value of the Bonds and/or the Additional Bonds, as

this term is defined in Section 3.7.10 (a).

the “Recording Company” The recording company of Bank Leumi Le-Israel Recording Co. Ltd.

the “Stock Exchange” the Tel Aviv Stock Exchange Ltd.

“Trading Day” a day on which trading takes place in the Stock Exchange.

the “Bonds (Series 23)” the Bonds (Series 23), registered bonds, which shall be issued by the

Company pursuant to the Prospectus.





the “Offered Bonds” or the “Bonds” each of the Bonds (Series 23), the Bonds (Series 24) and the Bonds

1 Pursuant to Provision 402 of the Good Banking Management Provisions, a “Business Day” is any day except Saturday, statutory holidays,

the two days of Rosh Hashanah, the day before Yom Kippur and Yom Kippur, the first day of Sukkot and Shemini Atzeret, the first and seventh days of Passover, Israeli Independence Day, Shavuot and Tisha B’Av, or any other day that is established by the Inspector pursuant to Section 7 of Provision 402 of the Good Banking Management Provisions.

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(Series 25).

the “Trustee” Reznik Paz Nevo Trusts Ltd. and/or any person or entity which shall

serve from time to time as Trustee for the Bondholders pursuant to

the Deed of Trust of each series.

“Special Resolution” a resolution which was adopted at a general meeting of the

Bondholders at which Holders who hold, themselves or by proxy, at

least 50% of the balance of the nominal value of the Bonds of each

series in circulation were present, or at an adjourned meeting at

which Holders who hold at least 10% of the balance of each series, in

accordance with that which has been set forth above, were present,

(provided that should no legal quorum be present at a meeting which

was adjourned in accordance with that which has been set forth

above, one-half hour after the time set for such a meeting, two (2)

Bondholders, who are present themselves or by proxy, shall

constitute a legal quorum, irrespective of the nominal value of the

Bonds which are held or represented by them), and which was

adopted (whether at the original meeting or at the adjourned

meeting) by a majority of at least 75% of the number of votes cast,

not including abstaining votes.

the “Consumer Price Index” or the “Index”

the price index known as the “Consumer Price Index”, including fruit

and vegetables, which is published by the Israel Central Bureau of

Statistics, and including that Index even if it is published by another

official institution or entity replacing the Israel Central Bureau of

Statistics, and including any other official index which shall replace it,

whether or not it is constructed on the basis of the same data as the

existing Index. Should it be replaced by another index which shall be

published by an institution or entity in accordance with that which

has been set forth above, and should the institution or entity in

question not have determined the ratio between the other index and

the replaced Index, the ratio in question shall be determined by the

Israel Central Bureau of Statistics. Should the ratio in question not

have been determined in accordance with that which has been set

forth above, the Trustee, in consultation with economic experts who

shall be selected by it, shall determine the ratio between the other

Index and the replaced Index.

the “Known Index” the most recent Consumer Price Index known.

the “Base Index” the Consumer Price Index for the month of May 2012, which was

published on the 15th day of June 2012.

the “Payment Index” the Consumer Price Index which is known on the date on which any

payment is made on account of the Principal or the Interest.

“Rating Company” Midroog or any other Rating Company, as this term has been defined

in the Securities Regulations (Details of the Prospectus and Draft

Prospectus – Structure and Form) - 1969.

“Arrears Interest” Interest at the rate known as the “Comptroller General’s Arrears

Interest Rate”, which is published from time to time on the website of

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the Israel Ministry of Finance – Division of the Comptroller General.

The relevant rate of arrears interest shall be determined according to

the arrears interest rate which was most recently published and was

known on the Starting Date of Payment of Arrears Interest.

“Starting Date of Payment of Arrears Interest” (a) should the Company, on any date of payment whatsoever, not pay

any amount whatsoever which shall be due from it in the context of

the Bonds, and should the Trustee submit a Notice of Forfeiture,

pursuant to the provisions of the Guarantee Document, to the State

of Israel, the Starting Date of Payment of Arrears Interest shall be

forty-six (46) Business Days after the date of delivery of the Notice of

Forfeiture in accordance with that which has been set forth above –

and only if the State of Israel does not pay the Trustee or the

Recording Company the amount which was not paid by the Company

(together with the interest accrued thereon and linkage, insofar as it

applies pursuant to the terms of the relevant series of Bonds) by the

end of the forty-fifth (45th) Business Day after the date of delivery of

the Notice of Forfeiture in accordance with that which has been set

forth above; or (b) should the Company not pay any amount

whatsoever which shall be due from it in the context of the Bonds

within sixty (60) days after the date slated for the payment thereof

(hereinafter: the “Grace Period”), and should the Trustee not have

given a Notice of Foreclosure to the State of Israel by the last deadline

for delivery of the Notice of Foreclosure, the Starting Date of Payment

of Arrears Interest shall be the first day after the expiry of the Grace

Period.

3.3 Terms of the Bonds (Series 23)

3.3.1 Interest on the Bonds (Series 23)

The unsettled balance of the Principal of the Bonds (Series 23) which is still in circulation shall bear fixed

annual interest at the rate which shall be determined in the tender, in accordance with that which has been

set forth in Chapter 2 of the Prospectus (hereinafter: the “Interest”). The Bonds (Series 23) are not linked

(Principal and Interest) to any linkage basis whatsoever. The Interest with respect to the Bonds shall be paid

in accordance with that which has been set forth in Section 3.3.2.

Income tax shall be withheld, as provided by law, from each payment of Interest with respect to the Bonds

(Series 23).

3.3.2 Date of repayment of the Principal of the Bonds and the Interest with respect to the Bonds (Series 23)

The Principal of the Bonds (Series 23) shall be repaid in a single installment on July 9, 2013.

The Interest with respect to the Bonds (Series 23) shall be paid on the date of repayment of the Principal of

the Bonds (Series 23) with respect to the period which begins on the day after the date of the tender and

ends on the date of payment in accordance with that which has been set forth above, and shall be based on

fixed annual Interest, which is calculated on the basis of 365 days per year.

3.3.3 Terms of linkage of the Principal and the Interest with respect to the Bonds (Series 23)

The Bonds (Series 23) are not linked (Principal and Interest) to any linkage basis whatsoever.

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3.3.4 Date for payment of the Principal and the Interest with respect to the Bonds (Series 23)

The Holders of the Bonds (Series 23) on the date of repayment of the Principal of the Bonds (Series 23), that

is, on July 9, 2013, shall be entitled to the payment of the Principal and Interest on account of the Bonds

(Series 23) against the delivery of the Bonds to the Company, to the Company’s registered offices or to any

other place with respect to which the Company shall give notice, at least five (5) Business Days before the

date of the payment (unless the Company shall have waived delivery in accordance with that which has been

set forth above).


3.4.1 Interest with Respect to the Bonds (Series 24)


annual Interest at the rate which shall be determined in the tender, in accordance with that which has been

set forth in Chapter 2 of the Prospectus (hereinafter: the “Interest”). The Bonds (Series 24) are linked

(Principal and Interest) to the Consumer Price Index, in accordance with that which has been set forth in

Section 3.4.3. The Interest with Respect to the Bonds (Series 24) shall be paid in accordance with that which

has been set forth in Section 3.4.2.

Income tax shall be withheld, as provided by law, from each payment of Interest with Respect to the Bonds

(Series 24).

3.4.2 Date of repayment of the Principal of the Bonds and the Interest with Respect to the Bonds (Series 24)


The Interest with Respect to the Bonds (Series 24) shall be paid in annual installments on July 9 of each of the

years 2013 through 2015 (inclusive), with respect to the twelve-month (12) period which begins on the first

day after the interest period immediately before it. The first payment of Interest with Respect to the Bonds

(Series 24) shall be paid on July 9, 2013, with respect to the period which begins on the first day after the

date of the tender and ends on the date of payment in accordance with that which has been set forth above,

and shall be based on fixed annual interest, which is calculated on the basis of 365 days per year.

3.4.3 Terms of linkage of the Principal and the Interest with Respect to the Bonds (Series 24)

The Principal of the Bonds (Series 24) and the Interest with respect thereto shall be linked to the increase in

the Consumer Price Index relative to the Base Index. Should it transpire that on the date of any payment

whatsoever on account of the Principal and/or Interest with Respect to the Bonds (Series 24), the Payment

Index is higher than the Base Index, the Company shall then make the payment in question of Principal

and/or Interest, it being increased proportionally to the rate of the increase in the Payment Index relative to

the Base Index. Should it transpire that the Payment Index has decreased relative to the Base Index, the Base

Index shall be the Payment Index. The method of the linkage shall not be changed throughout the period of

the Bonds (Series 24).

3.4.4 Date of Record for payment of the Principal and the Interest with Respect to the Bonds (Series 24)


is, on July 9, 2015, shall be entitled to the payment of the Principal on account of the Bonds (Series 24)

against the delivery of the Bonds to the Company, to the Company’s registered offices or to any other place

with respect to which the Company shall give notice, at least five (5) Business Days before the date of the

payment (unless the Company shall have waived delivery in accordance with that which has been set forth

above).

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The Date of Record for the purpose of determining the eligibility for the payment of the Interest (not

including with respect to the last payment of Interest) shall be twelve (12) days before the date of each

payment of Interest, that is, June 27 for each of the years 2013 through 2014. The Holders of the Bonds

(Series 24) on the date of repayment of the Principal of the Bonds (Series 24) (that is, on July 9, 2015), shall

be entitled to the last payment on account of the Interest.


3.5.1 Interest on the Bonds (Series 25)


annual Interest at the rate which shall be determined in the tender, in accordance with that which has been

set forth in Chapter 2 of the Prospectus (hereinafter: the “Interest”). The Bonds (Series 25) are linked

(Principal and Interest) to the Consumer Price Index, in accordance with that which has been set forth in

Section 3.5.3. The Interest with respect to the Bonds (Series 25) shall be paid in accordance with that which

has been set forth in Section 3.5.2.

Income tax shall be withheld, as provided by law, from each payment of Interest with respect to the Bonds

(Series 25).

3.5.2 Date of repayment of the Principal of the Bonds and the Interest with respect to the Bonds (Series 25)


The Interest with respect to the Bonds (Series 25) shall be paid in annual installments on July 9 of each of the

years 2013 through 2017 (inclusive), with respect to the twelve-month (12) period which begins on the first

day after the interest period immediately before it. The last payment of Interest shall be paid on July 9, 2017,

on the date of repayment of the Principal of the Bonds (Series 25). The first payment of Interest with Respect

to the Bonds (Series 25) shall be paid on July 9, 2013, with respect to the period which begins on the first day

after the date of the tender and ends on the date of payment in accordance with that which has been set

forth above, and shall be based on fixed annual Interest, which is calculated on the basis of 365 days per year.

3.5.3 Terms of linkage of the Principal and the Interest with Respect to the Bonds (Series 25)

The Principal of the Bonds (Series 25) and the Interest with Respect thereto shall be linked to the increase in

the Consumer Price Index relative to the Base Index. Should it transpire that on the date of any payment

whatsoever on account of the Principal and/or Interest with Respect to the Bonds (Series 25), the Payment

Index is higher than the Base Index, the Company shall then make the payment in question of Principal

and/or Interest, it being increased proportionally to the rate of the increase in the Payment Index relative to

the Base Index. Should it transpire that the Payment Index has decreased relative to the Base Index, the Base

Index shall be the Payment Index. The method of the linkage shall not be changed throughout the period of

the Bonds (Series 25).

3.5.4 Date of Record for payment of the Principal and the Interest with Respect to the Bonds (Series 25)


is, on July 9, 2017, shall be entitled to the payment of the Principal on account of the Bonds (Series 25)

against the delivery of the Bonds to the Company, to the Company’s registered offices or to any other place

with respect to which the Company shall give notice, at least five (5) Business Days before the date of the

payment (unless the Company shall have waived delivery in accordance with that which has been set forth

above).

The Date of Record for the purpose of determining the eligibility for the payment of the Interest (not

including with respect to the last payment of Interest) shall be twelve (12) days before the date of each

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payment of Interest, that is, June 27 for each of the years 2013 through 2016. The Holders of the Bonds

(Series 25) on the date of repayment of the Principal of the Bonds (Series 25) (that is, on July 9, 2017), shall

be entitled to the last payment on account of the Interest.

3.5.5 Arrears Interest

In any case in which the Company has not repaid in time any amount of the Principal or the Interest that is

due from it in accordance with the proposed Bonds, that amount shall bear Arrears Interest (as defined in

Section 3.2), from the Starting Date of Payment of Arrears Interest (as defined in Section 3.2), the Interest

being calculated in proportion to the number of days elapsing, in accordance with that which has been set

forth, on the basis of 365 days per year.

3.6 Additional terms with respect to the Bonds

Unless otherwise stated, that set forth in Sections 3.6.1 through 3.6.10 shall apply to each of the three (3) series of the

Bonds, which are offered pursuant to this Prospectus, separately.

3.6.1 Deletion from trading and early redemption

(a) Early redemption and deletion from trading at the initiative of the Stock Exchange

If and insofar as the Stock Exchange shall decide to delete the Bonds from trading, due to a decrease in

the value of the series of the Bonds below the amount set forth in the Stock Exchange guidelines with

respect to deletion from trading, the Company shall not enable early redemption of the Bonds, and they

shall be deleted from registration for trading on the Stock Exchange and shall be subject to the tax

implications as a result thereof (see Section 2.7.2 (c)).

(b) Early redemption and deletion from trading at the initiative of the Company

The Company shall be entitled, with the consent of the Comptroller General in advance and in writing, to

call in the Bonds for early redemption (in whole or in part), and in such a case, the provisions which are

set forth below shall apply, all subject to the guidelines by the Israel Securities Authority and to the

provisions of the Articles of Association of the Stock Exchange and the guidelines by virtue thereof, as

they shall be at the relevant time:

(1) The frequency of early redemptions shall not exceed one redemption per Quarter.

(2) Should early redemption be scheduled for a Quarter in which the date of a payment of Interest, or

the date of a payment for partial redemption, or the date of a payment for final redemption, has

also been scheduled, the early redemption shall be carried out on the date scheduled for the

payment, in accordance with that which has been set forth above.

In this regard, “Quarter” shall refer to each of the following periods: January – March, April – June,

July – September, October – December.

(3) The minimum amount of each early redemption shall not be less than NIS 10 million. Notwithstanding

that which has been set forth above, the Company shall be entitled to carry out early redemption at

a scope which is less than NIS 10 million, provided that the frequency of early redemptions shall not

exceed one redemption per year.

(4) Any amount which shall be repaid by way of early repayment by the Company shall be repaid with

respect to all of the Bondholders, on a pro rata basis, in accordance with the nominal value of the

Bonds held.

(5) Upon the adoption of a resolution by the Company’s Board of Directors with respect to the

implementation of early redemption in accordance with that which has been set forth above, the

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Company shall publish an Immediate Report on the implementation of early redemption for the

Bondholders, with a copy to the Trustee, whereby the Date of Record for the implementation

thereof shall be set forth in the Immediate Report and shall fall no less than seventeen (17) days and

no more than forty-five (45) days before the implementation of early redemption.

(6) The date of the early redemption shall not fall during the period between the Date of Record for the

payment of Interest with respect to the Bonds and the actual date of payment of the Interest. In the

Immediate Report, in accordance with that which has been set forth above, the Company shall

publish the amount of the Principal which shall be paid by way of early redemption and the Interest

accrued thereon with respect to the amount of the Principal, in accordance with that which has been

set forth above, until the date of the early redemption (including linkage differentials to the Index,

insofar as is relevant for the series) in accordance with that which has been set forth in Subsection

(7) below.

(7) Early redemption for part of a series of Bonds shall not be carried out if the last amount of

redemption is less than NIS 3.2 million. On the date of partial early redemption, if any, the Company

shall give notice by way of an Immediate Report of: (1) the percentage of partial redemption in

terms of the unsettled balance; (2) the percentage of partial redemption in terms of the original

series; (3) the Interest rate at partial redemption with respect to the redeemed part; (4) the Interest

rate which shall be paid at partial redemption, calculated with respect to the unsettled balance; (5)

the updating of the percentages of partial redemptions remaining, in terms of the original series; (6)

the date of record for eligibility for receipt of the early redemption of the Principal of the Bonds,

which shall be twelve (12) days before the date set for the early redemption.

(8) The amount which shall be paid to the Bondholders in case of early redemption shall be the highest

of the following: (1) the market value of the balance of the Bonds in circulation, which shall be

determined according to the higher of: (a) the price of the Bonds on the Stock Exchange at the end

of the Trading Day which preceded the date on which the Company’s Board of Directors adopted a

resolution with respect to the implementation of the early redemption; or (b) the average closing

price of the Bonds during the thirty (30) Trading Days which preceded the date of adoption of the

resolution by the Board of Directors with respect to the implementation of the early repayment;

(2) the obligation value of the Bonds in circulation, that is, Principal plus Interest and linkage

differentials (insofar as they apply), up to the actual date of early redemption; (3) the balance of the

cash flow of the Bonds (Principal plus Interest), capitalized according to the Return of Government

Bonds (as this term has been defined below). The capitalization of the Bonds (Series 23) shall be

calculated starting on the date of early redemption and up to the last date of repayment.

In this regard: “Return of Government Bonds” – the average return at redemption (gross) during a

period of seven (7) Business Days, ending two (2) Business Days before the date of record for the

notice, of three (3) series of Government bonds issued by the Government of Israel, the average

lifespan of which is closest to the average lifespan of the Bonds on the relevant date.

(c) Should the Comptroller General give his consent to the execution of early redemption (in whole or in

part) in accordance with that which has been set forth above, the provisions of Section 3.9.3 shall apply,

mutatis mutandis, with respect to the forfeiture of the Guarantee with regard to the payment of the

Backed Undertakings (or any part thereof), and all provided that the Company has not complied with the

duty of payment which is to be borne by it under early redemption, as set forth in Section 3.6.1 (B).

3.6.2 Postponement of dates

Should the date for repayment of the Principal (or any other payment, including Interest) fall on a day which

is not a Business Day, the date of the payment shall be postponed to the first Business Day thereafter, with

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no additional payment, and the date of record for the purpose of determining eligibility for payment shall not

change as a result thereof.

3.6.3 Purchase of Bonds by the Company and by a related corporation

(a) The Company reserves the right, subject to any provision of applicable law, to purchase, at any time, at

any price as it shall see fit, Bonds, which shall be in circulation from time to time (and from sellers which

it shall select at its discretion and with no obligation to approach all of the Holders), without derogating

from the duty of repayment which is incumbent upon it. Should the Bonds be purchased by the Company

in the course of trading on the Stock Exchange, the Company shall contact the Stock Exchange

clearinghouse with a request to take back the certificates which were purchased in accordance with that

which has been set forth above.

(b) The Bonds which shall be purchased by the Company shall automatically expire and shall be canceled and

deleted from trading on the Stock Exchange, and the Company shall not be entitled to reassure them. To

preclude all doubt, it is hereby clarified that, upon the purchase thereof by the State in accordance with

that which has been set forth in this Section, the State Guarantee shall expire with respect to the Bonds

which were purchased by the Company in accordance with that which has been set forth above.

(c) A subsidiary of the Company and/or another corporation under its control and/or controlling parties of

the Company and/or a corporation under the control of the controlling parties of the Company, directly

and/or indirectly (hereinafter: a “Related Holder”) shall be entitled to purchase (including by way of

issue) and/or to sell Bonds, at their discretion (subject to any applicable law). In the case of a purchase

and/or a sale in accordance with that which has been set forth above, the Company, subject and

pursuant to the provisions of applicable law, shall issue an Immediate Report in this matter. The Bonds

which shall be held in accordance with that which has been set forth above by a Related Holder shall be

considered as an asset of the Related Holder and shall not be deleted from trading on the Stock

Exchange, and, subject to any applicable law, they shall be transferable, as are the remaining Bonds. In

addition, Bonds which shall be held by a Related Holder shall not confer voting rights in a meeting of

Bondholders and shall not be taken into account for the purposes of a legal quorum, as long as they are

held by the Related Holder. Without derogating from that which has been set forth above, Bonds which

shall be held by a subsidiary of the Company and/or another corporation under its control shall not be

included within the Backed Undertakings and shall not entitle the Holders thereof to repayment by virtue

of the forfeiture of the State Guarantee pursuant to the Guarantee Document upon the fulfillment of the

circumstances and conditions which entitle the Bondholders to forfeit the State Guarantee, as long as

these bonds are held by a subsidiary of the Company and/or another corporation under its control.

(d) To preclude all doubt, that which has been set forth in this Section above, in and of itself, shall not

require the Company or a Related Holder or the Bondholders to purchase Bonds or to sell the Bonds

which they hold.

3.6.4 Payments of the Principal and Interest with Respect to the Bonds

(a) The payments of the Principal and the Interest shall be made in New Israeli Shekels.

(b) The payment on account of the Principal or the Interest (including linkage differentials to the Index,

should it apply) shall be paid to the Bondholders on the dates for the repayment of the Principal and/or

the Interest, as is relevant, on the dates which are set forth in Sections 3.3, 3.4 and 3.5, as is relevant

(hereinafter: the “Entitled Parties” or the “Bondholders”), and the last payment of the Principal shall be

made against the delivery of the Bond certificates to the Company, to the Company’s registered offices

or to any other place with respect to which the Company shall give notice, no later than five (5) Business

Days before the date for the repayment of the Principal, which is set forth in the Deed of Trust (unless

the Company shall have waived delivery in accordance with that which has been set forth above).

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(c) Payment to Registered Holders shall be made by check or by bank transfer to the Registered Holder’s

bank account, as set forth in Subsection (b) above. Payments to Unregistered Holders shall be made

through the Recording Company and/or the clearinghouse of the Stock Exchange. Should the Company

not be able to pay any amount whatsoever to the Entitled Parties which are to receive it, for a reason

which does not depend upon the Company, the provisions of Section 3.6.5 shall apply.

(d) A Registered Holder who wishes to inform the Company of the details of the bank account to be credited

with the payments pursuant to the Bonds, in accordance with that which has been set forth above, or to

change the payment instruction which he gave, shall be able to do so by means of a letter which shall be

sent by registered postal mail to the Chief Financial Officer of the Company; however, the Company shall

comply with the instruction only if it has reached its registered offices at least thirty (30) days before the

Date of Record for the repayment of any installment whatsoever pursuant to the Bonds.

(e) Should the notice be received late by the Company, the Company shall act in accordance therewith only

with respect to the payments which are due after the date of the payment that falls closest to the date of

receipt of the notice.

(f) Should the Registered Holder not have provided the Company, in a timely manner, with details in writing

with respect to his bank account to which payments pursuant to the Bonds are to be transferred, any

such payment shall be made by check, which shall be sent by registered postal mail to his last address

which is listed in the Bondholders’ Ledger. The sending of a check to a Registered Holder by registered

postal mail in accordance with that which has been set forth above shall be deemed, for all intents and

purposes, to constitute payment of the amount set forth therein, on the date of dispatch thereof by

postal mail in accordance with that which has been set forth above, provided that the check was paid out

in a proper manner upon its presentation for collection.

(g) To preclude all doubt, any payment which was demanded of the Company pursuant to the Deed of Trust,

and which was actually paid by the State of Israel, shall be deemed to have been paid by the Company,

and the Trustee and the Bondholders shall have no contentions and/or demands against the Company

and/or against the State of Israel in the context of payments which were actually made by the State of

Israel.

(h) Payment of the principle and the Interest shall be made subject to the terms of the linkage which are set

forth in Sections 3.3, 3.4, 3.5 above, as is relevant.

(i) Any compulsory payment, including tax, shall be withheld at source from any payment with respect to

the Bonds of the relevant series, insofar as the withholding thereof is compulsory under any law.

3.6.5 Refraining from payment for a reason which does not depend upon the Company

(a) Any amount which is due to the Bondholders which was not actually paid, for a reason which does not

depend upon the Company and/or the State in the case of forfeiture of the Guarantee, whereas the

Company and/or the State, as is relevant, was prepared to pay it and declared in writing to the Trustee

that a circumstance arose pursuant to which the Company and/or the State could not make a payment,

and, within the framework of its declaration, set forth a circumstance pursuant to which the Company

and/or the State could not make the payment, shall not bear Interest and/or linkage differentials, from

the date set for the payment thereof and up to the actual payment thereof, and the Bondholders shall

only be entitled to the amounts to which they were entitled on the date set for the payment of the

amount in question on account of the Principal or the Interest.

(b) The Company shall deposit with the Trustee, in a trust account in its name or to its order, for the

Bondholders, within fourteen (14) Business Days) of the date which was set for the payment thereof, the

payment which was not made in a timely manner, in accordance with that which has been set forth in

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Section 3.6.5 (a) above, and the deposit in accordance with that which has been set forth above shall be

deemed to constitute settlement of the payment in question. Should the amount in question be the last

payment, the holding in trust shall be deemed to constitute the redemption of the Bond by the

Company.

(c) The Trustee shall deposit in the trust account any amount, in accordance with that which has been set

forth above, in favor of the Bondholders and shall invest the monies which shall be transferred to it as set

forth in Section 3.17.7. Should the Trustee have acted in that way, it shall not owe the Entitled Parties,

with respect to the amounts in question, anything other than the consideration which shall be obtained

from the realization of the investments, less the expenses which are related to the investment in

question and to the management of the trust account, the commissions and compulsory payments which

apply to the trust account.

(d) Should the impediment to the actual making of the payment to the Holders be removed, the Trustee

shall transfer the monies which have accrued in favor of the Bondholders, in accordance with that which

has been set forth in Section 3.6.5 (c), against the receipt of proof and confirmation of their right to the

amounts in question and of the removal of the impediment to the actual making of the payment to the

Holders, to the Trustee’s complete satisfaction, and subject to the duty of withholding tax as source

under any law.

3.6.6 The Bondholders’ Ledger

(a) The Company shall keep and manage, in its registered offices, a Ledger of the Bondholders and shall

report therein the names and addresses of the Bondholders, the number of Bonds which are held by

them and the nominal value thereof. In addition, all of the transfers of ownership of the Bonds shall be

recorded in the Bondholders’ Ledger pursuant to the Deed of Trust. The Trustee and any of the

Bondholders shall be entitled, at any reasonable time, to examine the Ledger in accordance with that

which has been set forth above. The Company is entitled to close the Bondholders’ Ledger, from time to

time, for a period or periods which shall not jointly exceed thirty (30) days per year. The Company shall

not record transfers, including in cases of demise, on the dates and during the periods in accordance with

that which has been set forth above.

(b) The Company shall not be required to record in the Bondholders’ Ledger any notice with respect to an

explicit, implicit or assumed trust, or any pledge or encumbrance of any type whatsoever, or any right in

equity, claim or offset or any other right, in the context of the Bonds. The Company shall only recognize

ownership by the person in whose name the Bonds were recorded in the Bondholders’ Ledger. The legal

heirs of the Registered Holder, the executors of his estate or the executors of his will, and any person

who shall be entitled to the Bonds, as a result of the bankruptcy of any Registered Holder (and, if the

Holder is a corporation, as a result of the liquidation thereof), shall be entitled to be registered as

Holders, following the provision of proof which the Company’s managers shall deem sufficient in order to

prove their right to be registered as the Holders of the Bonds.

3.6.7 Change in rights

The rights which are associated with the Bonds may be changed as described in Section 3.7.4.

3.6.8 Splitting the Bond certificates

(a) Each Bond certificate which shall be issued pursuant to the Deed of Trust may be split into Bond

certificates, the total amount of the Principal of which shall be equal to the amount of the Principal which

is set forth in the certificate the splitting of which was requested, provided that certificates in accordance

with that which has been set forth above shall not be issued other than in the Minimum Quantity or in

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multiples of the Minimum Quantity, along with one additional certificate with respect to the balance, if

any. The Minimum Quantity shall refer to Bonds at a nominal value of NIS 100.

(b) The splitting shall be carried out by delivery of the Bond certificate in question to the Company, at its

registered offices, for the purposes of performing the splitting, along with an application in writing for

the execution of the splitting. All of the expenses involved in the splitting, including taxes and other

imposts, if any, shall be borne by the party that has requested the splitting. The Company shall comply

with the request to splitting and shall transfer the new Bond certificates, drawn up according to law, to

the party which has requested the splitting, within thirty (30) days after the delivery of the application for

splitting and the Bond certificate the splitting of which was requested, against payment of the expenses

which are involved in the splitting, in accordance with that which has been set forth above, by the party

which has requested the splitting.

3.6.9 Transfer of Bonds

(a) Subject to that which has been set forth in Section 3.6.9 (d) below, any transfer of Bonds by a Registered

Holder shall be made in accordance with a deed of transfer, the wording of which is generally accepted

by the Company, which is properly signed by the Registered Holder thereof or his legal representatives,

which shall be delivered to the Company at its registered offices, along with the certificates for the Bonds

transferred pursuant thereto, and any other proof which shall be required by the Company in order to

prove the transferor’s eligibility to transfer the Bonds. As long as no notice, in accordance with that

which has been set forth above, has been provided in the wording which is to be determined by the

Company, stating the address of the transferee and the place at which the payments pursuant to the

bonds are to be made, a transfer in accordance with that which has been set forth above shall not be

binding upon the Company.

(b) Subject to the provisions of any law, the Bonds are transferable by the Bondholders in the entire amount

of the nominal value thereof and even in part of that amount, provided that it shall be in New Israeli

Shekels, to any third party whatsoever, and any transferee shall also be entitled to transfer his rights by

virtue of the Bonds to another in the same manner.

(c) All of the expenses and commissions involved in the transfer shall be borne by the party that has

requested the transfer. Should any tax or other compulsory payment apply to the transfer of the Bonds,

any such tax or compulsory payment shall be borne by the parties which have requested the transfer,

and they shall be handed over to the Company together with the deed of transfer, the amount which is

required for the payment of any tax or compulsory payment in accordance with that which has been set

forth above, or proof of the payment thereof, which shall be to the satisfaction of the Company, shall be

handed over to the Company. The Company shall be entitled to retain the deed of transfer. Following the

fulfillment of all these conditions, the transfer shall be recorded in the Bondholders’ Ledgers and on the

transferred Bond certificates, which shall be handed over to the transferee.

(d) In cases involving the transfer of only part of the nominal amount of the Principal of a Bond, it shall first

be necessary to split the certificate for the Bond in question, pursuant to the provisions which are set

forth in the Deed of Trust, into a plurality of Bond certificates as required, in such a way that the total of

the amounts of nominal value therein shall be equal to the nominal value of the Bond certificate in

question.

3.6.10 Replacement of Bond certificates

Should a Bond certificate be worn out, lost or destroyed, the Company shall be entitled to issue a new Bond

certificate in its stead. The Company’s Board of Directors, or anyone who shall be empowered by it, shall be

entitled to establish conditions with respect to the manner of proof of loss or destruction of the certificate,

and with respect to the coverage and indemnification of the expense which was incurred by the Company for

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the purpose of clarification of the right of ownership of the certificate. In the case of wear, the worn-out

Bond certificate shall be returned to the Company before the new certificate is issued. Taxes, compulsory

payments and other imposts, if any, as well as other expenses which are involved in the issuance of the new

certificate, shall be borne by the party that has requested the certificate as set forth above.

3.7 Highlights of the Deeds of Trust

3.7.1 General

On June 25, 2012, the Company signed Deeds of Trust (and Amendment No. 1 thereof of July 2, 2012) with

Reznik Paz Nevo Trusts Ltd. with respect to the Bonds (Series 23), (Series 24) and (Series 25).

The details of the Trustee, as they were given to the Company, as at the date of the Prospectus, are as

follows:

Address: 14 Yad Harutzim Street, Tel Aviv. Telephone: 03-6389200; fax: 03-6393316; contact person: Yossi

Reznik, CPA (Israel); e-mail: [email protected].

The Trustee is a limited share company, which is registered in Israel and is active in trusts, and it complies

with the requirements for competence which are set forth in the Securities Law and the regulations enacted

pursuant thereto, to serve as a trustee for Bonds.

The Deeds of Trust for the Bonds (Series 23), (Series 24) and (Series 25) are attached as Appendix A-1,

Appendix A-2 and Appendix A-3 to this Prospectus.

3.7.2 The Deeds of Trust set forth, inter alia, the following provisions with respect to the Bonds:

General meetings of the Bondholders

(a) The Trustee or the Company shall be entitled to summon the Bondholders to a meeting of Bondholders.

Should the Company convene such a meeting, it shall send the Trustee a notice in writing with respect to

the place, date and time at which the meeting is to be held and the matters which are to be brought

before the meeting for discussion. In any case of convocation of a meeting of the bondholders by the

Trustee or the Company (in this section: the “Convening Entity”), the Convening Entity shall be required

to send, within one Business Day of the date of convocation of the meeting of the Bondholders, a notice

to the Comptroller General with respect to the convocation of the meeting and the subjects on the

agenda thereof. A representative of the Comptroller General shall be entitled to participate in the

meeting of the Bondholders as an observer, with no voting rights whatsoever.

The Company shall be required to convene a meeting, in accordance with that which has been set forth

above, pursuant to a request in writing by the Trustee or by the Holders of at least ten percent (10%) of

the unsettled balance of the Principal of the Bonds. The Trustee shall be required to convene a meeting

pursuant to a request by the Holders of at least ten percent (10%) of the unsettled balance of the

Principal of the Bonds. The Company shall bear the expenses which are involved in the convocation and

the holding of the meeting, insofar as it is subject to a duty to do so, pursuant to the Deed of Trust.

(b) Any meeting of Bondholders shall take place at the Company’s registered offices or at another address of

which the entity convening the meeting shall give notice, provided that the Trustee shall not have given

notice of another place for the holding thereof. The date of record for participation in the general

meeting of the Bondholders is the Business Day preceding the date of the general meeting.

(c) Subject to the provisions of Section 3.7.11, the Bondholders, the Trustee and the Company (should the

meeting have been convened by the Trustee), as is relevant, shall be given at least fourteen (14) days’

advance notice prior to the date on which the meeting is to be held, whereby the notice shall specify the

place, the date and the time of the meeting and shall set forth, in a general matter, the subjects to be

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discussed at the meeting. Should the purpose of the meeting be in order to discuss a proposal for the

adoption of a Special Resolution, notice in accordance with that which has been set forth above, at least

twenty-one (21) days in advance, prior to the date on which the meeting is to be held, shall be given,

whereby said notice shall specify the date and time of the start of the meeting and the highlights of the

proposed resolution. The Trustee shall be entitled to shorten the advance notice period at the request of

the Company or at the request of Bondholders who hold at least 10% of the unsettled balance of the

Principal of the Bonds, or should it have seen that a delay in the holding of the meeting constitutes or is

likely to constitute prejudice to the rights of the Bondholders. The Company shall be entitled to object to

the shortening of the advance notice period, in accordance with that which has been set forth above, for

reasonable cause only.

(d) Any notice on behalf of the Company or the Trustee to the Bondholders shall be given pursuant to the

provisions of Section 3.7.22.

(e) Any report by the Company via the MAGNA system of the Israel Securities Authority in the context of

information which the Company is required to provide in a notice pursuant to the Deed of Trust shall be

deemed to constitute a notice which was delivered to its destination at the time of publication of the

report as set forth above.

(f) No resolution whatsoever, which has been adopted at a meeting of Bondholders which was convened in

accordance with that which has been set forth above, shall be disqualified because notice of the meeting

was inadvertently not given to all of the Bondholders, or because notice in accordance with that which

has been set forth above was not received by all of the Bondholders.

(1) The Chair of the meeting of Bondholders shall be a person who shall be appointed by the Trustee.

Should the Trustee not have appointed a Chair in accordance with that which has been set forth

above, or should the person appointed by the Trustee in accordance with that which has been set

forth above be absent from the meeting, the Chair shall be chosen by the Bondholders who are

participating and present, and should they not reach an agreement, the Chair shall be appointed by

the Trustee.

(2) The meeting of Bondholders shall be opened after it has been proven that the legal quorum required

for the start of discussion of any of the subjects on the agenda is present.

(g) At meetings of Bondholders, a legal quorum shall consist of at least two (2) Bondholders, who are

present, themselves or by proxy, who jointly hold or represent at least ten percent (10%) of the total

nominal value of debt of the Bonds as at the date of the meeting. It is hereby clarified that that which has

been set forth above shall not derogate from the special requirements of applicable law with respect to a

legal quorum for the holding of a meeting of Bondholders which concerns a change in the Deed of Trust

or which concerns the dismissal of a trustee, nor from the provisions of Section 3.7.11 and Section

3.7.4 (c). Should no legal quorum, in accordance with that which has been set forth above, be present

within one-half hour of the time which was set for the start of such a meeting, the meeting shall be

adjourned to the same day of the following week, and should that day not be a Business Day, to the

Business Day immediately thereafter, in the same place and at the same time, or to a different day, place

and time, which the party that convened the meeting (the Trustee or the Company) shall determine and

of which it shall give notice to the Bondholders, in the same way as that in which the notice of the

original meeting was given (and may give notice thereof within the notice of convocation of the original

meeting), at least seven (7) days before the date which was set for the holding of the meeting which was

adjourned. Should no legal quorum, in accordance with that which has been set forth above, be present

at an adjourned meeting within one-half hour of the time which was set for the adjourned meeting, two

(2) Bondholders, who are present themselves or by proxy, shall constitute a legal quorum, irrespective of

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the nominal value of the Bonds which are held or represented by them. Notwithstanding that which has

been set forth above, at a meeting which was convened for the purpose of a Special Resolution for the

activation of remedies by virtue of the Deed of Trust (including calling in the Bond for immediate

repayment), a legal quorum shall exist if Holders of at least 50% of the nominal value of debt of the

Bonds were present at the meeting or, in the case of an adjourned meeting, Holders of at least 10% of

the balance as set forth above. Should no legal quorum be present at an adjourned meeting within one-

half hour of the time which was set for the start of such a meeting, two (2) Bondholders, who are present

themselves or by proxy, shall constitute a legal quorum, irrespective of the nominal value of the Bonds

which are held or represented by them.

(h) The majority which is required for the adoption of a Special Resolution, wherever such a resolution is

required pursuant to the terms of the Deed of Trust, is a majority of 75% of the votes of the Bondholders

who are present and voting (in accordance with the nominal value of debt which is held by those present

and voting), without abstaining votes.

(i) With the exception of those cases with respect to which it is otherwise stated in the Deed of Trust and

the addenda thereto and/or under any law, any question which shall be brought before the meeting of

Bondholders shall be resolved by way of an ordinary resolution. The majority which is required for the

adoption of an ordinary resolution is a simple majority of the votes of the Bondholders who are present

and voting (in accordance with the nominal value of debt which is held by those present and voting) or

their representatives who are present and voting at the meeting (in accordance with the nominal value

of debt which is represented by the representatives who are present and voting), without abstaining

votes, unless otherwise stated in the Deed of Trust and/or the addenda thereto.

(j) The declaration by the Chair with respect to the adoption or rejection of a resolution and the record with

respect thereto in the minutes book shall constitute prima facie evidence of that fact, and there shall be

no need to prove the number of votes which were cast in favor of the resolution or against it.

(k) A letter of appointment – (1) a letter of appointment, which appoints a proxy, shall be in writing and shall

be signed by the appointing party or by its representative which has been duly empowered in writing to

do so. Should the appointing party be a corporation, the appointment shall be made by means of an

authorization in writing, stamped with the stamp of the corporation and signed by the signatories of the

corporation; (2) a letter of appointment, which appoints a proxy, shall be drawn up in any generally

accepted form; (3) a proxy himself is not required to be a Bondholder; (4) a letter of appointment and

power of attorney, or another document pursuant to which the letter of appointment was signed, or a

certified copy of such a power of attorney, shall be deposited at the registered offices of the company

not less than 48 hours before the time of the meeting with respect to which the power of attorney was

issued, unless otherwise stated in the notice of convocation of the meeting.

(l) A vote which was carried out pursuant to the terms of a document which appoints a proxy shall be valid

even if, prior to the vote, the authorizing party died or was declared incompetent, or the letter of

appointment was canceled, or the Bonds with respect to which the vote was cast were transferred,

unless notice in writing with respect to the demise, the decision with regard to incompetence, the

cancellation or the transfer, as is relevant, shall have been received at the Company’s registered offices

prior to the general meeting.

(m) At any meeting of Bondholders, each Holder who is present himself or by proxy shall be entitled to one

(1) vote for every NIS 1.00 nominal value of the total nominal Principal which has not yet been paid up, of

the Bonds by virtue of which he is entitled to vote.

(n) In the case of joint Holders, only the vote of the Holder among them who is listed first in the

Bondholders’ Ledger, and who wishes to vote, whether himself or by proxy, shall be counted.

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(o) An Entitled Party who wishes to obtain a power of attorney in his name (or in the name of an authorized

person on his behalf), in accordance with that which has been set forth above, from the Recording

Company, shall submit an application to a Member of the Stock Exchange who has recorded the Bonds in

favor of the Entitled Party, for the issuance of a power of attorney for voting, and shall state the quantity

of Bonds with respect to which the power of attorney is sought. The Recording Company shall send the

power of attorney, as requested by the Entitled Party, to the Company. The wording of the power of

attorney and the manner of receipt thereof by the Bondholders shall be in accordance with that which

has been set forth in the by-laws of the Stock Exchange clearinghouse. A copy of the power of attorney

shall be sent to the Entitled Party via the Member of the Stock Exchange. The power of attorney for

participation in a meeting shall be valid on the date of the meeting, and on the date of the adjourned

meeting with respect to that meeting, provided that the adjourned meeting shall be held no later than

ten (10) days from the date which was set for the original meeting. The power of attorney shall remain in

force for a period of fourteen (14) days (except for the purpose of participating in a meeting of

Bondholders), for all intents and purposes.

(p) The Recording Company shall not make use of voting rights with respect to the Bonds which are recorded

in its name in the Bondholders’ Ledger, and those voting rights shall be given to the Entitled Party or to a

person who shall be determined by the Entitled Party, provided that the Holder has received a power of

attorney for voting from the Recording Company.

(q) When voting, the Holder or his proxy is entitled to use part of his votes in order to vote for the proposal

under discussion and to use part thereof in order to vote against the proposal and to use part thereof in

order to abstain, all as he shall see fit.

(r) Minutes of all of the discussions and resolutions at any general meeting of Bondholders shall be drawn

up and shall be recorded in the minutes book. Each set of minutes shall be signed by the Chair of the

meeting at which the resolutions were adopted and the discussions were conducted, or by the Chair of

the meeting thereafter, and shall constitute prima facie evidence of the matters which are recorded

therein, and, unless otherwise proven, the resolutions and discussions at such a meeting shall be deemed

to have been lawfully adopted and conducted.

(s) The Trustee shall participate in a meeting of Bondholders, but without the right to vote. A person who

shall be appointed by the Trustee, the Secretary of the Company, and any other person who shall be

permitted to do so by the Trustee, shall be entitled to be present at meetings of the Bondholders, but

without the right to vote. In cases where at the reasonable discretion of the Trustee and for reasonable

cause, it shall be necessary, during part of the meeting, to hold a discussion without representatives of

the Company being present, neither they nor anyone on their behalf shall participate in that part of the

discussion.

(t) With the consent of the Holders of the majority of the Principal of the Bonds who are present at a

meeting at which a legal quorum is present, the Chair shall be entitled and, upon demand by the

meeting, shall be required, to adjourn the meeting from time to time and from place to place, as the

meeting shall resolve (hereinafter: “Continued Meeting”). Should the meeting have been adjourned by

ten (10) or more days, notice of the Continued Meeting shall be given in the same manner as the notice

for the first meeting (whose continued holding was adjourned). With the exception of that which has

been set forth above, the Bondholders shall not be entitled to receive any notice of an adjournment nor

of the matters which shall be discussed at the continued meeting. No matters shall be discussed at the

continued meeting other than those which could have been discussed at the meeting at which the

adjournment was resolved and for which no resolution has yet to be adopted by the meeting. The Chair

of the meeting is entitled to determine that voting shall take place by means of voting letters. It is hereby

clarified that, in case of a vote by means of voting letters, a Holder who was not present at the relevant

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meeting, either himself or by proxy, shall also be entitled to vote, subject to proof of his eligibility to

participate and to vote at the meeting in question on the Date of Record for the meeting, all prior to the

closing time of the meeting / the time of voting at the meeting.

(u) Determination of a conflict of interest

When holding a meeting of the Bondholders (whether it was convened by the Company, by a Bondholder

or by the Trustee), the Trustee shall check for the existence of conflicts of interest (as this term is defined

below) among the Bondholders who wish to participate in the meeting, according to the circumstances

of the matter, and shall determine which of the participants have a Conflict of Interest, to which the

provisions which are set forth below shall apply.

The Trustee shall be entitled to require a Bondholder, who wishes to participate in a meeting of

Bondholders, to provide the Trustee with a declaration with respect to the presence and/or the absence

of conflicts of interest which that Bondholder has, in accordance with that which has been set forth

below. A Bondholder who does not provide the Trustee with a declaration in accordance with that which

has been set forth above, after having been asked to do so, shall be deemed to have declared that he has

a conflict of interest. The Trustee shall rely exclusively on the declarations in accordance with that which

has been set forth above, and shall not be required to conduct any further examination or investigation.

Votes by: (1) a Bondholder who is a Related Holder, as this term has been defined in Section 3.6.3 (c) of

the Prospectus, and (2) anyone who has been determined by the Trustee, pursuant to the provisions of

this Section above, to have a conflict of interest, shall not be counted among the votes cast at a meeting

of Bondholders.

It is hereby clarified that a vote by a Bondholder who is a Related Holder, as this term has been defined

in Section 3.6.3 (c) of the Prospectus, shall not be counted for the purpose of determining the existence

of a legal quorum for the opening of the meeting of Bondholders; however, a vote by anyone who has

been determined by the Trustee, pursuant to the provisions of this Section above, to have a conflict of

interest, shall be counted for the purpose of determining the existence of a legal quorum for the opening

of the meeting of Bondholders.

With respect to votes at any meeting of Bondholders, the Trustee shall examine the voting by the “Pure

Holders” only – that is, only the votes of Holders who are not Tainted Holders and who do not have a

conflict of interest shall be counted in such a way that the examination of the presence of the majority

required for the adoption of a resolution shall be made solely and exclusively on the basis of the votes by

the “Pure Holders” only (not including the abstaining votes from among them).

For the purpose of classification of the Pure Holders, it has been determined that a Holder to whom at

least one of the terms which have been set forth below shall apply, shall be deemed to be a Holder with

a Conflict of Interest, whose vote shall not be counted among the votes by the “Pure Holders”:

A Holder who is serving as an officeholder in the Company, or a Holder who served as an

officeholder in the Company at or around the time of the event which underlies the resolution which

is being put to a vote at the meeting;

Any Holder whom the Trustee has determined as being a Holder with a Conflict of Interest.

A Holder with a “Conflict of Interest” shall refer, inter alia, to any Holder who shall declare in writing to

the Trustee that he has a material interest, whether personal or other, in addition to the interest of all of

the Bondholders at the relevant meeting of Bondholders, which results from the actual holding of the

Bonds, including an interest, in accordance with that which has been set forth above, of a family member

of the Holder in question and of another corporation in which he, or a member of his family, has such an

interest.

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The Trustee shall examine the proper manner of handling the votes of Holders who asked to participate

in the meeting pursuant to all of that which has been set forth above, and, if necessary, shall approach

the competent Court with a request to receive instructions in the matter. As long as the Trustee has

acted reasonably in approaching the Court in accordance with that which has been set forth above, the

Trustee shall be exempt from any liability for damage which shall be caused as a result of the approach to

the Court. Should the Trustee have acted in accordance with a decision by the Court, in accordance with

that which has been set forth above, the Trustee shall be exempt from any liability with respect to such

an action.

It is hereby clarified that no additional separate meeting shall be conducted for those Holders with

respect to whom the Trustee has determined that they have a Conflict of Interest, and that, for the

purpose of adopting a binding resolution, the resolution which shall have been adopted at the meeting of

Pure Holders shall suffice, and approval of the resolution at a meeting of Holders with a Conflict of

Interest shall not be required.

3.7.3 Expiry of the Trustee’s term in office

(a) The Trustee’s term in office, the expiry thereof, and the appointment of a new Trustee shall be governed

by the provisions of any applicable law, the provisions of the Securities Law, the provisions of the Trust

Law and the provisions of the Deed of Trust.

(b) The Trustee’s term in office shall expire upon the occurrence of one of the following: (1) should the

Trustee cease to be a company registered in Israel, the principal purpose of which is to deal in trusts; (2)

one of the circumstances which are set forth in Section 35E of the Securities Law, pursuant to which the

Trustee is not qualified to be a trustee, shall apply with respect to the Trustee; (3) pursuant to the

provisions of any applicable law in the context of the expiry of the term in office of a trustee for bonds,

including pursuant to the Securities Law, as it shall be amended from time to time.

(c) Subject to the provisions of applicable law, the Trustee and its alternates (if any) shall be entitled to

resign from their positions as Trustees whenever they shall see fit, after having given notice in writing to

the Company, at least three (3) months in advance, in which they shall set forth the reasons for the

resignation. The resignation shall enter into force only after it has been confirmed by the Court, and after

a new trustee has been appointed with the consent of the Company, and as shall be approved by way of

an ordinary resolution of the Bondholders (and to preclude all doubt, the replacement of the Trustee as

set forth above shall not be deemed to constitute an amendment or a modification of the Deed of Trust).

(d) The Court shall be entitled to dismiss the Trustee and any trustee that shall replace it, should it not fulfill

its functions properly or should the Court find another reason to dismiss it.

(e) The Holders of 10% of the nominal value of debt of the Bonds shall be entitled to convene general

meeting of the Bondholders. The meeting which shall be convened in accordance with that which has

been set forth above shall be entitled to resolve, according to a vote by the Holders, themselves or by

proxy, of at least 50% of the nominal value of debt of the Bonds, to remove the Trustee from office. The

Company shall be entitled, subject to preliminary approval which shall be obtained by way of a resolution

at a general meeting of the Bondholders, to appoint a new trustee or new trustees instead of the

trustees whose possessions shall have been vacated or instead of their alternates.

(f) Should the Trustee’s term in office have expired, the Court shall be entitled to appoint another trustee,

for whatever period and at whatever terms as the Court shall see fit. Subject to the provisions of any law,

the Trustee whose term in office has expired shall continue to hold office until another trustee has been

appointed. Upon the termination of the trust, the Trustee shall transfer to the new trustee all of the

monies of the trust and all of the documents which have accumulated in its possession in the context of

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the trust which constitutes the object of the Deed of Trust, and shall sign any document which shall be

required for that purpose.

(g) Any new trustee shall have the same authority, powers and other authorizations as the Trustee whose

term in office has expired, and shall be subject to all of the duties and undertakings which the Trustee

took upon itself pursuant to the Deed of Trust, as well as to the fee arrangement which is set forth in the

Deed of Trust, so that it shall be able to act, for all intents and purposes, as if it had been appointed a

priori as the Trustee.

(h) It is hereby clarified that the termination of the Trustee’s term in office shall not derogate from any

rights, claims or contentions which the Company and/or the Bondholders shall have against the Trustee,

if any, the cause of which antedates the termination of its term in office as the Trustee, nor shall it

release the Trustee from any liability under any law. In addition, the termination of the Trustee’s term in

office shall not derogate from any rights, claims or contentions which the Trustee shall have against the

Company and/or the Bondholders, if any, the cause of which antedates the termination of its term in

office as the Trustee, nor shall it release the Company and/or the Bondholders from any liability under

any law.

3.7.4 Waivers, settlements and changes in the Deed of Trust

(a) Any change in the Deed of Trust shall be subject to the receipt of approval by the Comptroller General, in

advance and in writing, prior to the implementation thereof, including changes, in accordance with that

which has been set forth above, which might apply to the Deed of Trust as the result of the

implementation of an arrangement between the Company and its creditors pursuant to Section 350 of

the Companies Law - 1999. The Company shall approach the Comptroller General for the purpose of

obtaining approval, in accordance with that which has been set forth above, if and as necessary.

(b) Subject to the provisions of applicable law, the Trustee shall be entitled, from time to time and at any

time, should it have been convinced that doing so is beneficial to the Bondholders or should it have been

convinced that doing so is not prejudicial to the rights of the Bondholders, to waive any breach or non-

fulfillment of any of the terms of the Deed of Trust, with the exception of a waiver with respect to the

Interest rate, the linkage method or to the date of payment of Principal and Interest, or the list of causes

for calling in the Bonds for immediate repayment, in accordance with that which has been set forth in

Section 3.7.11, or cancellation of the duty of making the reports which the Company undertook to make

pursuant to the Deed of Trust, and other subjects which concern the imposition of monetary obligations

upon the Bondholders, with no need to obtain the approval of a meeting of the Bondholders, should the

Trustee have been convinced that the waiver, in accordance with that which has been set forth above, is

not prejudicial to the rights of the Bondholders.

(c) Subject to the provisions of any law and to the provisions and limitations which to apply by virtue of the

Guarantee Documents with respect to changes in the provisions of the Deed of Trust without having

obtained the approval of the State of Israel, in advance and in writing, the Trustee and the Company shall

be entitled to modify the terms of the Deed of Trust (both before and after the Principal of the Bonds is

due for repayment), with the exception of a change in the terms of the Bonds with respect to the Interest

rate, the linkage method for the date of payment of Principal and Interest, or the list of causes for calling

in the Bonds for immediate repayment, in accordance with that which has been set forth in Section

3.7.11, or cancellation of the duty of making the reports which the Company undertook to make

pursuant to the Deed of Trust, and other subjects which concern the imposition of monetary obligations

upon the Bondholders, with no need to obtain the approval of a meeting of the Bondholders, should the

Trustee have been convinced that the change is not prejudicial to the rights of the Bondholders.

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(d) In addition and without derogating from that which has been set forth above, the general meeting of the

Bondholders shall have the authority, by means of the adoption of a Special Resolution, to carry out,

inter alia, the following measures or any thereof:

(1) Subject to the approval by the State of Israel pursuant to the provisions of Subsection (c) above, to

agree to any amendment, change or arrangement of the rights of the Bondholders, whether the

rights in question result from the Deed of Trust or any other document, or to any settlement or

waver in the context of those rights.

(2) To agree to any amendment of the provisions of the Deed of Trust to which the Company shall agree

and which shall be approved by the State of Israel, in advance and in writing, pursuant to the

provisions of Subsection (c) above, and to empower the Trustee to sign any Deed of Trust and/or any

other document in the context of the documents, in accordance with that which has been set forth

above, all for the purpose of implementing the amendment, in accordance with that which has been

set forth above.

(e) To preclude all doubt, should a demand for payment not have been given to the Company and the

Comptroller General in the context of any payment which was not made in a timely manner pursuant to

the provisions of the Deed of Trust, by the end of the periods for forfeiture of the Guarantee as set forth

in the Guarantee Document, which is attached as Appendix C to the Deed of Trust, this shall be deemed

to constitute a waiver of the Trustee’s and the Bondholders’ right to carry out a forfeiture of the

Guarantee in the context of the payment which was not made in a timely manner and with respect to

which a demand for payment was not given, and in the context of that payment only; however, this shall

not be deemed to constitute a waiver by the Trustee and the Bondholders vis-à-vis the Company.

(f) In every case of exercise of Subsections (a) through (c) above, the Trustee shall be entitled to require the

Bondholders to deliver the Bond certificates to it for the purpose of entering a record with respect to any

settlement, waiver, change or amendment, in accordance with that which has been set forth above.

(g) The Company and/or the Trustee shall give notice to all of the Bondholders, in the manner which is set

forth in Section 3.7.22, with respect to any change and/or waiver as set forth in subsections (a) through

(c) above, shortly after the implementation thereof.

3.7.5 Claims and proceedings by the Trustee

(a) In addition to any provision in the Deed of Trust and as an independent right and power, even before the

Bonds are called in for immediate repayment, in accordance with that which has been set forth in Section

3.7.11, the Trustee shall be entitled, at its discretion and without giving any additional notice, to initiate

all of the proceedings, including legal proceedings, as it shall see fit, for the purpose of exercising the

rights of the Bondholders in the context of the repayment of the Principal and Interests (including linkage

differentials and Arrears Interest, if relevant) of the Bonds, and for the purpose of enforcing upon the

Company the execution of any other undertaking by the Company pursuant to the Deed of Trust, and

subject to the provisions of this Section, the Trustee shall be obligated to act in accordance with that

which has been set forth above, should it have been required to do so pursuant to a Special Resolution

which shall be adopted by a meeting of the Bondholders. Notwithstanding that which has been set forth

in this Section, the right to call in the Bonds for immediate repayment shall arise exclusively in

accordance with the provisions of Section 3.7.11, and not by virtue of this Section.

(b) That which has been set forth above shall not detract and/or derogate from the Trustee’s right to initiate

legal and/or other proceedings, even if the Bonds have not been called in for immediate repayment, all

for the protection of the Bondholders and/or for the purpose of the issuance of any order which

concerns the trust and subject to the provisions of any law.

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(c) Subject to the provisions of Subsection (d) below, the Trustee shall be required to act in accordance with

that which has been set forth in Subsection (a) above, should it have been required to do so pursuant to

a Special Resolution which shall be adopted by a meeting of the Bondholders, unless it has found, under

the circumstances of the matter, that it would be unjust and/or unreasonable to do so, and, in such a

case, the Trustee shall be required to approach the competent Court for the receipt of instructions in the

matter in question.

(d) The Trustee shall be entitled to initiate proceedings in accordance with that which has been set forth

above, to convene meetings of the Bondholders, in order for the Holders to resolve, by way of a Special

Resolution, which proceedings shall be initiated for the exercise of their rights pursuant to the Deed of

Trust. In addition, the Trustee shall be entitled to again convene a meeting of the Bondholders, for the

purpose of receiving instructions in any matter which concerns the conducting of the proceedings in

accordance with that which has been set forth above.

(e) Subject to the provisions of the Deed of Trust, the Trustee shall be entitled but not obligated to convene

at any time a general meeting of the Bondholders, in order to discuss and/or to obtain its instructions

with respect to any matter which concerns the Deed of Trust.

(f) In any case where the Trustee shall be required, pursuant to the terms of the Deed of Trust, to perform

any operation whatsoever, including for the purpose of protecting the rights of the Bondholders in

accordance with that which has been set forth in this Section 3.7.5, the Trustee shall be entitled to

refrain from taking any action in accordance with that which has been set forth above, until it has

received instructions from a meeting of the Bondholders and/or instructions from a court which the

Trustee shall have approached, at its discretion, with a petition for instructions, in any case in which it

believed instructions to be necessary, in accordance with that which has been set forth above.

3.7.6 Indemnification for the Trustee

(a) Without derogating from the rights to compensation and indemnification which are granted to the

Trustee under law, the Trustee and any of its representatives, or any other person who was appointed by

the Trustee pursuant to the Deed of Trust, shall be entitled to receive indemnification from all of the

monies and investments which shall be received by or in the possession of the Trustee, from the

proceedings which it initiated or in another manner pursuant to the Deed of Trust, with respect to the

undertakings which they took upon themselves, in the course of the execution of the trust pursuant to

the Deed of Trust or in the context of such actions as, in their opinion, were required for the aforesaid

execution, and/or in the context of the use of the powers and authorizations which are given to them by

virtue of the Deed of Trust, and in the context of all kinds of legal proceedings, opinions by attorneys and

other experts, negotiations, discussions, expenses, claims and demands with respect to any matter or

thing which was or was not done in any way whatsoever with regard to that which has been set forth

above, and the Trustee shall be able to withhold the monies which are in its possession (except payments

that are to be made to the Trustee by the State of Israel in the case of forfeiture of the Guarantee and

that are intended for the Bondholders, including the Additional Registered Holders (as these terms are

defined in Section 3.9.3 (e)), insofar as there are any. Such amounts, in accordance with that which has

been set forth, may not be delayed or offset) and to pay, out of said monies, the indemnification

amounts that are due to the Trustee in accordance with the Deed of Trust, all provided that they

represent reasonable expenses which were incurred in the course of the execution of the Trust as set

forth in the Deed of Trust. All of the aforesaid amounts shall have priority over the rights of the

Bondholders (except over the rights of the Bondholders to receive the amounts due to them within the

forfeiture of the Guarantee). The Trustee shall not be entitled to indemnification insofar as it acted with

malice or in violation of statutory duties applying thereto.

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(b) The Trustee shall be entitled to receive indemnification from the Bondholders (subject to the bondholder

indemnification amount limit as set forth below) and/or from the Company (provided that it shall not be

entitled to double indemnification), as is relevant, with respect to any damage and/or loss and

reasonable expenses which it incurred and/or which it shall incur in the context of actions which it

performed or which it is required to perform by virtue of its duty pursuant to the terms of the Deed of

Trust, and/or under law and/or pursuant to an instruction by a competent authority and/or any law

and/or upon demand by the Bondholders and/or upon demand by the Company. Notwithstanding that

which has been set forth above, it has been agreed that the Trustee shall not be entitled to demand

indemnification in advance, in accordance with that which has been set forth above, with respect to a

matter which cannot be postponed, and that this shall not derogate from its right to retroactive

indemnification, if and insofar as it acquires said right. In addition, it is clarified that the Trustee shall not

be entitled to demand indemnification from the Bondholders for damage that it has sustained from the

Company and/or to demand indemnification from the Company for damage that it has sustained from

the Bondholders.

The right of the Trustee to receive indemnification from the Bondholders pursuant to this Section

3.7.6 (b) shall be limited to NIS three (3) million only, with respect to the Series (23), (24) and (25) of the

Bonds that were issued jointly pursuant to the Prospectus, as set forth in the Deeds of Trust and the

Guarantee Documents with respect to each of the Series of the Bonds (hereinafter: the “Bondholder

Indemnification Amount Limit”). It is clarified that in case of expansion of one or more series of the

Bonds, the Indemnification Limit shall not increase.

(c) In any case where the Trustee shall be required, pursuant to the terms of the Deed of Trust and/or under

law and/or pursuant to an instruction by a competent authority and/or any law and/or upon demand by

the Bondholders and/or upon demand by the Company, to perform any operation whatsoever, including

but not limited to the initiation of proceedings or the filing of actions upon demand by the Bondholders,

in accordance with that which has been set forth in the Deed of Trust, the Trustee shall be entitled to

refrain from taking any action, in accordance with that which has been set forth above, until it has

received, to its satisfaction, an Undertaking to Indemnification (without detracting from the Bondholder

Indemnification Amount Limit). It is hereby agreed that that which has been set forth above shall not

exempt the Trustee from taking an urgent action which is required for the prevention of real adverse

prejudice to the rights of the Bondholders.

(d) The Company shall not indemnify the Trustee with respect to expenses which it incurred and/or shall

incur in the context of actions which it performed and/or shall perform upon demand by the

Bondholders for any reason whatsoever, with the exception of operations which are required for the

protection and/or the exercise of the Bondholders’ rights by virtue of the Deed of Trust.

3.7.7 Collateral for the Bonds

The Bonds are secured by a State Guarantee pursuant to which the State guarantees the repayment of the

Company’s Backed Undertakings, pursuant and subject to the terms which are set forth in the wording of the

Guarantee Document, the highlights of which are described in Section 3.9.

3.7.8 Transferring the consideration for the issue to the Company

The consideration for the issue which shall be received by the Issue Coordinator, after the Issue Coordinator

has paid, out of said consideration, the commissions and expenses which he is required to pay pursuant to

the provisions of the Prospectus (including the Supplementary Notice which shall be published by the

Company), shall be transferred by him immediately following the issue of the Bonds to an account with

respect to which the Company shall give instructions.

3.7.9 Miscellaneous

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(a) The Trustee is not subject to the duty of examining and, in actual fact, the Trustee has not examined the

need for provision of sureties to secure the payments to the Bondholders. The Trustee has not been

asked to perform and, in actual fact, the Trustee has not performed any economic, accounting-related or

legal due diligence examination with respect to the state of the Company’s business or the business of

the Company’s subsidiaries. By engaging in the Deed of Trust and consenting to serve as a trustee for the

Bondholders, the Trustee is not expressing its explicit or implicit opinion of the Company’s ability to

uphold its undertakings vis-à-vis the Bondholders or of the economic value of the sureties which have

been and/or shall be provided by the Company (if any) pursuant to the Deed of Trust and/or the ability to

realize them. That which has been set forth above shall not derogate from the Trustee’s duty (insofar as

such a duty applies to the Trustee under any law) of examining the effect of changes in the Company

from the date of issue of the Bonds and thereafter, insofar as such changes are capable of adversely

affecting the Company’s ability to comply with its undertakings the Bondholders.

(b) To preclude all doubt, it is hereby clarified that subject to any applicable law, the Company shall be

entitled to encumber its property and/or any part thereof in favor of any person or entity as it shall see

fit, with no limitation whatsoever and in any degree whatsoever, including for the purpose of securing

series of Bonds or other undertakings, with no need for any consent by the Trustee or by the

Bondholders.

3.7.10 Issue of additional Bonds

(a) The Company reserves the right to expand at any time and without requiring the consent of the Trustee

and/or the Bondholders, the series of the Bonds by way of one or more private offerings and/or an

offering to the public, at whatever terms as it shall see fit, subject to the provisions and limitations which

apply by virtue of the Guarantee Document with respect to the issue of Additional Bonds (as this term is

defined below), subject to obtaining approvals as required by law, including approval by the Comptroller

General and the Finance Committee, in advance and in writing, and subject to the fact that the Additional

Bonds that are issued by the Company will be secured by a Guarantee by the State of Israel (at the same

terms), to the effect that the total nominal value of the Principal of the Bonds that are secured by a

Guarantee by the State of Israel will increase to reflect fully the increase in the total nominal value of the

Principal of the Bonds (it is clarified that upon the increase in the nominal value of the Principal of the

Bonds, the additional Backed Undertakings shall also be increased respectively, with the exception of the

Bondholder Indemnification Amount Limit, which shall not increase, in accordance with that which has

been set forth above), at whatever price and in whatever manner as the Company shall see fit, including

a discounting or premium rate which is different from other issues of the same series which have been

carried out, provided that it shall give notice to that effect to the Trustee (hereinafter: the “Additional

Bonds”). The Bonds and the Additional Bonds (starting from the date of issue thereof) shall constitute

one series for all intents and purposes, and the Deed of Trust shall also apply with respect to Additional

Bonds, in accordance with that which has been set forth above, which shall be issued by the Company.

The Company shall approach the Stock Exchange with an application to register the Additional Bonds in

accordance with that which has been set forth above for trading, following the offer thereof.

(b) The Trustee shall serve as a trustee for the Bonds, as they shall be in circulation from time to time, even

in case of expansion in accordance with that which has been set forth above, and the consent of the

Trustee to serve in accordance with that which has been set forth above for the expanded series shall not

be required. Without derogating from that which has been set forth above, in any case of expansion of

the series of the Bonds, the Trustee shall have the right to demand an increase of its fee in an amount

which reflects the entire rate of the increase which has occurred in the series as a result of the expansion

in question, starting from the date of the expansion and on a permanent basis until the expiry of the

period of the trust, and the Company gives its consent in advance, by engaging in the Deed of Trust, to

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the increase of the Trustee’s fee, in accordance with that which has been set forth above. To preclude all

doubt, it is hereby clarified that: (a) the Principal of the Additional Bonds shall be repaid on the date of

repayment of the Principal, as set forth in the Deed of Trust; and (b) the Holders of the Additional Bonds,

in addition to that which has been set forth in this Section above, shall not be entitled to Interest with

respect to Interest periods for which the Date of Record for eligibility fell prior to the date of issue of the

Additional Bonds.

(c) It is hereby clarified that the expansion of the series of the Bonds, in accordance with that which has

been set forth above, shall not be carried out prior to the signing of a valid amended Guarantee

Document or the replacement of the Guarantee Document by a valid Guarantee Document which

reflects fully the increase in the amount of the nominal value of the Principal of the Bonds (and in the

Backed Undertakings in accordance with that which has been set forth in Subsection (a) above)

(hereinafter: the “Guarantee with Respect to the Additional Bonds”). The Company shall give notice to

the Trustee in advance with respect to its intention to perform an expansion of a series, in accordance

with that which has been set forth above, and shall provide the Trustee, prior to the expansion of the

series, with an original Guarantee with Respect to the Additional Bonds, which is valid and signed.

(d) Without derogating from that which has been set forth in this Section above, should the discounting rate

which shall be determined for the Additional Bonds, as a result of the expansion of the series, be

different from the discounting rate of the Bonds which exist in circulation at the time (if and insofar as

they were issued at a discount), the Company shall approach the Tax Authority, prior to the expansion of

the series of the Bonds, in order to obtain its approval for the determination of a uniform discounting

rate for the Bonds of the same series, in the context of withholding tax at source from the discounting

fees with respect to the Bonds of the same series, according to a formula which assigns weights to the

different discounting rates for the same series, if any.

(e) Should approval in accordance with that which has been set forth above be obtained, the Company shall

calculate the weighted discounting rate with respect to all of the Bonds and shall publish the uniform

weighted discounting rate for the entire series by way of an Immediate Report before the date of

expansion of the series. In addition, tax shall be withheld at source on the dates of repayment of the

Bonds according to the weighted discounting rate in accordance with that which has been set forth

above and pursuant to the provisions of applicable law. Should approval in accordance with that which

has been set forth above not be obtained, the Company shall give notice by way of an Immediate Report

prior to the issue of the Additional Bonds as a result of the expansion of the series, to the effect that

approval in accordance with that which has been set forth above was not obtained and, in that notice,

shall state that the uniform discounting rate shall be the highest discounting rate which arose with

respect to the Bonds. Tax shall be withheld at source at the time of repayment of the Bonds, pursuant to

the discounting rate which was reported in accordance with that which has been set forth above.

In light of that which has been set forth above, there may be cases in which tax will be withheld at source

with respect to discounting fees at a rate which is higher than the discounting fees determined for

anyone who held Bonds prior to the expansion of the series. In such a case, an assessee who held Bonds

prior to the expansion of the series and often repayment of the Bonds, shall be entitled to file a tax

report to the Tax Authority and to receive a tax refund in the amount of the tax which was withheld from

the discounting fees, insofar as he is entitled to a refund in accordance with that which has been set forth

above under any law.

(f) Without derogating from the provisions of any applicable law, the Company reserves the right to issue at

any time, and with no need to obtain the approval of the Trustee and/or the Bondholders, additional

series of Bonds (hereinafter: the “Additional Series”) at whatever terms of redemption, interest, degree

of repayment in case of liquidation, and other terms and conditions as the Company shall see fit, and

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whether they are superior, equal to or inferior to the terms of the Bonds, without prejudice to the duty

of repayment which is incumbent upon it.

3.7.11 Right to call in for immediate repayment

(a) Subject to that which has been set forth in Subsection (b) below, upon the occurrence of one or more of

the events which have been set forth in this Section, the provisions of Subsection (c) below shall apply. It

is clarified that the provisions of this Section, including the Subsections hereof, and/or any other

provision in the Deed of Trust shall not serve to detract from the effect of the Guarantee Document, and

in any case, irrespective of the occurrence of any of the events stated in this Section, the Guarantee

Document shall continue to remain in effect and bind the State of Israel according to its conditions as set

forth in Appendix C to the Deed of Trust:

(1) Should the Company not pay any amount which shall be due from it in the context of the Bonds (in

this Section: the “Amount in Arrears”), provided that following the non-payment in accordance with

that which has been set forth above, the Trustee gave the State of Israel a Notice of Non-Payment or

a Notice of Complete Forfeiture (hereinafter jointly: “Notice of Forfeiture” as this term has been

defined above) by the last deadline set for that purpose in the Guarantee Document, and should the

State of Israel not pay the Recording Company (and/or the Trustee for the Additional Registered

Holders, if any), the amount which was not paid by the Company (together with the Interest accrued

with respect to the Amount in Arrears up to the actual date of payment thereof), within no more

than forty-five (45) Business Days from the date of delivery of the Notice of Forfeiture in accordance

with that which has been set forth above. Should the Amount in Arrears (together with the Interest

accrued with respect to the Amount in Arrears up to the actual date of payment thereof) be paid by

the end of the period of forty-five (45) Business Days in accordance with that which has been set

forth above, this shall not be deemed to constitute a breach of the provisions of the Deed of Trust by

the Company, and shall not constitute cause for immediate repayment.

(2) Should the Company not pay any amount which shall be due from it in the context of the Bonds, and

should the Trustee not give the State of Israel a Notice of Forfeiture during the Period for Partial

Forfeiture of the Guarantee (as this term has been defined in the Guarantee Document), and

provided that should the Company and/or the State of Israel pay the Amount in Arrears within sixty

(60) days after the date slated for the payment thereof (in this Section: the “Amount in Arrears” and

the “Grace Period”), together with the Interest (including linkage differentials to the Index) accrued

with respect thereto by the end of the Grace Period, this shall not be deemed to constitute a breach

of the provisions of the Deed of Trust by the Company, and shall not constitute cause for immediate

repayment.

(3) Should a permanent and final liquidation order for the liquidation of the Company (with the

exception of liquidation for the purposes of merger with another company or restructuring of the

Company pursuant to a resolution by the Government of Israel with respect to the restructuring of

the electricity sector (hereinafter: the “Restructuring of the Electricity Sector”)) be issued by the

Court, or should a temporary liquidation order be issued by the Court, or should a valid resolution be

adopted for the liquidation of the Company (with the exception of liquidation for the purposes of

merger with another company or in the context of the Restructuring of the Electricity Sector), and

should the order or the resolution in accordance with that which has been set forth above not be

canceled within forty-five (45) days of the date of issuance of the order or adoption of the

resolution, as is relevant.

(4) Should an order for the suspension of proceedings be issued to the Company, or should a petition be

filed by the Company for an arrangement with its creditors pursuant to Section 350 of the

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Companies Law, which concerns an arrangement governing a debt between the Company and all or

most of its creditors (except for the purposes of merger with another company and/or in the context

of the Restructuring of the Electricity Sector).

(5) Should a merger as a result of which the Company is not the surviving company have been carried

out without obtaining the approval and advance of a special majority of the Bondholders at an

extraordinary meeting, unless the Company or the receiving company, as is relevant, declared to the

Bondholders, at least ten (10) Business Days before the date of the merger, that the receiving

company will bear the Company’s undertakings vis-à-vis the Bondholders, and that there is no

reasonable fear that as a result of the merger the receiving company will not be able to uphold its

undertakings vis-à-vis the Bondholders, and with the exception of a merger which was carried out in

the context of the Restructuring of the Electricity Sector.

It is hereby agreed that if and insofar as any of the events which are set forth in subsections (a)(3)

through (a)(5) above takes place, pursuant or with respect to a resolution by the Government of Israel

regarding the Restructuring of the Electricity Sector, in accordance with that which has been set forth in

Subsection (a)(3) above, the Company shall transfer to the Trustee confirmation in writing attesting to

the fact that the event, in accordance with that which has been set forth above, took place pursuant or

with respect to a resolution by the Government of Israel regarding the Restructuring of the Electricity

Sector, and that the Trustee is exempt from taking action, and the Trustee shall not examine the

aforesaid notice and shall not be required to examine the correctness of that which is set forth in the

confirmation by the Company, in accordance with that which has been set forth above, and the Bondage

not have any contention against the Trustee in the context of that which has been set forth in this

subsection.

(b) Notwithstanding that which has been set forth in Subsection (a) above and in Subsection (c) below, and

without derogating from the validity of the Guarantee Document pursuant to the terms thereof, should

any of the events which are set forth in Subsections (a)(3) through (a)(5) above occur, the Bondholders

shall have no cause to call in the Bonds for immediate repayment, if the State gives notice to the Trustee

in writing, within twenty-one (21) Business Days after the date of the notice in writing by the Trustee to

the Comptroller General with respect to the occurrence of any of the events which are set forth in

Subsections (a)(3) through (a)(5) above (and this, after the Trustee shall have been given notice by the

Company pursuant to Section 3.7.18 (g) (hereinafter: the “Period for Notice by the State”), pursuant to

which it confirms that the undertakings by the State vis-à-vis the Trustee and the Bondholders pursuant

to the Guarantee Document shall continue to remain in force and unchanged, notwithstanding the

occurrence of any of the events which are set forth in Subsections (a)(3) through (a)(5) above

(hereinafter: the “Notice of Undertaking”). To preclude all doubt, it is hereby clarified that in any case,

whether or not the Notice of Undertaking was sent, the Guarantee shall not expire and the undertakings

by the State pursuant thereto shall not expire as a result of the Structural Change or any of the cases

which are set forth in this Section 3.7.11.

(c) Without derogating from that which has been set forth in Subsection (b) above, should one or more of

the events which are set forth in Subsection (a) take place, the following provisions shall apply:

(1) Upon the occurrence of any of the events which are set forth in Subsections (a)(3) through (a)(5)

above, the Trustee shall be required to convene a meeting of the Bondholders, on the agenda of

which shall be a Special Resolution with regard to the calling-in of the entire unsettled balance of the

Bonds for immediate repayment, but only after the expiry of the Period for Notice by the State and

insofar as the Notice of Undertaking has not been given by the State up to the expiry of the Period

for Notice by the State.

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Notwithstanding that which has been set forth above, with respect to the cause which is set forth in

Subsections (a)(1) through (a)(2), the Trustee shall be entitled (but not obligated) to convene a

meeting of the Bondholders, and shall be obligated to do so if at least 10% of the Holders of the

unsettled balance of the Principal of the Bonds issue a demand in writing for the convocation of a

meeting of the Bondholders, which the Trustee shall be obligated to convene.

(2) The date on which the meeting, which shall be convened pursuant to the provisions of Subsection

(c)(1) above, shall be held, shall be upon the expiry of thirty (30) days from the date of convocation

thereof, and a Special Resolution to call in the entire unsettled balance of the Bonds for immediate

repayment shall be on the agenda thereof. The notice of convocation shall state that should the

Company cause the cancellation or the removal of the event set forth in subsection (a) above, with

respect to which the general meeting was convened, to the reasonable satisfaction of the Trustee up

to the date on which the meeting is to be held, the convocation of the meeting of the Bondholders in

accordance with that which has been set forth above shall be canceled. The Trustee shall be entitled,

at its discretion, to shorten the period of thirty (30) days, in accordance with that which has been set

forth above, should the Trustee be of the opinion that any postponement of the calling-in of the

Company’s debt for immediate repayment, or any postponement in the holding of the meeting,

endangers or is likely to endanger the rights of the Bondholders.

Notwithstanding that which has been set forth above, the date on which the meeting, which shall be

convened pursuant to the provisions of Subsection (c)(1) above, shall be held – provided that the

Special Resolution to call in the entire unsettled balance of the Bonds for immediate repayment,

which shall be on the agenda thereof, shall be with respect to the event set forth in Subsection (a)

above – shall be upon the expiry of 10 days from the date of convocation thereof, and the remaining

provisions of Section (c)(2) shall apply, mutatis mutandis.

(3) Should any of the events set forth in Subsection (a) above not have been canceled or removed up to

the date on which the meeting is held, and should a resolution be adopted as a Special Resolution at

the meeting of the Bondholders in accordance with that which has been set forth above, the Trustee

shall be required, within a reasonable time, to call in the Bonds for immediate repayment by issuing

a warning in writing to the Company twenty-one (21) Business Days in advance of its intent to do so,

provided that insofar as possible under the circumstances of the case, the Bonds shall be called in for

immediate repayment, in accordance with that which has been set forth above, in a way which does

not adversely affect the Company’s operations which involve the generation, transmission or

distribution of electricity, and which takes into account the Company’s duty to provide an essential

service.

(d) To preclude all doubt, any action by the Company or event within or concerning the Company which

constitutes the implementation of a provision of applicable law and/or the implementation of binding

Government resolutions by or with respect to the Company, and/or the outcome of such actions or

events shall not confer upon a Bondholder the right to demand the repayment of the Bonds, in whole or

in part, by way of immediate repayment as a result of the occurrence of any of the causes which are set

forth in Subsections (a)(1) through (a)(5) (hereinafter: the “Exempting Event”) (to preclude all doubt, the

events which are set forth in Subsections (a)(1) and (a)(2) shall not be deemed to constitute Exempting

Events). If and insofar as an Exempting Event occurs, the Company shall transfer to the Trustee

confirmation in writing, attesting to the fact that the Exempting Event has taken place and that the

Trustee is exempt from taking action, and the Trustee shall not examine and shall not be required to

examine the correctness of that which is set forth in the confirmation.

(e) It is clarified that the Trustee’s duties, pursuant to this Section 3.7.11, are subject to its actual knowledge

of the existence of the facts, the events, the circumstances and the incidents which are set forth therein,

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on the basis of the Company’s publications for the public or on the basis of notice in writing by the

Company, which shall be sent to it pursuant to Sections 3.7.18 (e) and 3.7.18 (g). This shall not detract

from the Trustee’s duties and rights under any law.

(f) Should the Bonds have been called in for immediate repayment pursuant to the terms of the Deed of

Trust, the Trustee shall be required, without it having any right to exercise discretion in the matter, to

give a Notice of Complete Forfeiture (as this term is defined in the Guarantee Document) to the

Comptroller General, in the manner which is set forth in the provisions of the Guarantee Document,

which is attached as Appendix C to the Deed of Trust. A copy of the Notice of Complete Forfeiture shall

be delivered to the Company by the Trustee.

3.7.12 Trust for receipts

All of the receipts which shall be received by the Trustee, with the exception of its fee and the repayment of

any debt owed to it, in any way whatsoever, including but not only as a result of the proceedings which are

set forth in Sections 3.9.3, 3.7.11 and 3.7.5 (if it receives amounts as a result of these proceedings, despite

the fact that the State of Israel will pay any amount that has been forfeited on account of the Guarantee

directly to the Recording Company and/or to the Trustee for the Additional Registered Holders, insofar as

there are such holders at the time of the forfeiture, as relevant), shall be held by it in trust and shall be used

by it for the following purposes and according to the following order of priority:

Initially, for the settlement of the expenses, imposts and undertakings which were expended by the Trustee,

imposed upon it or caused as a result of the operations involved in the implementation of the trust or in

another manner in the context of the operations which were performed pursuant to the terms of Sections

3.9.3, 3.7.11 and 3.7.5, including its fee, and the balance shall be used, firstly, in order to pay the Bondholders

the Interest and/or the Principal which are due to them pursuant to the terms of the Bonds, pari passu and

proportionally to the amount of the arrears of Interest and/or Principal which are due to each of them, if any,

with no preference or priority right for any thereof; and secondly, in order to pay the Bondholders the

amounts of the Principal and/or the Interest (including Arrears Interest) which are due to them pursuant to

the Bonds which are held by them, pari passu, the date of payment of which shall have come due and

proportionally to the amounts which are due to them, with no preference in the context of temporal priority

of the issue of the Bonds by the Company or in any other manner; and the balance, if any, shall be paid by the

Trustee to the Company or to its successors, as is relevant.

3.7.13 Power to delay the distribution of monies

Notwithstanding that which has been set forth in Section 3.7.12, should the monetary amount which is

received as a result of the initiation of the proceedings set forth above, and which, at any time, shall be

available for distribution pursuant to Section 3.7.12 above, be less than 10% of the balance of the unsettled

Principal of the Bonds and the Interest, the Trustee shall not be required to distribute it and shall be entitled

to invest the amount in question, in whole or in part, in investments which are permitted pursuant to Section

3.7.17. The Trustee shall further be entitled to replace the aforesaid investments from time to time with

other permitted investments, as it shall see fit.

When the investments in question, together with the profits thereon, and along with additional monies which

shall be received by the Trustee for the aforesaid purpose, come to an amount which shall suffice for the

payment of at least ten percent of the balance of the unsettled Principal of the Bonds and the Interest (or the

amount of NIS 10 million, whichever is lower), the Trustee shall pay them to the Bondholders in accordance

with that which has been set forth in Section 3.7.12. Notwithstanding that which has been set forth above,

the payment of the Trustee’s fee and the Trustee’s expenses shall be paid out of the monies in accordance

with that which has been set forth above, immediately upon the date on which the payment of the fee is due

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and/or immediately after the payment of the expense by the Trustee (as is relevant), even if the total of the

amounts which shall have come into the Trustee’s possession is less than the amount set forth above.

Notwithstanding that which has been set forth above, the payment of the Trustee’s fee and the Trustee’s

expenses shall be paid out of the monies in accordance with that which has been set forth above,

immediately upon the receipt thereof by the Trustee even if the amounts which have come into the Trustee’s

possession are less than NIS 1 (one) million in accordance with that which has been set forth above.

The Trustee’s power to delay the distribution of monies in accordance with that which has been set forth in

this Section is limited to the earlier of the following: the nearest date set for a payment of Principal and/or

Interest (they being linked to the Index) with respect to the Bonds of the relevant series, or a reasonable time

after the receipt of the amounts in accordance with that which has been set forth above.

3.7.14 Notice of distribution

The Trustee shall notify the Holders of the date and the place where any payment of the payments which are

mentioned in Sections 3.7.12 and 3.7.13 is to be made, by way of notice fourteen (14) days in advance, which

shall be given in the manner set forth in Section 3.7.22.

The monies which shall be distributed in accordance with that which has been set forth in Section 3.7.12 shall

be deemed to constitute payment on account of the repayment of the Bonds, in accordance with the order

which has been set forth in Section 3.7.12.

After that date set forth in the notice, the Bondholders shall be entitled to Interest with respect to the Bonds,

at the rate which has been set forth in the Bonds, solely and exclusively on the balance of the amount of the

Principal (if any), less the amount which has been paid or has been offered for payment to them in

accordance with that which has been set forth above.

3.7.15 Receipt from the Bondholder and from the Trustee

A receipt from the Bondholder for the amounts of the Principal and Interest which were paid to him by the

Trustee with respect to the Bond shall release the Trustee and the Company, by way of a final and absolute

release, in all matters related to the payment of the amounts set forth in the receipt.

A receipt from the Trustee with respect to the deposit of the amounts of the Principal and Interest (including

linkage differentials, if relevant) with it, in favor of the Bondholders with the Trustee, including pursuant to

the provisions of Section 3.7.14, shall be deemed to constitute a receipt vis-à-vis the Company from the

Bondholder and shall release the Company, by way of an absolute release, with respect to the payment of the

amounts set forth in the receipt.

Monies which were distributed in accordance with that which has been set forth in Sections 3.7.12 and 3.7.13

shall be deemed to constitute payment on account of the repayment of the Bonds.

3.7.16 Presentation of the Bond to the Trustee and records in the context of partial payment

A Registered Holder shall be required to present to the Trustee, at the time of partial payment of any

Principal and Interest pursuant to Sections 3.7.12, 3.7.13, 3.7.15, the certificate for the Bonds with respect to

which the payments are made, and the Trustee shall enter a record on the Bond certificate with respect to

the amounts which were paid in accordance with that which has been set forth above and the date of

payment thereof.

In any special case, the Trustee shall be entitled, at its discretion, to waive the presentation of the Bond

certificate after it has been given, by the Holder and/or anyone on his behalf, an indemnification document

and/or a guarantee which in its opinion is sufficient with respect to the damages which might be caused by

the fact that the record in accordance with that which has been set forth above was not entered, all as the

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Trustee shall see fit. Notwithstanding that which has been set forth above, the Trustee shall be entitled, at its

discretion, to keep records in any other manner with respect to partial payments in accordance with that

which has been set forth above.

3.7.17 Investment of monies

All of the monies which the Trustee is entitled to invest pursuant to the Deed of Trust shall be invested by it,

in its name or to its order, in investments in which the laws of the State of Israel permit the investment of

monies in trust, provided that they constitute one of the following investment channels: (1) Government

bonds, the date of final redemption of which is not more than one year away; (2) short-term Government

loans; (3) deposits in New Israeli Shekels in one of the five major banks in Israel, all as the Trustee shall see fit

and subject to the terms of the Deed of Trust. Should the Trustee have acted in that way, it shall not owe the

Entitled Parties, with respect to the amounts in question, anything other than the consideration, including

the earnings with respect to the investments in question, which shall be obtained from the realization of the

investments, less the Trustee’s fee and expenses, the commissions and expenses related to the investment in

question and to the management of the Trust Account, and less the compulsory payments which apply to the

Trust Account, and, with respect to the balance of the monies in accordance with that which has been set

forth above, the Trustee shall act in accordance with the provisions of the Deed of Trust.

Should the monies result from the deposit thereof by the Company pursuant to Section 3.6.5, the Trustee

shall hold the monies in question and shall invest them in the manner set forth in this Section 3.7.17, up to

the expiry of one (1) year after the Date of Final Redemption of the Bonds. After that date, the Trustee shall

refund the amounts which have accrued in its possession (including the profits which result from the

investment thereof), less its expenses, to the Company, which shall hold the monies in question in trust for

the Bondholders. The Company shall confirm to the Trustee in writing the refund of the aforesaid amounts

and the fact of their receipt in trust for the Bondholders.

Monies which shall be held by the Company in trust, in accordance with that which has been set forth above,

shall be invested by the Company in the name and to the order of the Bondholders in investments in which

the laws of the State of Israel and the provisions of the Deed of Trust permit the investment of monies in

trust, until the expiry of seven years from the date of transfer of the amounts, in accordance with that which

has been set forth above, to the Company by the Trustee. Upon the expiry of seven (7) years from the date of

transfer of the amounts, in accordance with that which has been set forth above, to the Company, and

provided that they have not been demanded by the Bondholders, the Company shall be released from

keeping the amounts, in accordance with that which has been set forth above, in trust for the Bondholders,

and the Company shall be entitled to dispose of the amounts, in accordance with that which has been set

forth above, as it shall see fit, including for its personal use. That which has been set forth above shall not

derogate from the Company’s duty vis-à-vis the Bondholders to pay the monies to which they are entitled, as

set forth under any law.

3.7.18 Undertakings by the Company vis-à-vis the Trustee

The Company undertakes vis-à-vis the Trustee as follows, as long as all of the Company’s undertakings in the

context of the Bonds and the Deed of Trust have not been repaid in their entirety:

(a) To conduct the Company’s business in a good and proper manner.

(b) To keep and to retain orderly account ledgers as provided by law, and to retain the ledgers, including the

documents which serve them as references and the other material documents which are related to its

business, in a manner which does not constitute a material breach of the provisions of any applicable

law.

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(c) Should the Company cease to be a “Reporting Corporation” as this term is defined in the Securities Law,

the Company shall provide the Trustee and the Bondholders with all of the reports which are required of

a corporation which is not a “Reporting Corporation”, in accordance with that which has been set forth

above, pursuant to the provisions of Section 8 of Institutional Entities Circular No. 2010-9-3 dated July 14,

2010, which was published by the Capital Markets, Insurance and Savings Division of the Israel Ministry

of Finance, on the subject of “Provisions with respect to investment by institutional entities in non-

Government bonds”.

(d) Subject to the provisions of [Section] 12.5 of the Deed of Trust and Subsection (i) below, to give, within a

reasonable time, to the Trustee and/or to persons as it shall order, any document or information which

has to do with the business and/or the assets of the Company, which shall be reasonably required, at the

discretion of the Trustee, for the purpose of protection of the Bondholders and exercise and

implementation of the authority, powers and authorizations of the Trustee and/or its representatives

pursuant to the Deed of Trust.

(e) To give notice to the Trustee, immediately upon being apprised of any event in which an attachment in a

material amount is imposed upon its assets, in whole or in any material part, and of any event in which a

receiver is appointed for its assets, in whole or in any material part.

(f) That it shall act concerning the Issue Consideration in accordance with the provisions of Section 5.2 of

the Prospectus (purpose of the consideration).

(g) In addition to that which has been set forth in Subsection (e) above, to give notice to the Trustee with

respect to the breach of any of the provisions of the Deed of Trust by the Company, including the

occurrence of one or more of the events which are set forth in Sections 3.7.11 (a) and 3.7.11 (b),

immediately upon being apprised of the occurrence thereof. In addition, the Company shall deliver to the

Trustee any notice which it shall deliver to the Comptroller General, pursuant to which the Company,

after having obtained the approval of its Audit Committee and its Board of Directors for that purpose,

has resolved to request that the upcoming payment with respect to the Backed Undertakings shall be

made by the State.

(h) To provide the Trustee, not later than thirty (30) days after the date of the Supplementary Notice which

shall be published by the Company pursuant to the Prospectus and/or after the date of the expansion of

the series, insofar as it is expanded, with an amortization table for the payment of the Bonds (Principal

and Interest) in an Excel file.

(i) To give the Trustee a copy of any document or any information which the Company has transferred to

the Bondholders, insofar as any such document or information shall be transferred. In addition, the

Company shall transfer to the Trustee or to its authorized representative (a notice of whose

appointment, for the purposes of this Section, shall be given to the Company in advance) additional

information with respect to the Company (including explanations, documents and calculations which

have to do with the Company, its business or its assets), insofar as this information, in the opinion of the

Trustee, is likely to be essential and necessary for the protection of the Bondholders’ rights, and provided

that the Trustee is acting in good faith and in a reasonable manner. Any information which is not in the

public domain, which shall be transferred to the Trustee or to its authorized representative in accordance

with that which has been set forth above, shall be kept confidential by it and shall not be used by it other

than for the purpose of the fulfillment of its functions as the Trustee pursuant to the Deed of Trust,

including for the purpose of a presentation thereof at meetings of the Bondholders, subject to receipt of

the Company’s consent, in advance and in writing, for the purpose of providing a report on the state of

the Company’s business and for the purpose of adopting a resolution which concerns their rights, and in

such a case, the Trustee shall require the Bondholders to keep the information which is given to them

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confidential unless the information has come into the public domain other than as the result of a breach

of the duty of confidentiality by the Trustee and/or by any of the Bondholders. Documents and/or

information which shall be delivered to the Trustee, pursuant to this Section, shall be delivered provided

that the delivery thereof does not constitute an offense of Use of Inside Information, as this term is

defined in the Securities Law and subject to the undertaking made to the Company by the Trustee and by

anyone whom it shall appoint on its behalf, in accordance with that which has been set forth above, to

maintain confidentiality.

(j) As of the date of issue of the Bonds pursuant to the Prospectus, the Company shall not be subject to any

limitation whatsoever, over and above that which is set forth under any law for the purpose of

performing a Distribution, as this term is defined in the Companies Law, with respect to which approval

has been obtained from the Government Companies Authority (in accordance with Section 4 of Chapter

6 of the Prospectus), including by way of the distribution of a dividend or the purchase of shares in the

Company by itself or by a corporation under its control.

(k) The Company shall provide the Trustee on March 31 of each year, and as long as the Deed of Trust is in

effect, a confirmation signed by the Chair of the Board of Directors or by the CEO of the Company

whereby to the best of his (their) knowledge, in the period from the date of the Deed and/or from the

date of the previous confirmation that was delivered to the Trustee, whichever is later, until the date of

giving the confirmation, the Company has committed no violation of the Deed of Trust, including any

violation of the terms of the Bonds, unless explicitly stated otherwise.

(l) The Company undertakes to transfer to the Trustee a copy of any report which the Company is required

to file to the Israel Securities Authority, concurrently with the filing thereof to the Israel Securities

Authority, and a copy of any document which the Company shall transfer to its shareholders or to the

Bondholders, and the details of any information which the Company shall transfer to them in any other

way; in addition, the Company shall transfer to the Trustee additional information upon reasonable

demand by the Trustee.

(m) It is hereby clarified that that which has been set forth in this Section shall not derogate from the duties

of confidentiality which shall apply to the Trustee under any law, including the Trustee’s duty of

confidentiality pursuant to Section 12.5 of the Deed of Trust [and] Subsection (i) above.

(n) It is further clarified that the Company shall be deemed to have fulfilled its duty of providing the Trustee

with the documents and details which are described in this subsection above, if it published the

information on the distribution site of the Israel Securities Authority (MAGNA) and/or the website of the

Stock Exchange.

(o) In any case in which the rating company is replaced, the Company shall publish an Immediate Report in

which it shall set forth the reasons for the replacement of the rating company. It is hereby clarified that

that which has been set forth above does not constitute an undertaking by the Company that the Bonds

shall be rated.

3.7.19 Trustee’s fee and coverage of expenses

The Trustee shall be entitled to a fee for the trust services, in accordance with that which has been set forth

in Appendix D to the Deeds of Trust, which are appended to this Prospectus.

3.7.20 Special powers

(a) The Trustee shall be entitled to deposit all of the deeds and documents which attest to, represent and/or

determine its right in the context of any asset which is in its possession at the time, in a safe in the

possession of a banking corporation which is one of the five major banking corporations in Israel. Should

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the Trustee have acted in that way, it shall not be liable for any loss which shall be incurred in the context

of any such deposit, unless the Trustee acted with gross negligence.

(b) The Trustee shall be entitled to commission the opinion or the advice of any attorney, accountant,

assessor, evaluator, surveyor, broker or other expert and to act in accordance with his conclusions,

whether the opinion or advice in question was obtained by the Trustee or by the Company or in another

manner, and the Trustee shall not be liable for any loss or damage which shall be caused as a result of

any action or omission which was performed by it on the basis of advice or opinions in accordance with

that which has been set forth above, unless the Trustee acted negligently and/or in bad faith and/or

maliciously. Subject to that which has been set forth below, the Company shall bear all of the expenses of

the engagement of the consultants who shall be appointed, in accordance with that which has been set

forth above, provided that the Trustee shall give notice to the Company, in advance, of its intention to

obtain an expert opinion or advice, in accordance with that which has been set forth above. Prior to the

appointment of a consultant or an expert, the Trustee and the Company shall agree on a list of no more

than three (3) consultants and/or experts with the relevant reputation and expertise, whom the Trustee

shall approach with a request for proposals for their fee, should they be appointed as agents in

accordance with that which has been set forth above. The Company shall select one of the proposals

which shall be submitted and shall be entitled to conduct negotiations with the Consultants and/or the

experts on their proposals.

(c) The Trustee shall be entitled to obtain a certificate, signed by a senior officeholder and a Director of the

Company, and/or an evaluation which confirms that in their opinion, any business, measure, action or

other thing is desirable and favorable for the Company, as sufficient proof that the business, measure,

action or thing actually is desirable and favorable for the Company, and the Trustee shall not be

obligated, under any circumstances, to require additional proof or another certificate, and shall not be

liable for any loss or damage which might be caused as a result thereof, provided that it acted as a

reasonable trustee.

(d) Notwithstanding all of that which has been set forth in the Deed of Trust, the Trustee shall not intervene

in any way whatsoever in the management of the Company’s business or matters which pertain to it,

over and above the powers which are expressly vested in it in the Deed of Trust.

(e) The Trustee shall faithfully exercise the authority, powers and authorizations which were conferred upon

it pursuant to the Deed of Trust, at its absolute discretion, but with a reasonable degree of care. Should

the Trustee have acted in that way, it shall not bear any liability for any damage which was caused by

errors in discretion which were made in good faith, unless the Trustee acted with negligence or with

malice.

(f) The Trustee shall have the power to decide with respect to all kinds of immaterial doubts and questions

which shall arise with respect to any immaterial provision of the Deed of Trust, and any decision by it

with respect to an immaterial question which actually arose, or which is included in the actions and

measures taken by the Trustee, shall be binding upon the parties and any person or entity which has an

Interest in the Deed of Trust.

3.7.21 The Trustee’s power to employ proxies

The Trustee shall be entitled to use the authority and powers which are granted to it in the Deed of Trust,

whether itself or through the appointment of a proxy who shall act in its stead, whether an attorney or any

other person, in order to perform or to participate in the performance of special actions which must be

performed in the context of the trust, provided that the Trustee shall have given notice to the Company, a

reasonable time in advance, with respect to the appointment of proxies, in accordance with that which has

been set forth above, and after the proxies have undertaken vis-à-vis the Company and have signed a

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declaration of confidentiality, in a wording which is similar to the wording in which the Trustee undertook to

maintain confidentiality, in accordance with that which has been set forth in Section 12.5 of the Deed of

Trust. In addition, the Trustee shall be entitled, from time to time, to dismiss a proxy whom it has appointed

and to appoint another proxy instead of the dismissed proxy. The Company shall bear the fees of the proxies

upon demand by the Trustee, provided that prior to the appointment of a proxy, in accordance with that

which has been set forth above, the Trustee shall give notice to the Company in writing with respect to the

appointment, and shall specify the details of the proxy’s fee and the purpose of his appointment, and

provided that the Trustee, insofar as possible, shall consult with the Company and, insofar as possible, shall

take its position into consideration with respect to the identity and the terms of the proxy. It is hereby

clarified that the appointment of proxies, in accordance with that which has been set forth above, shall not

derogate from the liability of the Trustee.

3.7.22 Notices

(a) Any notice on behalf of the Company and the Trustee to the Bondholders shall be given by way of a

report via the MAGNA system. The Trustee is entitled to instruct the Company, and the Company shall be

required, to make immediately, via the MAGNA system on behalf of the Trustee, any report in the

wording which shall be forwarded in writing by the Trustee to the Company, and in the case as set forth

below and those cases only, the report in accordance with that which has been set forth above shall also

be published by way of the publication of a notice in two (2) widely circulated daily newspapers which

are published in Israel in the Hebrew language: (a) an arrangement or settlement pursuant to Section

350 of the Companies Law; (b) a merger; and (c) the convocation of a general meeting of Bondholders.

Any notice which shall be published or sent by the Company via the MAGNA system in accordance with

that which has been set forth above shall be deemed to have been delivered to any Bondholder and/or

to the Trustee on the date of publication thereof, in accordance with that which has been set forth

above, via the MAGNA system or in the press, as is relevant.

(b) Copies of the notices and invitations which the Company shall give to the Bondholders shall be sent by

the Company to the Trustee and to the Comptroller General.

(c) Should the Company cease to report pursuant to Chapter F of the Securities Law, any notice on behalf of

the Company and/or the Trustee to the Bondholders shall be given by sending a notice by registered

postal mail to every Registered Holder of Bonds, at his address most recently entered in the Bondholders’

Ledger (in the case of joint Holders – to the joint Holder whose name appears first in the Ledger). Any

notice which shall be sent in accordance with that which has been set forth above shall be deemed to

have been delivered to the Holders of the Bonds three (3) Business Days after being handed in at a post

office.

(d) Any notice or demand on behalf of the Trustee to the Company may be given by means of a letter which

shall be sent by registered postal mail, according to the address which has been set forth in the Deed of

Trust, to the Chief Financial Officer, or to any other address of which the Company shall notify the

Trustee in writing, and any such notice shall be deemed to have been received by the Company five (5)

Business Days after the date on which it was handed in at a post office. The date of delivery shall be

proven by presentation of the confirmation of delivery. The provisions of this Section shall not derogate

from the provisions of Section 3.9.3 above. A copy of a notice, in accordance with that which has been

set forth above, shall be delivered by the Trustee to the Comptroller General, to the address which is set

forth in the Deed of Trust, or to any other address of which the Comptroller General shall notify the

Trustee, and any such copy of a notice or demand shall be deemed to have been received by the

Comptroller General seven (7) Business Days after the date on which the copy was delivered by

registered postal mail.

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(e) Any notice or demand on behalf of the Company to Trustee may be given by means of a letter which shall

be sent by registered postal mail according to the address which has been set forth in the Deed of Trust,

or to any other address of which the Trustee shall notify the Company in writing, and any such notice or

demand shall be deemed to have been received by the Trustee seven (7) Business Days after the date on

which the copy was delivered by registered postal mail. The date of delivery shall be proven by

presentation of the confirmation of delivery. A copy of a notice, in accordance with that which has been

set forth above, shall be delivered by the Company to the Comptroller General to the address which is

set forth in Section 3.9.5, or to any other address of which the Comptroller General shall notify the

Company, and any such copy of a notice or demand shall be deemed to have been received by the

Comptroller General seven (7) Business Days after the date on which the copy was delivered by

registered postal mail.

3.8 Rating of the Bonds

The Proposed Bonds have been rated by Midroog at a rating of Aaa, at a scope of up to NIS 3 billion nominal value.

The rating report and the consent of the rating company to the inclusion thereof in the Prospectus are attached as

Appendix B to this Prospectus.

3.9 Guarantee Document

On June 25, 2012, the Company entered into a framework agreement with the State of Israel for the provision of a

guarantee, pursuant to which the State of Israel provided the Company with three (3) Guarantee Documents (one

Guarantee Document for each of the series of the Offered Bonds pursuant to this Prospectus), pursuant to which the

State of Israel shall guarantee the upholding of the Company’s undertakings for the repayment of the unsettled

balance of the Backed Undertakings (as this term has been defined above) vis-à-vis the Bondholders of each of the

three (3) series of Bonds which are offered pursuant to this Prospectus (hereinafter: the “Agreement for the Provision

of the Guarantee”). The Agreement for the Provision of the Guarantee governs the principal terms of the three (3)

Guarantee Documents which were signed by the State vis-à-vis the Trustee (one Guarantee Document with respect to

each series of Bonds), the details of which shall be cited below; the provisions which shall apply in the event of

forfeiture of the State guarantee; and the sureties with which the Company shall provide the State to secure the

repayment of the Company’s undertakings vis-à-vis the State in the event of forfeiture of the Guarantee. For

additional details on the Agreement for the Provision of the Guarantee, see Section 8.2.1.2 of the Prospectus.

Following are the principal details of the Guarantee Document:

3.9.1 Applicability of the Guarantee

Pursuant to the Guarantee Document, the Division of the Comptroller General in the Israel Ministry of

Finance (hereinafter: the “Comptroller General”) has undertaken to guarantee, by way of an irrevocable,

autonomous guarantee in the name of the State of Israel (hereinafter: the “State”) vis-à-vis the Bondholders

of each series (separately), pursuant to the terms of each Guarantee Document, the repayment of the

Company’s undertakings to pay the Backed Undertakings up to the actual date of repayment of the Bonds of

that series pursuant to the terms thereof, all pursuant to the terms of each Guarantee Document

(hereinafter: the “Guarantee”).

3.9.2 Validity of the Guarantee

The Guarantee of each series of Bonds shall be valid starting from the date of the issue of the Bonds of the

relevant series to the Bondholders of each series by the Company (hereinafter: the “Date of

Commencement”) and up to the expiry of twenty-one (21) Business Days after the Date of Final Redemption

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of the Backed Undertakings of each series, pursuant to the terms of the relevant Deed of Trust (hereinafter:

the “Date of Termination”).

To preclude all doubt, should a Notice of Non-Payment (as this term is defined below) have been given by the

Trustee for the relevant series up to the Date of Termination of any of the Backed Undertakings of that series

pursuant to the terms of the relevant Deed of Trust, the Guarantee shall continue to be valid with respect to

the amount in the context of which a Notice of Non-Payment was given, up to the actual date of payment of

the amount with respect to which a Notice of Non-Payment was given.

Without derogating from the generality of that which has been set forth above, the Guarantee shall not

expire and the undertakings by the State pursuant thereto shall not expire as a result of any change in the

identity of the shareholders of the Company and/or change in the structure and/or change in the name

and/or change in the legal status, as is relevant, of the Company, irrespective of the reason for the change.

The State Guarantee shall not apply with respect to Bonds which shall be held by a subsidiary of the

Company, as long as they are held by it in accordance with that which has been set forth above. Bonds which

shall be purchased by the Company shall be canceled and shall be deleted from trading on the Stock

Exchange, and the certificates shall be withdrawn from the clearinghouse, and accordingly, the Guarantee

with respect thereto shall expire.

3.9.3 Forfeiture of the Guarantee

(a) The Guarantee may be forfeited in the following cases: (i) should the Company not have made a certain

payment of the Backed Undertakings of a certain series by the date of payment which was established in

the Deed of Trust for the payment in question (hereinafter: the “Established Date of Payment” and the

“Payment Not Made”, as is relevant), the guarantee may be forfeited solely and exclusively with respect

to the Payment Not Made in the context of that series of Bonds (hereinafter: “Partial Forfeiture of the

Guarantee”), and the balance of payments which are included in the Backed Undertakings in the context

of that series of Bonds shall be repaid on the original date established for the payment thereof pursuant

to the Deed of Trust of each series. The making of payment by the State with respect to Partial Forfeiture

of the Guarantee shall be deemed to constitute the making of the Payment Not Made, and this shall not

constitute a breach of the provisions of the Deed of Trust of the relevant series, nor shall it constitute

cause for calling in the Bonds of that series for immediate repayment; or (ii) should a certain series of the

Bonds have been called in for immediate repayment pursuant to the terms of the Deed of Trust of that

series, upon which occurrence the Guarantee may be forfeited with respect to the remainder of the

Company’s undertakings to make payment for the Backed Undertakings of the relevant series of Bonds

pursuant to the terms of the Bonds of the relevant series (hereinafter: “Complete Forfeiture of the

Guarantee”).

(b) Upon the occurrence of an event in accordance with that which has been set forth in Subsection (a)(i)

above, the Trustee shall give notice in writing to the Comptroller General (without it having any right to

exercise discretion in the matter) with respect to the non-payment by the Company on the date set for

the payment pursuant to the Deed of Trust of that series, and upon receipt of the notice in accordance

with that which has been set forth above, the Guarantee shall be deemed to have been forfeited in an

amount equal to the Payment Not Made as at the date thereof, in accordance with that which has been

set forth in the notice (hereinafter: “Notice of Non-Payment”). A Notice of Non-Payment shall be

delivered to the Comptroller General by the Trustee in the course of a period of twenty-one (21) Business

Days which shall begin on the date established for each payment which the Company did not fulfill its

duty to make (hereinafter: the “Period for Partial Forfeiture of the Guarantee”). A Notice of Non-

Payment shall be sent by the Trustee to the offices of the Comptroller General and to the offices of the

Company, by way of personal delivery, as set forth in Section 3.9.5. A Notice of Non-Payment shall be

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deemed to have reached its addressee at the time of delivery thereof, provided that an appropriate

confirmation of delivery is received.

(c) Without derogating from the generality of that which has been set forth in Subsection (b), should the

Trustee not have given a Notice of Non-Payment to the Comptroller General by the end of sixteen (16)

Business Days from the date which was set for any payment, in accordance with that which has been set

forth above, a Bondholder who held 10% or more of the balance of the nominal value of the Bonds on

the Date of Record for the making of the payment with respect to which the Notice of [Non-]Payment

was not given, in accordance with that which has been set forth above (hereinafter: “Material Holder”),

and after having issued a demand in writing for the Trustee to give a Notice of Non-Payment, in

accordance with that which has been set forth above, shall be entitled to give a Notice of Non-Payment

to the Comptroller General himself, instead of the Notice of Non-Payment on behalf of the Trustee with

respect to a certain payment, along with confirmation by the Bondholder in question that he had

approached the Trustee with a demand for it to give a Notice of Non-Payment to the Comptroller

General and the Trustee did not comply with that demand, after he has proven to the satisfaction of the

Comptroller General that he held Bonds, in accordance with that which has been set forth above, on the

date which was set for the payment. A Notice of Non-Payment, in accordance with that which has been

set forth above, shall be filed by a Material Holder, in accordance with that which has been set forth in

this paragraph, by the end of twenty-one (21) Business Days after the date which was set for the making

of any payment. Should a Notice of Non-Payment have been submitted by a Material Holder, the Notice

shall apply with respect to the entire Series (and not only with respect to the holdings of the Material

Holder in question).

(d) Upon the occurrence of an event in accordance with that which has been set forth in Subsection (a)(ii)

above, the Trustee shall give notice in writing (without having a right to exercise discretion on the

matter) to the Comptroller General with respect to the calling-in of the balance of the Backed

Undertakings with respect to that series for immediate repayment (hereinafter: “Notice of Complete

Forfeiture”). A Notice of Complete Forfeiture shall be delivered to the Comptroller General by the

Trustee in the course of a period of twenty-one (21) Business Days which shall begin on the date on

which the balance of the Backed Undertakings were actually called in for immediate repayment by the

Trustee or the Bondholders pursuant to the provisions of the relevant Deed of Trust (hereinafter: the

“Period for Complete Forfeiture of the Guarantee”). A Notice of Complete Forfeiture shall be sent to the

offices of the Comptroller General and to the offices of the Company by way of personal delivery, as set

forth in the Guarantee Document. A Notice of Complete Forfeiture shall be deemed to have reached its

addressee at the time of delivery thereof provided that an appropriate confirmation of delivery is

received.

(e) Should a Notice of Non-Payment or a Notice of Complete Forfeiture (hereinafter jointly: the “Notice of

Forfeiture”) be received from the Trustee or from a Material Holder pursuant to the Guarantee

Document, and provided that it has received in the course of the Period for Partial Forfeiture of the

Guarantee or the Period for Complete Forfeiture of the Guarantee, as is relevant, the State shall pay the

Recording Company, into the bank account of the Holding Company, as the Trustee shall instruct, in

accordance with the instructions of the Stock Exchange and the Stock Exchange Clearinghouse, as these

shall be from time to time, no later than forty-five (45) Business Days) from the date of delivery of the

Notice of Forfeiture (hereinafter: the “Date of Deferred Payment”), the amount which was forfeited by

virtue of the Guarantee and pursuant to the terms thereof. Should there be additional registered holders

– that is, holders in whose names the Bonds shall be registered (hereinafter: the “Additional Registered

Holders”), the amounts which are due to the Additional Registered Holders in question shall be paid to

the Trustee, which shall take measures for the payment of the amounts in question to the Additional

Registered Holders.

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In addition, the fee and expenses of the Trustee shall be secured by the Guarantee (to the extent not

paid by the Company). In addition, indemnification to the Trustee (to the extent that the Trustee is

entitled to indemnification from the Bondholders in accordance with the provisions of the Deed of Trust),

in accordance with the indemnification undertaking applying to the Bondholders only (and not the

indemnification undertaking applying to the Company) as set forth in Section 3.7.6 (b) above and subject

to the Bondholder Indemnification Account Limit as this term is defined in Section 3.7.6 (b) above, shall

be paid by the State to the Trustee’s account, as the Trustee shall instruct.

The Recording Company and/or the Trustee (should there be Additional Registered Holders) shall

transfer the amount which shall be transferred to them by the State, in accordance with the Guarantee

Document, to the Bondholders within two (2) Business Days of the date on which any amount was

transferred to them by the State in accordance with the Guarantee Document. In this context, it is

hereby clarified that the transfer of the payments to the Recording Company and the Trustee (insofar as

there are any Additional Registered Holders) and with respect to the Trustee’s expenses and the

indemnification of the Trustee, to the Trustee’s account, from the State pursuant to the Guarantee

Document shall be deemed to constitute actual payment to the Bondholders (including in the matter of

the calculation of Interest, linkage (if any) and Arrears Interest, if any), and the Trustee and/or the

Bondholders shall have no contention and/or demand and/or claim against the Company and/or against

the State, should the payments (in whole or in part) for any reason whatsoever not have been

transferred to the Bondholders in a timely manner, for any reason whatsoever.

(f) Upon the delivery of a Notice of Non-Payment in writing from the Trustee or from a Material Holder, in

accordance with that which has been set forth above, the date of actual payment with respect to the

amount of the Principal and/or Interest of the Bonds of the relevant series, with respect to which the

Notice of Non-Payment was given by the Trustee in accordance with that which has been set forth in the

Deed of Trust shall be deferred to the Date of Deferred Payment, and a deferment in accordance with

that which has been set forth above shall not be deemed to constitute a breach of the Deed of Trust and

shall not constitute cause for calling in the Bonds of the relevant series for immediate payment and shall

not confer the right to receive additional monies, with the exception of Interest (and linkage, if any) with

respect to the period of the deferral, as set forth above. Effective from the date on which the payment

was not made by the Company, the amount of the Principal of the Bonds shall continue to bear interest

in accordance with that which has been set forth below until the earlier of Date of Deferred Payment or

the date of payment by the State.

With respect to all that which has been set forth above, it is clarified that:

Starting on the original date of payment for the Payment Not Made on the regular date of payment and

up to the actual date of payment of the Payment Not Made, the amount which was forfeited shall bear

interest at the rate of the Interest on the Bonds, as determined in the tender for the relevant series

(hereinafter: the “Deferral Interest”) and linkage, should it apply pursuant to the terms of the relevant

series of Bonds. Insofar as through to forty-five (45) days from the date of the Notice of Forfeiture (as

defined above), the State of Israel does not pay the Forfeited Amount (plus the Deferral Interest and the

Index Linkage, to the extent that this applies in accordance with the terms of the relevant bond series),

then effective from this date until the actual date of payment of the Forfeited Amount, the Forfeited

Amount (plus the Deferral Interest, and the Index Linkage Differentials, to the extent relevant, which has

been accrued for the same until that date) shall bear Arrears Interest (as defined in Section 3.2 above),

instead of the Deferral Interest.

To preclude all doubt, the balance of the Principal of the Bonds (and the Linkage Differentials, if relevant)

that have not yet matured shall continue to bear Interest at the rate prescribed in the tender, for the

Interest period that starts on the original Date of Payment.

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(g) In accordance with that which has been set forth above, the Guarantee was given to secure the Backed

Undertakings. This being the case, it is hereby clarified that the amount of the Guarantee shall decrease

in accordance with the amount of the payments which shall be paid by the Company with respect to an

installment on account of any of the Backed Undertakings in each of the series. In addition, should the

Guarantee have been partially forfeited, the Guarantee shall decrease in accordance with the total

amount which was forfeited and paid by the State on account of the Backed Undertakings, and the

Backed Undertakings shall be reduced accordingly.

(h) Subject to the remaining provisions of this Section 3.9.3, the Trustee shall not be obligated to take any

measures whatsoever for the collection of the amounts secured from the Company. This section shall be

deemed to constitute a waiver by the guarantor of a demand from the debtor, pursuant to the provisions

of Section 8 of the Guarantee Law - 1967.

(i) Pursuant to the provisions of the Deed of Trust, insofar as the Company fails to repay any amount on the

account of the Backed Undertakings at the time prescribed for that purpose in the Deed of Trust, the

Company shall announce this to the Trustee within one (1) Business Day of the scheduled date of

payment, and shall publish an Immediate Report to that effect. In addition, the Company shall publish an

Immediate Report of giving a notice of forfeiture to the Comptroller General and shall publish an

Immediate Report on the date on which the State is to pay the Payment Not Made by the Company, at

least four (4) Trading Days prior to the actual execution of the payment by the State. A report of the

Company as set forth shall indicate the amount that will be paid to the Bondholders by the State of

Israel, and the Interest rate (which includes the Deferral Interest) and the original Date of Record for

payment that is the original Date of Record of the Payment Not Made.

3.9.4 Payment by the State

Notwithstanding that which has been set forth in Section 3.9.3 (b) and (c), the State shall be entitled to make

payment on account of any Interest and/or Principal of the Bonds which was not repaid by the Company up

to the date established for the payment thereof, even if a demand for payment was not delivered to the

State by the Trustee, or by a material holder, provided that payment shall be made up to the Date of

Deferred Payment.

3.9.5 Notice pursuant to the Guarantee Document

Any notice pursuant to the Guarantee Document, with the exception of a Notice of Forfeiture, in accordance

with that which has been set forth in Sections 3.9.3 (b), (c) and (d) shall be in writing and shall be sent by

registered postal mail to the Division of the Comptroller General, Israel Ministry of Finance, 1 Kaplan Street,

Jerusalem, or shall be delivered personally and addressed to (a) the Senior Deputy Comptroller General

(Finance and Banking Department), (b) the Commissioner of State Guarantees, and (c) the Staff Accountant of

the Comptroller General. A notice that shall be sent shall be deemed to have reached the addressee and to

have been brought to his attention within three (3) Business Days if sent by registered postal mail; at the time

of delivery thereof and provided that confirmation of delivery was received if delivered by hand.

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Chapter 4 – Company capital and rights associated with the shares in the Company

4.1 Registered capital

As at the date of the Prospectus, the Company’s registered share capital is NIS 12,026,017, divided into 80,167,387

ordinary shares, 40,053,252 Class B ordinary shares, and 39,531 undefined shares.

In the three (3) years which preceded the date of the Prospectus, no change has taken place in the Company’s

registered capital.

4.2 Issued capital

The issued and paid-up share capital of the Company as at the date of the Prospectus is NIS 12,021,823.8, divided into

80,164,986 ordinary shares and 40,053,252 Class B ordinary shares. The Company’s issued share capital has been

entirely paid up.

In the three (3) years which preceded the date of the Prospectus, no change has taken place in the Company’s issued

and paid-up capital.

4.3 The Company’s status as a public company

The Company’s shares were traded on the Stock Exchange for a certain period of time.1 On September 30, 1986, the

State of Israel published an offer for the shareholders in the Company to sell their shares to it, against payment of

approximately NIS 1.6 (which, at the time of the offer, were equivalent to approximately US$ 1.067) per share. At that

time, the public held share capital at the rate of approximately 5.3% of the Company’s issued and paid-up share

capital. The majority of the shareholders from among the public accepted this offer, and only approximately 0.15% of

the issued and paid-up share capital remained in public hands. As a result of this offer, the Company’s shares were

deleted from trading on the Stock Exchange on March 31, 1987. In addition, for a certain period of time, the

Company’s shares were traded on the London Stock Exchange2, and in 1994, the Company’s shares were deleted from

trading on the London Stock Exchange as well.

As at the date of the Prospectus, the State of Israel holds approximately 99.846% of the Company’s issued and paid-up

capital, and accordingly, the Company is a “Government company”, as this term is defined in the Government

Companies Law. In addition, the Company is defined as a “public company”3, as this term is used in the Companies

Law. As at the date of the Prospectus, some of the Company’s bonds (Series 22) are traded on the Stock Exchange,

pursuant to a prospectus of the Company dated May 21, 2002.

4.4 Holdings of the Company’s securities by stakeholders as at the date of the Prospectus

To the best of the Company’s knowledge and that of its managers, the stakeholders who hold shares and/or securities

in the Company, shortly before the date of the Prospectus, are as set forth below:

1 The Company currently has no information with respect to the date and the manner in which its shares were offered to the public in the

past. 2 The Company currently has no information with respect to the date and the manner in which its shares were offered on the London Stock

Exchange in the past. 3 For the reason with respect to which the Company is defined as a “public company”, see Section 1.1 of Chapter 6 of the Prospectus.

D-2

Stakeholder Share class Nominal value stated in NIS

Number of shares Percentage of holdings4

In capital In voting

State of Israel (1)

Ordinary 0.10 79,980,010 99.77% 99.77%

Ordinary Class B 0.10 40,053,252 100% 100%

Yahav David Ordinary 0.10 1 0 0

Yiftah Ron-Tal Ordinary 0.10 1 0 0

(1) The controlling party of the Company.

4.5 Controlling parties of the Company

As at the date of the Prospectus, the controlling party of the Company is the State of Israel, which holds 79,980,010

ordinary shares and 40,053,252 Class B ordinary shares, which jointly constitute approximately 99.846% of the

Company’s issued and paid-up share capital and the voting rights therein, as set forth in Section 4.4 of the Prospectus.

4.6 Securities convertible into shares in the Company

As at the date of the Prospectus, the Company has not issued securities which are convertible into shares in the

Company.

4.7 Rights associated with shares in the Company

In light of the Company’s status as a Government company as well as a public company, the Company is subject to the

Companies Law and the regulations enacted pursuant thereto, the Government Companies Law and the regulations

enacted pursuant thereto, and the Securities Law and the regulations enacted pursuant thereto. As required by law, in

any cases where the provisions of the Company’s Articles of Association, as set forth below, conflict with a cogent

provision of an applicable law, the provisions of the applicable law shall prevail. In addition, pursuant to Section 3 of

the Government Companies Law, the Company’s Articles and Memorandum of Association has no power to derogate

from the provisions of the Government Companies Law. For a description of the principal provisions which apply to

the Company by virtue of the Government Companies Law, including with respect to resolutions which require

Government approval, see Section 22.5 of Chapter 6 of the Prospectus.

It should further be stated that the Company’s Articles of Association include references to the Companies Ordinance

(of 1929), which was subsequently superseded by the Companies Ordinance [New Version] (of 1983). The majority of

the provisions of the Companies Ordinance [New Version] have been superseded by the provisions of the Companies

Law (with the exception of provisions having to do with liquidation and encumbrance). This being the case, and given

that the Company’s Articles of Association have not been replaced but rather, have been amended a number of times,

and include references to the provisions of the Companies Ordinance or the Companies Ordinance [New Version], the

Articles of the Association of the Company has provisions that contradict cogent provisions that have been prescribed

in the Companies Law, which supersede the provisions of the Articles of Association of the Company. For convenience

of reading, in places where such references exist, the relevant provision has been cited in the original (in a footnote),

and insofar as a parallel provision exists in the Companies Law or the Companies Ordinance [New Version], which has

superseded the provision in question and is still valid, the content of the parallel provision has been expressly cited

and to the extent there is a cogent provision in the Companies Law – stated in the said provision.

4 The Company has not issued securities which are convertible into shares in the Company.

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It is hereby clarified that the wording which appears below is a concise version and is no substitute for study of the

complete version of the Company’s Articles of Association, which has been published on the distribution site of the

Israel Securities Authority, the address of which is http://www.magna.isa.gov.il.

Following is a detailed listing of the principal voting rights of the Company’s shares, as set forth in the Company’s

Articles of Association:

4.7.1 Change in rights

The rights or privileges, in whole or in part, which are attached to any class of shares which constitute part of

the Company’s capital at that time, may (unless otherwise stated in the terms of issue of the shares of that

class) – subject to the provisions of Section 44 of the Companies Ordinance5 – be changed in any way

whatsoever, subject to the written consent of the holders of three-quarters (3/4) of the holders of shares of

that class. All of the provisions of the Company’s Articles of Association which have to do with general

meetings shall apply to such a separate meeting, mutatis mutandis and as is relevant, but in such a way that

the required forum shall consist of members of that class, who hold or represent by proxy one-third (1/3) of

the paid-up capital, or the capital which is recorded as paid-up, on account of the issued shares of that class,

and in such a way that any member of that class, who is present himself or by proxy, is entitled to demand a

vote by ballot, and in such a way that the shareholders of that class shall have one vote in the ballot for each

share which is held by each one thereof.

4.7.2 General meetings and voting rights

4.7.2.1 Subject to any special rights or limitations which are attached, at the time, to any class or class of

shares, each member6 who is himself present, shall have one vote in a show of hands, and in a

5 Section 44 of the Companies Ordinance states as follows: “(1) Wherever the Memorandum of Association or the Articles of Association of

a company, the capital of which is divided into shares of different types, includes provisions with respect to the right to introduce changes in the rights inherent to each type of shares, provided that a fixed portion of the holders of shares of that type which have been placed on the market consented to the change, or provided that a resolution has been adopted at a special meeting of those shareholders, and on the basis of the provisions in question, a change is made, at any time, in the rights of any type of shares, the holders of at least fifteen percent of the total number of shares of that class which have been issued, who did not consent to the change or did not vote in favor of adopting the resolution, may approach the Court and may petition for the cancellation of the change, and should the petition in question have been filed, the change shall not become valid unless and until it has been approved by the Court; (2) a petition pursuant to this section must be filed within seven days of the date on which consent was given or the date on which the resolution was adopted, and may be filed in the name of the shareholders who have the right to file it by one or more persons who have been appointed by them in writing; (3) should the Court before which such a petition is filed, and which has heard the statements of the petitioner and of any other person who has approached the Court with a request to be heard and whom the Court has found to have an interest in the petition, have found that, taking into account all of the circumstances of the case, the change will unjustly prejudice the rights of the holder of the class of shares in whose name the petitioner has spoken, may cancel the change, and should the Court not have found as set forth above, it shall approve the change; (4) the decision by the Court with respect to any such petition is a final decision; (5) the company shall send the Registrar of Companies, within fifteen days of the date on which the Court order with respect to any petition as set forth above is issued, a copy of the order, and should the company not have complied with this provision, it shall be subject to a fine of 5 pounds for each day in which the offense continues, and any manager, business manager, secretary or other official of the company, who knowingly or maliciously allow the offense to be committed shall be accused of the offense and shall be subject to a similar penalty; (6) the term ‘change’ in this section also includes a cancellation, and the expression ‘a change is made’ shall be interpreted accordingly.” The arrangement which is described in this section changed upon the entry of the Companies Law into force, as Section 20 (c) of the Companies Law states that, in cases where shares in a company are divided into classes, no change shall be made in the Articles of Association which shall prejudice the rights of a class of shares without the approval of a meeting of that class, and Section 75 of the Companies Law states that the provisions which apply to a general meeting shall apply, mutatis mutandis, to a class meeting. Section 91 of the Companies Law states that the Court, at the request of a shareholder, is entitled to order the cancellation of a resolution which was adopted at a general meeting which was convened or conducted other than in compliance with the terms set forth for that purpose pursuant to the Companies Law or the company’s Articles of Association.

6 The term “Member” was replaced, under the Companies Law, by the term “Shareholder”; and the term “Members’ Ledger” was replaced

by the term “Shareholders’ Ledger”.

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vote by ballot, each member who is present himself or by proxy shall have one vote for each share

held by him.7

4.7.2.2 It is permissible to vote personally or by proxy. In a vote by show of hands, a member who is only

present by proxy shall have no vote; however, the proxy of a state or a corporation shall be

entitled to vote by show of hands. A proxy is not required to be a member of the Company.8

4.7.2.3 In case of a tie, whether by show of hands or by ballot vote, the Chair of the meeting shall be

entitled to an additional vote or a casting vote, in addition to the votes to which he is entitled as a

member.

4.7.2.4 A resolution which was adopted by the members of the Board of Directors, and concerning which

notice was given to the members in the manner set forth in the Company’s Articles of Association

for the giving of notices, and which was confirmed and upheld in writing, within one month after

the adoption thereof as set forth above, by members who are entitled, in a vote by ballot, to

three-fifths (⅗) of the total number of votes by members, shall be as valid and as effective as an

ordinary resolution which was adopted at a general meeting which was held one month after the

adoption by the members of the Board of Directors.

4.7.2.5 A member who is not of sound mind is entitled to vote, whether in a show of hands or by ballot,

by means of the committee in charge of him or by means of his other legal guardian or supervisor,

and the latter persons are entitled to give their votes by proxy in a vote by ballot.

4.7.2.6 Should two (2) or more persons be jointly entitled to a share, then, when voting on any question

whatsoever, the vote of the most senior of the members voting, whether himself or by proxy, shall

be allowed, and the votes of the remaining registered owners of the chair shall not be counted. In

this matter, seniority shall be determined according to the order in which the names are recorded

in the Members’ Ledger.

4.7.2.7 A state or a corporation which is a member of a company is entitled, by means of a document

signed by the competent minister of the government of that state or a resolution by the members

of the Board of Directors or the other managing entity of that corporation, as is relevant, to

empower any person to act as its representative at any meeting of the Company or of any class of

its members, and such a representative shall be entitled to make use, in the name of that state or

that corporation, of the powers which the state or the corporation in question could have used,

had it been an individual member of the Company.

4.7.2.8 The document appointing a proxy shall be signed by the appointer, or by his representative who

has been lawfully empowered in writing; should the appointer be a state, the document shall be

signed by the competent minister of the government of that state, and should the appointer be a

corporation, the document shall be stamped with the official stamp of the corporation, and if it

has no stamp – it shall be signed by whatever official or representative is lawfully competent to do

so.

4.7.2.9 The document appointing a proxy and the power of attorney or other authorization by virtue of

which the document was signed, if any, or a notarized copy of such a power of attorney, shall be

deposited at the office at least forty-eight (48) hours before the date and time which were set for

the holding of the meeting, or the adjourned meeting, at which the person who is listed in that

7 Pursuant to the provisions of Section 84 of the Companies Law, a resolution at a general meeting shall be adopted by a count of votes

(that is, according to the quantity of shares which confer voting rights), whereby only a private company is entitled to establish a different rule for decision in its Articles of Association.

8 Pursuant to the provisions of Section 83 (a) of the Companies Law, a shareholder in a public company is entitled to vote, himself or by

proxy, and in a voting letter pursuant to the provisions of Part 7 of the Companies Law.

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document intends to vote; otherwise, the person so listed shall not be entitled to vote by virtue of

that proxy document.

4.7.2.10 A vote which was given in accordance with a proxy document shall be valid, even if, prior to the

vote, the empowering person died or became mentally ill, or the proxy document was canceled or

the consent by virtue of which it was signed was canceled, or the share with respect to which the

vote is cast was transferred, provided that notice of the demise, the mental illness, the

cancellation or the transfer was not received by the office at least one (1) hour before the date

and time which were set for the holding of the meeting.

4.7.2.11 The document appointing a proxy shall be deemed to grant the authority to demand, or to join a

demand for, a vote by ballot.

4.7.2.12 The Chair of the meeting at which the vote was cast shall be the sole judge of the qualification of

the vote, and the Chair who is present at a vote by ballot shall be the sole judge of the

qualification of each vote which is cast in that ballot box. Any vote which was not disqualified at

the meeting or in the ballot box in which it was given shall be deemed to be qualified for all of the

purposes of the meeting or ballot box in question.

4.7.2.13 A general meeting shall be held once every calendar year, on the date, at the time and in the place

which shall be determined by the Company in a general meeting or, in the absence of such a

determination, by the members of the Board of Directors, but in such a way that no more than

fifteen (15) months [shall elapse] between the holding of two consecutive meetings.

4.7.2.14 The general meetings which are set forth in Section 4.7.2.13 above shall be called “ordinary

meetings”. All of the other general meeting shall be called “extraordinary meetings”.

4.7.2.15

(a) The members of the Board of Directors are entitled to convene an extraordinary meeting

whenever they see fit, and, pursuant to a demand for convocation pursuant to Section 63 of

the Companies Ordinance9 by members of the Company who held, on the date of the deposit

of the demand for convocation, not less than one-tenth (1/10) of the Company’s paid-up

capital which, on the date of the deposit, bears voting rights in general meetings of the

9 Section 63 of the Companies Ordinance states as follows: “(1) Notwithstanding anything which is set forth in the Company’s Articles of

Association, the company’s directors are required to immediately convene an extraordinary general meeting of the company, upon demand by members of the company who hold, at the time of delivery of the demand, no less than one-tenth of the company’s paid-up capital which, on the date of delivery of the demand, confers voting rights at general meetings of the company; and, should the company have no share capital, the company’s directors are required, upon demand by members who represent no less than one-tenth of the voting rights of the members who, on that day, or voting rights at general meetings of the company, to immediately convene an extraordinary general meeting of the company. (2) The demand shall specify the purpose of the meeting and shall be signed by the persons issuing the demand, and shall be filed at the company’s registered offices, and may be filed by means of a plurality of identically worded documents, each of which is signed by one or more of the persons issuing the command. (3) Should the directors not set out to convene a meeting within twenty-one days of the date on which the demand was delivered, the persons issuing the demand, or that part of said persons which holds more than half the number of votes, may all convene a meeting themselves; however, any meeting which was convened in such a way shall not be held following the expiry of three months from the date in question. (4) Any meeting which was convened pursuant to this section by the persons issuing the demand shall be convened, insofar as possible, in the same way in which meetings are convened by directors. (5) All of the fair expenses which were borne by the persons issuing the demand for a meeting, because the directors did not convene the meeting at the proper time, shall be reimbursed by the company, and any amount which was paid as set forth above shall be withheld from the amounts which the company is required to pay, in the present or in the future, to the directors who refrained from calling the meeting, as their salary or as another payment for their service. (6) For the purposes of this section, the directors shall be deemed to have refrained from convening a meeting as required by law, if the meeting was one at which a resolution was to be proposed as a special resolution and they did not give notice thereof as required pursuant to Section 66.” The provisions of Section 63 of the Companies Ordinance are parallel to Sections 109-111 of the Companies Ordinance [New Version], which were replaced by Sections 63-64 of the Companies Law.

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Company, the members of the Board of Directors are required to immediately set out to

lawfully convene an extraordinary general meeting of the Company.10

(b) The demand for convocation shall set forth the purpose of the meeting and shall be signed by

the persons demanding the convocation and shall be deposited in the Company’s registered

offices, and may be composed of a plurality of documents in identical form, each of which is

signed by one (1) or more of the persons demanding the convocation.

(c) Should twenty-one (21) days have elapsed from the date of deposit of the demand for

convocation, and should the members of the Board of Directors not have set out to convene a

meeting as provided by law, the persons demanding the convocation, or any thereof who

represent more than half (½) of the total voting rights of them all, are entitled to convene the

meeting themselves, but any meeting which was convened in such a way shall not be held

after the expiry of three (3) months from the aforesaid date.

(d) Any meeting which is convened as set forth above by the persons demanding the convocation

shall be convened in as similar a way as possible to the way in which meetings are convened

by the members of the Board of Directors.

(e) All of the expenses which were incurred by the persons demanding the convocation, in light of

the fact that the members of the Board of Directors did not convene a meeting as required by

law, shall be refunded to them by the Company, and any amount which was so refunded shall

be withheld by the Company from amounts which are owed or shall be owed by the

Company, as salary or other consideration for the services of those members of the Board of

Directors who did not convene the meeting.

(f) For the purposes of this Section 4.7.2.15, the members of the Board of Directors, with respect

to a meeting at which a resolution is to be proposed as a special resolution, are to be deemed

not to have convened the meeting as required by law, in the event that they did not give

notice thereof as required in Section 66 of the Companies Ordinance.

4.7.2.16 No discussion shall be held at a general meeting of the Company unless a legal quorum is present

at the time when the discussion began at the meeting. A legal quorum shall exist when

shareholders who are entitled, by virtue of the shares held by them or represented by them, to

50% of all of the Company’s votes are present, whether themselves or by proxy.

Should no legal quorum be present within one-half hour of the time which was set for the

meeting, the meeting shall be adjourned by one (1) week, to the same date, the same time and

the same place, with no repeat notice of the holding of the adjourned meeting11

, or to a date, a

time and a place which shall be determined by the Board of Directors by way of notice to the

shareholders. Should no legal quorum be present at the adjourned meeting within one-half hour

of the time which was set for it, the legal quorum shall be any number of participants who shall be

present.

10

Pursuant to Section 63 (b) of the Companies Law, the Board of Directors of a public company shall convene an extraordinary meeting according to its decision, and also upon the demand of two Directors or one-quarter of the Directors serving in office; or one or more shareholders holding at least 5% of the issued capital and at least 1% of the voting rights in the company, or one or more shareholders holding at least five percent of the voting rights in the company.

11 Pursuant to Regulation 36B (d) of the Securities Regulations (Periodic and Immediate Reports), 5730-1970, in the case of the adjournment of the meeting, an Immediate Report shall be filed, which shall state the fact that the meeting was adjourned and shall provide details as set forth in sub-regulation (a) with respect to the adjourned meeting. The details may be given by way of a reference to the report which was published with respect to the convocation of the meeting which was adjourned.

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The legal quorum as set forth above shall be entitled to discuss the matters for which the meeting

was convened. In any event, no subjects other than those which were included on the agenda of

the meeting which was adjourned shall be brought for discussion at an adjourned meeting.

At an adjourned meeting, no matters other than those which were on the agenda of the meeting

at which the adjournment was resolved, and which were not discussed, or concerning which the

discussion was not completed at that meeting, shall be discussed. There is no need to give notice

of the adjournment and the matters on the agenda of the adjourned meeting; however, should

the meeting have been adjourned by fifteen (15) days or longer, notice of the adjourned meeting

shall be given in the way in which notice was given of the meeting at which the discussion was

adjourned.

The Chair shall be entitled, with the consent of a meeting at which a quorum is present, and shall

be required, should the meeting have instructed him to do so, to adjourn the meeting from one

date to another and from one place to another. Whenever a meeting is adjourned by 10 days or

longer, notice of the adjourned meeting shall be given in the same way as with respect to an

original meeting. Aside from that which has been set forth above, the members shall not be

entitled to notice of the adjournment of the meeting or of the matter which shall be discussed at

an adjourned meeting.12

No matter shall be discussed at an adjourned meeting other than the

matter which could have been discussed at the meeting at which the adjournment took place.

The Chair (if there is a Chair) of the Board of Directors, or, in his absence, the managing member of

the Board of Directors, shall chair each general meeting; however, should there be no Chair or no

managing member of the Board of Directors, or should neither one of them be present at that

meeting within fifteen (15) minutes of the time which was set for the holding of the meeting, or

should he not wish to serve as Chair, the members who were present shall choose a member of

the Board of Directors, or – should no member of the Board of Directors be present, or should all

of the members of the Board of Directors who were present refuse to serve as Chair – one of their

number, to chair the meeting.

4.7.2.17 Should a resolution have been brought up for voting at a general meeting, it shall be decided by a

show of hands13

, unless, prior to the announcement of the results of the show of hands or

immediately upon the announcement thereof, the Chair shall have demanded a vote by ballot or a

demand therefor shall have been raised in writing by no less than three (3) members who are

themselves present and entitled to vote, or in writing by one or more members who hold or

represent by proxy – or who are entitled to vote with respect to – one-tenth (1/10) or more than

one-tenth (1/10) of the nominal value of the capital which is represented at the meeting, and,

whenever a vote by ballot shall not have been demanded as set forth above, the announcement

by the Chair of the meeting that the resolution has been adopted, or has been adopted by a

certain majority, or has not been adopted, or has not been adopted by a certain majority, shall be

final; and the record thereof in the Company’s minutes later shall constitute conclusive evidence

12

See footnote 11 in the matter of the duty of publication of an Immediate Report with respect to the adjournment of a meeting. Pursuant to Section 74 (a) of the Companies Law, should a general meeting have been adjourned to a date which is more than twenty-one days away, notices and invitations to the adjourned meeting shall be given as set forth in Section 69 of the Companies Law, which refers to a public company. Pursuant to Section 74 (c) of the Companies Law, should a general meeting have been adjourned, with no modification of the agenda thereof, to a date which is more than twenty-one days away, notices and invitations with respect to the new date shall be given as soon as possible, and no later than seventy-two hours prior to the general meeting; the notices and invitations as set forth above shall be given, in a public company, pursuant to Section 69 (a) of the Companies Law.

13 Pursuant to the provisions of Section 84 of the Companies Law, a resolution at a general meeting shall be adopted by a count of votes (that is, according to the quantity of shares which confer voting rights), whereby only a private company is entitled to establish a different rule for decision in its Articles of Association.

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to that effect, with no need to prove the number of votes or the ratio of votes which was recorded

in favor of or against the resolution in question.

4.7.2.18 Should a vote by ballot have been demanded as set forth above, it shall take place on the date, at

the time and in the place which the Chair shall state, and the results of the vote by ballot shall be

deemed to constitute a resolution by the meeting at which the vote by ballot was demanded.

4.7.2.19 No vote by ballot on the question of the choice of the Chair of the meeting shall be demanded,

and a vote by ballot which has been demanded with respect to the adjournment of the meeting

shall be held at once. A demand for a vote by ballot may be taken back.

4.7.2.20 A demand for a vote by ballot shall not prevent the continuation of the meeting for the purposes

of discussion of any other matter than the matter with respect to which the vote by ballot was

demanded.

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Chapter 5 – Consideration with respect to the issue and intended purpose thereof

5.1 Consideration with respect to the issue

The expected (gross) immediate consideration for the Company with respect to the issue to the public1 pursuant to this Prospectus, less the estimated expenses involved in the issue, shall be as set forth below:

Expected consideration with respect to the issue (gross)2 Approximately NIS 3,000 million

Less all of the expenses involved in the preparation and publication of a prospectus Approximately NIS 45 million

Expected immediate consideration (net) Approximately NIS 2,955 million

* The Company’s estimate with respect to all of the distribution commissions, success commissions and the other expenses involved in the preparation and publication of this Prospectus will be published within the framework of the Supplementary Notice.

5.2 Intended purpose of the consideration

The consideration with respect to the issue shall be used by the Company only to finance its expenditures for the surplus fuel costs which are not or have not been covered by the electricity tariff paid by the consumers, and shall be deposited for that purpose in a special account which shall be managed in accordance with the principles which were agreed upon by and between the Company and the Electricity Authority on June 17, 2012. For a detailed listing of the principles, see Section 7.1.3.2 (c)(6) in Chapter 6 of the Prospectus.

Insofar as the State, through the offices of the Accountant General, will allow the Company to make use of the proceeds of the issue that differs from the use in accordance with that which has been set forth above, the said different use, which will be approved in accordance with that which has been set forth above, shall be made subject to decisions of the Board of Directors of the Company as made from time to time.

Until the date on which use shall be made of the consideration from the issue pursuant to the intended purpose which is described in the previous paragraph above, the Company shall deposit the consideration of the issue, in whole or in part, in solid investments, whereby the solid investment policy shall be based on an estimation of the Company’s future undertakings, and shall be implemented by means of bank deposits linked to the Index, to foreign currency or New Israeli Shekels, Government bonds and/or corporate bonds with an appropriate dispersal, and in any other solid way of investment.

5.3 Minimum amount

No minimum amount which must be obtained in the issue pursuant to this Prospectus has been determined.

1 Calculated on the assumption of the purchase of all of the units offered pursuant to this Prospectus, according to the unit price. 2 On the assumption of the purchase of all of the units offered pursuant to the Prospectus.

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Chapter 6 – Description of the Business Affairs of the Corporation1

Part 1: Description of the General Development of the Business Affairs of the Company

1. The Company’s operations and a description of the development of its business affairs

1.1 General

The Company was incorporated in Israel on March 29, 1923, under the name of the Palestine Electric Corporation

Ltd. In 1961, the Company was renamed to its current name, the Israel Electric Corporation Ltd. The Company is

engaged in the generation, transmission, distribution and sale of electricity to consumers in Israel. See Section 2

for details on the fields of activity of the Company.

In 1926, the authorities in the British Mandate for Palestine granted the Company a concession that is known as

the “Jordan Concession”, and a concession that is known as the “Yarkon Concession” (which was granted to

Pinchas Rothenberg, the founder of the Company) was endorsed to it (hereinafter: the “Concessions”). Pursuant

to the Concessions, the Company was granted the exclusive right to generate, supply and distribute electricity and

to sell it throughout the Mandate for Palestine, except in Jerusalem and its environs.

The Concessions received statutory validity within the framework of the Electricity Concessions Order - 1927

(hereinafter: the “Electricity Concessions Order”).

The validity of the Concessions was set for a period of seventy (70), years, which ended on March 3, 1996, and

from that time on, the provisions of the Electricity Sector Law - 1996 (hereinafter: the “Electricity Sector Law”),

which replaced the Electricity Concessions Order, and the regulations that have been promulgated thereunder,

apply to the operations of the Company. See Section 22.1 for details on the highlights of the Electricity Sector Law.

The Company generates, transmits, distributes and supplies almost all of the electricity that is consumed in the

Israeli national economy pursuant to the licenses that have been granted to it for each such type of operation, in

accordance with the Electricity Sector Law, which have been extended over the years, and it operates as an

electricity system administrator. As of the time of this Prospectus, the Company has licenses for 100% of the

volume of transmission, distribution and supply and generation licenses covering 96% of the total output of all of

the generation licenses in the national economy. See Section 7.4.3.4 with respect to generation. The system

administration activity is performed by the Company within the framework of the “the General License” (as this

has been defined in Section 22.1.2) although it has not been given a special purpose license on this matter. See

Section 22.1.2 for details.

The licenses of the Company have been extended by the Ministers, from time to time over the years, with an

order, usually for periods of one year each time, for all of its activities, pursuant to their authority under Section

60 (D11) of the Electricity Sector Law in its version prior to Amendment No. 10 to the Electricity Sector Law2

(hereinafter: “Amendment 10 to the Electricity Sector Law”). In Amendment 10 to the Electricity Sector Law, the

manner of extension of the licenses of the Company was changed whereby the authority of the Ministers to

extend times according to Section 60 (D11) was restricted to one period only, which shall not exceed one year (as

opposed to the State prior to Amendment 10, when the Ministers were authorized to extend the licenses for

periods of up to one year without restriction as to the number of extension periods). Pursuant to Amendment 10

to the Electricity Sector Law, the licenses of the Company were extended until January 1, 2013 (see Section 22.1.2

with respect to the extension of the new generation licenses through to January 1, 2013), and in accordance with

1 With respect to positions or estimates of the Company included in this prospectus, it is clarified that the provisions or estimates of

the Company included herein do not serve to bind the discretion of the Company or any of its permissions to act and/or decide by any law in a manner differing from the positions or estimates of the Company as set forth.

2 The Electricity Sector Law (Amendment No. 10 and Provisional Order), 2012, Codex of 2006, p. 208.

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the amendment, they may be extended until January 1, 2014, only, and any additional extension will involve a

legislative amendment. See Section 22.1.2 for additional information on the extension of the licenses of the

Company.

The Company is a holder of an “essential service supplier license” (as this term is defined in the Electricity Sector

Law) and is also engaged in the construction and setup of the infrastructure that is required for its other

operations.

The shares of the Company were traded for a certain period3 on the Tel Aviv Stock Exchange Ltd. (hereinafter: the

“Stock Exchange”), but following a purchase offer that the State of Israel published on September 30, 1986 to the

shareholders of the Company, which was accepted by a majority of the shareholders at the time from the public,

the shares of the Company ceased to be traded on the Stock Exchange, and as of the date of the Prospectus, some

of the bonds of the Company (Series 22) are being traded on the Stock Exchange pursuant to a prospectus of the

Company dated May 21, 2002.

As of the date of this Prospectus, the State of Israel holds approximately 99.846% of the issued, paid-up share

capital of the Company, and therefore, the Company is a “government company” as this term has been defined in

the Government Companies Law - 1975, (hereinafter: the “Government Companies Law”) and the Company and

its operations are also subject to the provisions of that law. The balance of the issued and paid up capital of the

Company, at a rate of approximately 0.15%, is held by approximately 120 individuals and corporations. See

Section 22.5 for a description of the main points of the Government Companies Law.

In February 2005, following an application that was made by the Company to the Government Companies

Authority (hereinafter: the “Companies Authority”), in order to clarify the issue of the status of the Company as a

public or private company, the Company was provided with an expert opinion by the legal adviser to the

Companies Authority, according to which, in the opinion of the Companies Authority, the Company is a public

company, as this has been defined in the Companies Law - 1999 (hereinafter: the “Companies Law”). In

accordance with the expert opinion, the fact that the source of the shares that are held by the public cannot be

identified with certainty does not warrant the denial of the protections that are conferred upon the shareholder

public pursuant to the Companies Law, and the Company bears the burden of proving that all of its shares in

accordance with that which has been set forth above originate merely from private issues. In view of the above

mentioned expert opinion and in view of the definition of the term “public company” in the Companies Law, the

Company operates as a public company. Pursuant to its status as a public company and pursuant to the issue of

the Bonds (Series 22) by prospectus as set forth above and their holdings by the public, it is subject to the

provisions of the Securities Law - 1968 (hereinafter: the “Securities Law”).

3 The Company does not currently have in its possession information as to the time and manner in which the shares were offered to

the public.

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1.2 Diagram of the holding structure of the Company

* Additional subsidiaries and sub-subsidiaries of the Company, which are inactive, have not been included in the

diagram. In addition, the Company has immaterial holdings (a holding rate of close to zero) in the following

companies: Israel Chemicals Ltd., Binyanei Ha’Uma Ltd., the Israel Farmers Company Ltd. and in a government

company, Mekorot Water Company Ltd. The Company consolidates the statements of the National Coal

Supply Corporation Ltd. in its own Financial Statements. See Note 13 to the Financial Statements) of the

Company for December 31, 2011 and March 31, 2012, in Chapter 9 of this Prospectus (hereinafter: the

“Annual and Quarterly Financial Statements”), respectively.

** Jordan Properties Ltd. has two fully owned subsidiaries, both of which are inactive: the Banks of the Jordan

Company Ltd. and Palestinian Construction Company Ltd.

*** The Company holds 50% of the management shares and of the rights to appoint directors, without rights to

share profits. The remaining 50% is held as follows: the Mutual Help Society of Israel Electric Corporation

Employees in the Southern Region (Final Holder) (25%), the Society of Israel Electric Corporation Workers in

the Northern Region (RA) (Final Holder) 16.667%) and the Savings and Mutual Help Fund of Israel Electric

Corporation Workers in Jerusalem Ltd. (Final Holder) (8.333%).

See Section 15.3 for details on differences of opinion between the Company and the State on the rights of the

Company to property and assets of the Company that it possessed on the date of expiry of the Concession.

1.3 The nature and the results of each significant structural change, merger or acquisition

Details on the structural change in the Company that is required by the provisions of the Electricity Sector Law and

the government resolutions4 and the preparations of the Company to implement it follow:

1.3.1 General

The Electricity Sector Law states that the purpose of the law is to regulate activity in the Electricity Sector for the

benefit of the public, while securing reliability, availability, quality, efficiency and creating conditions for

competition and the minimization of costs.

4 For Government Resolutions from 2004 onward that are listed in this Chapter, refer to the government website at the following

address: http://www.pmo.gov.il/PMO/Archive/Decisions

99.98% 00% 100%

The Managing Company of the

Advanced Studies Fund of Israel

Electric Corporation Employees

Ltd. ***

Jordan Properties Company Ltd. **

Israel Electric Corporation Ltd.*

The National Coal Supply

Corporation Ltd.

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In recent years, a number of amendments have been made to the Electricity Sector Law, which lay down

separation between the generation, transmission, distribution and system administration activities, under the

conditions that are prescribed in the Electricity Sector Law, through their decentralization into a number of

separate entities (hereinafter: the “Structural Change”), while establishing transitional provisions and a

schedule for the implementation of the instructions that allow the Company to generate, transmit, distribute,

supply, sell and trade electricity, and to serve as the administrator of the electricity system, in accordance with

the licenses that have been granted to it pursuant to the Electricity Sector Law, through to January 1, 2013

During the course of the years that have elapsed since the date of the enactment of the Electricity Sector Law,

the Government of Israel and the Government Ministries adopted a number of resolutions and

recommendations with respect to the Electricity Sector, as described in greater detail below, some of which

have been subsequently adopted as amendments to the Electricity Sector Law while others have not been

implemented for various reasons.

In addition, throughout 2010, discussions were held between the management of the Company and the labor

union of the Company and representatives of the Ministry of Finance and the National Labor Federation, at the

end of which, in September 2010, a document was formulated, stating a possible outline of a structural change

in the Company (hereinafter: the “Outline of Understandings”), which is described in greater detail below, and

which is inconsistent with the provisions of the Electricity Sector Law as worded at the time of the Prospectus.

As of the date of this Prospectus, the implementation of the structural change in any outline has not yet

commenced, and there is uncertainty with respect to the final form of a structural change, the time of its

implementation and its consequences for the Company, its business affairs and outcomes.

1.3.2 Main points of the provisions of the Electricity Sector Law pertaining to the structural change

The following is a description of the outline of the Structural Change in the Electricity Sector in Israel and in the

Company, in accordance with the provisions of the Electricity Sector Law as it is phrased as of the date of this

Prospectus.

1.3.2.1 The Electricity Sector Law determines that no person5 shall execute activity of generation (except generation

of electricity at a certain output and that is not sold to another party), transmission, distribution or supply of

electricity, activity or trade of electricity or administration of an electricity system (hereinafter jointly:

“Activity in the Electricity Sector”), other than pursuant to a license that has been granted to him for this

purpose in accordance with the Electricity Sector Law (hereinafter: the “License”) by the Public Services

Authority - Electricity (hereinafter: the “Electricity Authority”), which will take effect after the approval of the

Minister.

The Electricity Sector Law sets forth conditions for the issuance of licenses for activity in the Electricity Sector,

which include, inter alia, a number of restrictions, the main ones being as follows:

(A) As a rule, no single person is to be given a license for more than one activity. Notwithstanding:

(1) A person may be given a generation license together with a supply license, paying attention, inter

alia, to the development of competition in the Electricity Sector.

(2) No license is to be granted if after the receipt of the License, a person, with the exception of the

State of Israel, would hold a license for the administration of the system or shall be a holder of

means of control6 in a holder of such a license, and shall also be a holder of a license for the

generation, distribution or supply of electricity, or if they would hold means of control in the holder

of such a license. However, a holder of a license for the administration of the system or a subsidiary

5 “Person”: pursuant to the Interpretation Law - 1981, this also implies a body of persons, whether or not the Person in question is a

corporation. 6 “Control measures” in the Electricity Sector Law - any of the following: (1) a right of participation in the general meeting of a

company or equivalent entity of one corporation; (2) a right to appoint directors or a chief executive officer of the Company, and in a corporation that is not a company – similar functionaries; (3) the right to participate in the profits of the Company; (4) the right to share the balance of the assets of the Company, after settlement of its debts at the time of its liquidation.

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thereof, may also, if thus determined in this license and if crucial for the reliability of the supply of

electricity, be granted licenses for generation, so long as such licenses are not be granted for 5% or

more of the generation capacity in the Electricity Sector, and, if the Minister finds that special

circumstances exist – 10% or more of such a magnitude.

(B) No generation license or distribution license shall be issued to a party holding means of control of a

transmission license holder.

(C) No transmission license shall be issued to a holder of means of control of a generation license holder or a

distribution license holder.

(D) No generation license shall be issued unless one of the following is fulfilled:

(1) The license applicant holds means of control of a distribution license that holds 10% or more of the

distribution volume in the Electricity Sector;

(2) The license applicant holds means of control of a distribution license holder, and after receipt of the

requested license shall hold 10% or more of the volume of the generation capacity in the Electricity

Sector;

(3) A person shall hold after the receipt of the requested license 30% or more of the volume of the

generation capacity in the Electricity Sector;

(4) The license applicant is a holder of a transmission license.

(E) No distribution license shall be issued if one of the following is fulfilled:

(1) The license applicant holds means of control of a generation license holder that holds 10% or more

of the volume of the generation capacity in the Electricity Sector;

(2) The license applicant holds means of control of a generation license holder, and after receipt of the

requested license shall hold 10% or more of the volume of the distribution in the Electricity Sector;

(3) A person that will hold after the receipt of the requested license 25% or more of the distribution

volume in the Electricity Sector.

The Ministers, upon consultation with the Electricity Authority and the Companies Authority, are entitled to

establish rates that differ from those which have been set forth in Subsections (D) and (E) if they find this to

be crucial for the promotion of the purposes of the Electricity Sector Law, and they are also entitled to

establish additional restrictions on the granting of licenses.

1.3.2.2 Transitional provisions and milestones in the Electricity Sector Law for executing the Structural Change

The Electricity Sector Law establishes special provisions and milestones for the Company as follows:

(A) The licenses of the Company that have been issued to it pursuant to the Electricity Sector Law, and that

were in effect prior to the end of the “transitional period” as defined in the Law (10 years from the day of

commencement of the law, that is, March 4, 2006) (hereinafter: the “Transition Period”), shall remain in

effect with respect to all of the activities that have been performed thereby through to the time

prescribed in the Electricity Sector Law as extended from time to time, which is, through to the date of

the Prospectus, January 1, 2013.

This date may be deferred by an order by the Ministers if they find it crucial for the promotion of the

purposes of the Electricity Sector Law7, upon consultation with the Electricity Authority and the

Companies Authority and with the approval of the Knesset Economic Affairs Committee, for an additional

period that shall not exceed one year, that is, through to January 1, 2014 (hereinafter: the “Authority of

the Ministers to Extend Deadlines”). An additional extension beyond this time requires a legislative

7 With respect to generation licenses that have been given to power stations that are included in the Development Plan of the

Company that was approved in accordance with Section 19 of the Electricity Sector Law until January 1, 2009 – see Section 22.1.2

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amendment. Prior to Amendment 10 to the Electricity Sector Law, the Ministers were granted authority

to extend the dates for periods of up to a year each for an unlimited number of extension periods.

Based on past experience, the Company expects the licenses to be extended for additional periods until

the date of implementation of the Structural Change, but in view of the uncertainty as to its

implementation, there is no certainty as to whether, for what periods and under what conditions some or

all of its licenses will be extended, and under what conditions or which licenses shall be granted to it after

the implementation of the Structural Change, to the extent implemented. The Company’s assessment is

that after the implementation of the Structural Change, the Company will receive new licenses in

accordance with the outline of the organizational structure as will be implemented.

This information with respect to the Company's expectation that its existing licenses will be extended and

with respect to the period for which they will be extended constitutes forward looking information, as per

its definition in the Securities Law, which is based, in accordance with that which has been set forth above,

on past experience, however there can be no certainty that it will be realized, primarily because of the fact

that the extension of licenses after January 1, 2014 involves a legislative change and is not under the

control of the Company.

(B) The granting of replacement licenses – the Electricity Authority is entitled, with the approval of the

Minister, to grant replacement licenses for all or some of the licenses of the Company that were in effect

prior to the end of the transaction period, (hereinafter: the “Replacement Licenses”), even if the

conditions that have been set forth in the Electricity Sector Law with respect to the granting of licenses

for operations in the Electricity Sector are not fulfilled, so long as those Replacement Licenses for which

these provisions of the law have not been fulfilled remain in force until the time that has been set forth in

the Law (as of the date of the Prospectus, January 1, 2013), and which is also extendable pursuant to the

authority of the Ministers to extend the dates. If and to the extent that Replacement Licenses are

granted, the other licenses of the Company will only apply to its operations for which Replacement

Licenses have not been granted. As of the date of this Prospectus, no Replacement Licenses have been

granted to the Company, and to the best of its knowledge, none have been granted to any other entity

either.

(C) The granting of generation licenses for new facilities – the Electricity Authority is entitled, with the

approval of the Minister, to grant generation licenses even in the absence of the fulfillment of the

restrictions that have been set forth in the Electricity Sector Law with respect to the granting of

generation licenses, for power stations that are included in the Development Plan of the Company that

has been approved by the Minister in consultation with the Electricity Authority (pursuant to Section 19

of the Electricity Sector Law), through to January 1, 2009, this being for the period in which the licenses of

the Company that were in effect prior to the end of the Transitional Period are in effect. This time is also

extendable, for an additional period that shall not exceed one year, in accordance with the authority of

the Ministers to extend the dates, only after the Ministers have found that there is no other reasonable

alternative to the construction of a power station, taking into account the urgent needs of the energy

sector. See Sections 7.7, 8.6 and 9.7 for further information on the Development Plans of the Company.

See Section 22.1.2 for details on the validity and manner of extension of the new generation licenses of

the Company.

(D) The granting of generation and distribution licenses to a government company or to a government

subsidiary – the Electricity Authority is entitled, with the approval of the Minister, to grant a government

company or a government subsidiary generation licenses and distribution licenses for an electricity

system that has been operated in accordance with the licenses of the Company that were in effect at the

end of the Transitional Period and the licenses that have been issued pursuant to Subsection (B) above,

even without the restrictions that have been set forth in the Electricity Sector Law as described in

Sections 1.3.2.1(D)(3) and 1.3.2.1(E)(3), as long as the following conditions are met:

(1) Generation licenses shall only be granted if, subsequent to the receipt of a license, the license holder

will possess power stations that operate based on a mixture of certain types of fuels that includes

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diesel oil, natural gas and coal; however, with respect to coal, the license applicant may not generate

electricity through the use of coal itself, but it is to have rights to receive electricity that is generated

at a coal powered power station8.

(2) Distribution licenses shall be granted in such a manner that the costs of the license holders with

respect to the electricity facilities that are used for their operations, at the time of the granting of the

licenses, will be as similar as possible; however, the Ministers are entitled, after having consulted

with the Electricity Authority and the Companies Authority, to determine otherwise, should they find

this to be crucial for the advancement of the purposes of the Electricity Sector Law.

(3) After the receipt of the License, the license holder shall not hold, through another corporation, 30%

or more of the volume of the generation capacity in the Electricity Sector, or 25% or more of the

distribution capacity in the Electricity Sector9.

(4) The validity of the License shall be contingent upon such that as from July 1, 2013, no government

company or government subsidiary shall hold, jointly and severally, more than 51% of the means of

control in a holder of a distribution or generation license that has been given pursuant to this section

of the Law.

(E) The holding of means of control in a holder of a transmission license – the Ministers shall determine, in

an order, by the time prescribed in the Law (as of the date of the Prospectus – January 1, 2013) upon

consultation with the Electricity Authority and the Companies Authority, whether a government company

or a government subsidiary, holding means of control of a holder of a generation or distribution license,

will be also be able to hold means of control of a holder of a transmission license. This date may be

extended for an additional period that shall not exceed an additional year, in accordance with the

Authority of the Ministers to Extend Deadlines. To the best of the Company’s knowledge, as of the date

of the Prospectus, no such order has been given.

(F) The granting of a supply license together with a distribution license – notwithstanding the provisions the

have been set forth in Section 1.3.2.1, a supply license may be given to a government company or to a

government subsidiary that is a holder of a distribution license by law, until the time that has been set

forth in the Law (as of the date of the Prospectus - January 1, 2013). This date may be extended, for a

period that shall not exceed one additional year, in accordance with the Authority of the Ministers to

Extend Deadlines. In addition, a supply license may be given to a company that is a holder of a

distribution license by law, even if it is not a government company or a government subsidiary, until the

date set in the law (as of the date of the Prospectus, January 1, 2013), but that time may be extended by

an order, by the Ministers, after consultation with the Electricity Authority, if they find this to be crucial

for the advancement of the goals of the Electricity Sector Law for a period that shall not exceed six (6)

months only.

1.3.2.3 Prohibition on the provision of certain services in the Electricity Sector – a government company, or a

government subsidiary, which holds means of control in a holder of a license pursuant to the transitional

provisions in the Electricity Sector Law, shall not engage in the field of engineering planning of power stations,

in the construction of power stations, in logistics, in information technologies or in the purchase of fuel of

various kinds, and a government company or a government subsidiary that holds a license pursuant to the

transitional provisions in the Electricity Sector Law, shall not engage in such occupations for another

corporation that is a holder of a license pursuant to the Electricity Sector Law.

8 On this matter, a license holder will be considered to be holding a material part of the generation in the electricity sector as set forth

in Section 18(B) of the Electricity Sector Law and the provisions of the Electricity Sector Law with respect to an essential service provider license holder will apply to it, as long as the Minister has not prescribed otherwise. Any determination by the Minister prior to January 1, 2015, requires the consent of the Minister of Finance.

9 This restriction is intended, in accordance with the explanations to the proposal for an amendment to the Electricity Sector Law within the framework of which this provision was vested in the law, to ensure the operation of at least four (4) generation companies and four (4) distribution companies.

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1.3.2.4 Resolutions of the Government and government agencies with respect to the Structural Change in the

Electricity Sector and the Policy Document

Over the years, from the time of the enactment of the Electricity Sector Law, the Government of Israel and

government agencies have adopted a number of resolutions with respect to the Structural Change, some of

which have been adopted into the Electricity Sector Law, while other resolutions have not been adopted into

Law or implemented. The following are details of the principal resolutions as set forth:

(A) In March 2003, the Government of Israel adopted a resolution with respect to the implementation of the

Structural Change in the Electricity Sector10

. The main points of this resolution are: (1) Action is to be

taken in order to regulate the Electricity Sector, including the amendment of the Electricity Sector Law in

order to give expression to certain principles, inter alia, imposition of restrictions on the granting of a

license to a person for more than one activity in the fields of generation, transmission and distribution,

restrictions on the holding of means of control in a holder of a license for activity in the Electricity Sector

and restrictions with respect to the scale of activity in which a license holder can hold, and setting of

exceptions to these rules; (2) The amendment of the Electricity Sector Law such that the operations of

the Electricity Administration in the Ministry of Energy and Water and the Electricity Authority will be

consolidated; (3) Charging the Companies Authority, in coordination with the Ministry of Energy and

Water, the Ministry of Finance and the Ministry of Justice, to take action to incorporate the operations of

the Company in accordance with the principles that have been set forth above, and conclusion of the

incorporation as set forth until March 4, 2006, including the conclusion of incorporation of the activities

that may be performed in accordance with the existing licenses, prior to 2006, to the effect that at the

end of the validity of the currently existing licenses in the Company, new licenses may be granted

immediately in accordance with the principles as set forth. In addition, the Companies Authority shall act

as soon as possible to incorporate new power stations, which are included in the Development Plan of

the Company, and if need be also existing stations, as subsidiaries, and issue them to the public; and (4)

Charging the Minister, in consultation with the Electricity Authority, to prepare the principles and rules

for the arrangements that are required in order to encourage the entry of private producers and

additional distribution companies into the Electricity Sector, to establish the arrangements that will

prevail in the Electricity Sector between the various companies and establish rules for uniform accounting

reporting in the Electricity Sector with respect to each of the companies that are essential service supplier

license holders, as this term is defined in the law.

(B) At the same time, the Government adopted an additional resolution11

whereby the Companies Authority

would establish a plan for the issue of shares of government companies on the Stock Exchange, in 2003-

2005. Accordingly, the Companies Authority was charged with formulating and proposing to the Minister

of Finance resolution proposals for submission to the Ministerial Committee on Privatization, for the

purpose of the privatization of various government companies, among which was the Company, including

by way of the sale of part of their shares via the capital market. With respect to the Company, it was

decided that up to 49% of its shares would be sold, after the securing the application of the conclusions

of the Electricity Sector Reform Committee and the resolution of the Ministerial Committee for Social and

Economic Affairs (hereinafter: the “Socio-Economic Cabinet”) on this matter would be guaranteed12

.

(C) In a resolution from August 200413

, the Government of Israel established that all of the measures that are

required to implement the Structural Change in the Electricity Sector must be taken, which included

charging the committee to implement the reform in the Electricity Sector, and for this purpose, a

committee was formed by the Ministers, in order to submit recommendations on the issues and the steps

that pertain to the implementation of the Electricity Sector Law in the various segments of the electricity

10 Government Resolution No. 104: Reform in the electricity sector, dated March 25, 2003. 11 Government Resolution No. 94: Promoting the privatization of State-owned enterprises by the issuance of capital market, dated

March 25, 2003. 12 See footnote no. 11. 13 Government Resolution No. 2429, Implementation of the structural change in the Electricity Sector, dated August 15, 2004.

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chain; the Ministers and the Companies Authority were required to act in accordance with their lawful

authority in order to raise the implementation of the recommendations of the committee to the agenda

of the board of the Company, and impose on the Director General of the Companies Authority to raise on

the agenda of the board of directors of the Company, immediately, the incorporation of new generation

units at the Israel Electric Corporation within separate subsidiaries, and subject to the expert opinion of

the Attorney General; the Company was required to act in order to implement the recommendations of

the committee no later than March 30, 2005. The resolution further stated that if the Company did not

act to implement the Structural Change in accordance with the recommendations of the committee until

that date, the Ministers and the Companies Authority would take action, in accordance with their lawful

authority, in order to ensure that these resolutions would be implemented, including the preparation of a

resolution for the Ministerial committee for Privatization; it was decided to impose on the Minister, to

publish by October 31, 2004, rules for the introduction of private generation into the Electricity Sector, in

accordance with his lawful authority.

(D) In September 200614

, the Government of Israel adopted a resolution whereby the Electricity Sector and

the Company would undergo reorganization, and the Electricity Sector Law would be amended to the

extent required, in order to allow for the implementation of this resolution. In general terms, this

resolution determined as follows:

(1) The Company will become a government-owned holdings company, which will hold a number of

subsidiaries, each of which will engage in a different activity (the generation, distribution and

transmission of electricity and the administration of the system and in companies in the fields of

additional services as set forth below).

(2) The management of the Company, and any field of activity of the Company that is not incorporated

separately, shall remain part of the holdings company.

(3) The Company will hold four (4) subsidiaries in the field of generation, all of which will be entitled to

supply electricity to end consumers. These companies shall be incorporated as subsidiaries of the

holdings company, and the Company’s holdings in each of the subsidiaries in the field of generation

will gradually be reduced to 51%, including by way of issue to the public, after which each such

subsidiary will be entitled to engage in the desalination of water. It was further determined that the

generation and supply segment, upon the establishment of competition, is to be gradually

deregulated with regard to the charge rates of the Electricity Authority.

(4) From March 1, 2007, a transmission and system administration company shall operate with the

function of operating and monitoring the electricity transmission grid. This company shall have a

profit center established that is separate from the transmission activity, which will deal in the

administration of the system, long term planning of the electricity system and management of

trading of electricity. This profit center shall have powers vis-à-vis the companies operating in the

Electricity Sector, in a manner that will ensure, inter alia, the level of development and holding that is

required in the Electricity Sector, under the supervision of the Government.

(5) The Company will hold four (4) subsidiaries in the field of distribution that would be as similar to one

another as possible in terms of cost structure and volume of activity. These holdings shall be

incorporated as subsidiaries of the holdings company by March 1, 2007, and the holdings of the

Company in each of the subsidiaries in the distribution field will gradually be reduced to 51% by

January 1, 2012. These companies shall act to operate and develop the regional electricity grid, and

their activity shall be conducted under supervision, including the distribution service charge rate.

(6) Other services (such as planning, construction and performance, information technologies and

logistics, which are currently carried out in the divisions of the Company) will be gradually

14 Government Resolution No. 463, Structural change in Israel Electric Corporation, dated September 12, 2006

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incorporated in separate subsidiaries, and the holdings of the Company in each such subsidiary will

be gradually reduced to 51%.

(7) The employees of the Company shall be entitled to benefits (from the Company or from the relevant

subsidiary) as is common practice in the privatization process for a government company in

accordance with the provisions of the Government Companies Law.

(8) The Ministers shall be authorized to establish in the regulations, despite the provisions of the

Obligation for Tenders Law, that the generation, distribution and transmission companies that have

been split from the Company shall give priority to contracts with the utility companies, for a period

and under conditions that the Ministers shall determine. In addition, these companies shall be

allowed to contend in other tenders that are outside the field of electricity.

(9) Upon the sale of 49% of the holdings of the holdings company in the distribution and generation

companies, the holdings company shall be allowed to establish subsidiaries that will engage in other

fields of activity.

(E) The government resolution authorized the representatives of the Companies Authority, the Budgets

Division in the Ministry of Finance and the Ministry of Energy and Water (then the Ministry of National

Infrastructure), to confer with the management of the Company and with the representative labor union

of the Company about the process of the Structural Change and the reorganization of the Electricity

Sector and the Company, with the goal of presenting the agreements that would be achieved for the

approval of the Ministerial Committee for Social and Economic Affairs, to the extent that will be required

for the purpose of the amendment of the Electricity Sector Law. It was further established in the

government resolution that the known costs of the Structural Change will be reflected in future electricity

charge rates.

(F) In February 2007 (before Amendment No. 5 to the Electricity Sector Law was passed), following a

government resolution dated September 200615

, the Director General of the Ministry of Energy and

Water, the Budgets Commissioner at the Ministry of Finance and the Director General of the Companies

Authority published a policy document, which included the main points of their recommendations for the

implementation of the outline of the Structural Change in the Company (hereinafter: the “Policy

Document”). In accordance with the Policy Document, the Company would be reorganized, in a gradual

process, in order to become a holdings company, which would hold a number of subsidiaries:

(1) The generation segment – two (2) alternatives were established for the implementation of the

Structural Change in the generation segment:

(a) Alternative 1: the generation activity in the existing generation units in the Company would be

moved to four (4) to six (6) subsidiaries, which would be, to the extent possible, of a similar

composition of generation technologies and a similar composition of consumption of fuels used

for powering the generation units, and of similar generation costs, except for the coal units. Each

of the two (2) existing coal sites of the Company would be held two (2) generation companies,

through joint ownership, and these would not sell electricity directly to consumers. See Section

7.1.1.1 for details on the existing generation facilities of the Company.

(b) Alternative 2: the existing generation activity of the Company would be moved to four (4)

subsidiaries, which would be, to the extent possible, of similar composition of generation

technologies and of composition of consumption of fuels used for powering the generation

units, except the coal powered generation units. Either of the two (2) existing coal sites would be

owned by one of the generation companies to the effect that each of the two (2) generation

companies would have, in addition to the remaining units, a coal station as well. The third and

fourth generation companies would have agreements to purchase capacity and/or energy from

15 Government Resolution No. 463, Structural change in Israel Electric Corporation, dated September 12, 2006.

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the two (2) companies owning the coal units, with the goal of creating a similar mix in electricity

supply.

The determination of the structure and formation of the generation companies would be done in a

manner that would prevent market failures or unfair exploitation of the market power in the

electricity market, and so clear rules of structural separation and independence would be established

between the holding companies and the generation companies, and among the different generation

companies, to ensure the business independence of the generation companies and the promotion of

competition in the Electricity Sector.

Holdings at a rate of 49% of the holdings of the Company in each of the generation companies would

be sold through to June 30, 2013, and upon the completion of the sale at the rate that has been set

forth above, each generation company would be permitted to engage in the desalination of water,

subject to the provisions that have been set forth in Section 6(D) of the Electricity Sector Law with

respect to the commitment of an essential service supplier.

(2) Administration of the system – a separate company would be established for the administration of

the system, administration of trade and long term planning (which would not engage in the

transmission of electricity as well). The system administration company would be fully government

owned.

(3) The transmission segment – a separate company would be formed in the field of electricity

transmission (known in the Policy Document as: “Delivery”), and clear rules would be determined for

structural separation and independence between the Company and the transmission systems, in

order to secure the independence of the business of the transmission system and secure the

development of competition in this field. The Ministers would have to decide, by January 1, 2011

with respect to the ownership of the transmission company out of three (3) options: (A) a subsidiary

of the Company; (B) a fully owned government company of the Government; or (C) a subsidiary of

the system administration company.

(4) The distribution segment – would be split into four (4) or five (5) regional distribution companies

with territorial continuity, which would be as similar as possible to one another in cost structure and

volume of activity. The companies would be established and operated as subsidiaries of the

Company and clear rules of structural separation and independence between the Company and the

distribution companies to be established and among the distribution companies themselves would

be determined, in order to secure the independence of the businesses of the distribution companies

and the promotion of competition in the sector. The operations of the distribution companies would

be regulated, the Criteria and charge rates to be charged by the distribution companies being

determined by the Electricity Authority and the distribution companies would be required to provide

services without discrimination to all parties in the Electricity Sector.

Holdings at a rate of 49% of the holdings of the Company in each of the distribution companies

would be sold off through to June 30, 2013.

(5) The supply segment – upon the incorporation of the generation companies of the Company, all

consumers in the sector would initially be assigned to those companies, according to principles to be

determined. The supply of electricity to consumers would be carried out by the generation

companies and also by other independent entities that are not the distribution, transmission or

system administration companies, based on supply licenses.

(6) The service companies - the power station planning, construction and execution divisions,

information technology, logistics and the fuel and coal fields would be established and would

operate as a separate company or companies belonging to the Company, and clear rules of structural

separation and independence between the subsidiaries and the Company and among the

subsidiaries themselves would be established, in order to ensure the business independence of the

companies and the development of competition in the industry. Holdings at a rate of 49% of the

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holdings of the Company in each of the service companies would be sold by June 30, 2013, and upon

the completion of the sale in the distribution and generation companies, the Company would be

entitled to set up subsidiaries to engage in other fields of activity, subject to that which has been set

forth in Section 6(D) of the Electricity Sector Law.

(7) Transfer of assets and debts

(a) The Company shall sell to companies that shall be established the assets belonging to the activity

sectors / segments that are being transferred to the companies.

(b) Loans that the Company has taken up shall be left under its responsibility and shall not be

moved to the companies that will be established.

(c) Assets that shall be used by more than one company shall be transferred to the a company that

shall be determined by the Ministers, and suitable contracts shall be made out to regulate the

use of the assets by the other companies, under conditions that would allow the objective of

competition to be achieved as soon as possible.

(d) The consideration for the sale shall be determined based on the carrying value of the assets in

the Company’s accounting records.

(e) Part of the consideration, in an amount that is equal to the balance of the loans of the Company,

proximate to the date of transfer, shall be gradually repaid by the companies to which the assets

shall be transferred, at times that shall allow the Company to pay its creditors the amounts

secured by loans.

(f) The balance of the consideration shall be paid to the Company immediately by the transferee

companies. Money originating from the balance of the consideration that the Company shall

receive from subsidiaries shall be used by the Company immediately for investment in the equity

of the subsidiaries.

(g) Interest shall be paid on the part of the consideration that shall not be paid immediately, which

will enable the payment of the interest payments to which the Company is committed pursuant

to the conditions of the loans that it has taken.

(h) The sale of the assets to the new companies would be made in such manner that the assets and

revenues that the Company would have after the Structural Change, directly or indirectly -

through its holdings in the subsidiaries that would be established, shall provide for the

repayment of the balance of the debt of the Company to creditors.

(i) On February 18, 200716

, the Government of Israel adopted a resolution whereby it adopted the

outline of Amendment No. 5 to the Electricity Sector Law and established the outline of the

process for its legislation.

The existence of the Policy Document further set forth that clear rules should be established to

ensure structural separation between the Company and its subsidiaries. Most of the principles that

have been set forth in the Policy Document were anchored a short time later within the framework

of Amendment No. 5 to the Electricity Sector Law dated March 2007. However, most of the dates

that were set in Amendment No. 5 were effectively cancelled or deferred within the framework of

Amendment No. 8 of June 2008, and others were set in lieu of them. See Section 22.1.2 for further

information on the amendments to the Electricity Sector Law.

(G) On March 28, 200717

, the Government of Israel adopted a resolution whereby ongoing negotiations were

to be conducted with the employees of the Company with respect to their rights in the context of the

16

Government Resolution No. 1210, Draft Electricity Sector Law (Amendment No. 5) - 2007 – Qualification of the Ministerial Committee for Legislation and Law Enforcement, dated February 18, 2007.

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Structural Change. The resolution established that the negotiations would be led by the Ministers and

that significant resolutions requiring the approval of the Ministers are to be made by the Ministers based

on joint decisions.

(H) In June 200818

, the Government of Israel approved the formation of two (2) government companies

owned by the State of Israel, which would operate in the Electricity Sector – the System Administration

Company Ltd., which was supposed to carry out the activity relating to the administration of the system

in the Electricity Sector, and the New Electricity Generation Stations Company Ltd., which was supposed

to act to generate electricity in accordance with the provisions of the Electricity Sector Law. The two

companies were incorporated and registered with the Registrar of Companies in October 2008. On May

12, 200919

an additional government resolution was adopted to charge the Ministers with advancing the

activity of the founded government companies in accordance with their goals. To the best of the

Company’s knowledge, as of the date of the prospectus, the System Administration Company Ltd. is

inactive; in December 2010, a new CEO was elected for New Generation Stations Ltd., and as the

Company has been informed, it has begun its activity.

1.3.2.5 The Position of the Company with respect to the implementation of the Structural Change in accordance

with the provisions of the Electricity Sector Law

In the opinion of the Company, relying, inter alia, on the various Government resolutions that have been

adopted with respect to the Structural Change in the Electricity Sector (and in particular Government

resolutions of September 200620

), the Policy Document and the explanations to the Electricity Sector Law and

legislative amendments made thereto over the years, the provisions of the Electricity Sector Law, as currently

worded, permit, subject to receipt of all of the approvals required by law, for a gradual process to be held

within which the Company would be recognized as a holdings company that would control a number of

subsidiaries that would have generation licenses, a number of subsidiaries that would have distribution

licenses, and a single subsidiary that would hold a transmission license, as stipulated below:

(A) At least four (4) subsidiaries holding a generation license, each of which would hold licenses for 30% of

the generation capacity of the Electricity Sector, at the most, and each of which generation companies

would have power stations that would operate based on a mix of field of various types, including: diesel

oil, natural gas and coal (subject to an exception with respect to generation using coal);

(B) At least four (4) subsidiaries holding a distribution license, each of which would hold licenses for 25% of

the distribution level in the Electricity Sector, at the most, the costs with respect to the electricity

facilities used by each of the companies being as similar as possible;

(C) A company with a transmission license, unless the Ministers determine, by January 1, 2013 (or by January

1, 2014, if and to the extent that it is extended in accordance with the authority of the Ministers to

extend dates) that a government company or a government subsidiary holding means of control of a

generation or distribution license holder would not be able to hold means of control of a transmission

license holder as well;

(D) Beginning in July 2013, the Company, as a parent company, would not be able to hold more than 51% of

the means of control in the generation or distribution companies (this restriction would apply to the

Company in the case of the Company receiving new generation or distribution licenses for its

subsidiaries);

(E) The system administration activity would be carried out within a separate corporation in which the

Company would have no holdings.

17 Government Resolution No. 1482, Negotiation on the consequences of the structural change in the Electricity Sector over the rights

of employees at Israel Electric Corporation Ltd., dated March 28, 2007. 18 Government Resolution No. 3704, Establishing government companies in the Electricity Sector – approval of resolution of the

Ministerial Committee for the Society and Economy (Socioeconomic Cabinet), dated June 30, 2008. 19 Government Resolution No. 129, Increase in competition in the electricity sector, dated May 12, 2009. 20 Government Resolution No. 463, structural change in Israel Electric Corporation of September 12, 2006.

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(F) The Company would be entitled to hold a subsidiary or subsidiaries for providing engineering design

services for power stations, construction of power stations, logistics, information technologies and

purchase of fuel of various types (which would not hold a license for carrying out activity in accordance

with the Electricity Sector Law);

(G) The holding structure that has been described above is subject to the approval of the Minister.

Notwithstanding that which has been set forth above, there is an option for one or more of the generation

and distribution companies and for the transmission company to be detached completely from the group of

the Company.

The provisions of the Electricity Sector Law are complex and may be construed or implemented in different

outlines, and the Company has no certainty that its interpretation of the provisions of the Electricity Sector

Law is the interpretation that will be accepted or be implemented. Although the Government related, in its

decision dated September 12, 2006, to the implementation of the Structural Change in a manner that is

similar to the interpretation of the Company, the Company has no certainty that the Law will be implemented

in accordance with this resolution.

1.3.2.6 The Outline of Understandings

In accordance with that which has been set forth, in September 2010, in the wake of discussions that took

place between the Company and representatives of the Ministry of Finance, the Israel General Labor

Federation and the labor union at the Company, the parties to these discussions came to understandings in

respect of possible principles for an outline of a structural change in the Company, which were put in writing.

As of the date of the Prospectus, the outline is inconsistent with the provisions of the Electricity Sector Law as

worded.

A breakdown of the principles for this outline follows:

(A) The system administration activity operations will be removed from the Company and moved to a

separate government company that is to serve as the system administrator.

(B) In the field of generation:

(1) The Ramat Hovav site21

will be sold off in full and moved to private or government ownership (total

of approximately 1150 megawatts22

).

(2) The activity of the fourth combined cycle23

of the Emergency Plan at Alon Tavor shall be sold in full

and transferred to private or government ownership. The Company shall plan and construct the

generation unit (approximately 380 megawatts).

(3) Project “D”24

– the coal powered station: shall be established as a separate company, shall be

planned and constructed by the Company and a 51% ownership private or government partner shall

be introduced into it. The Company shall hold 49% and shall not be a controlling shareholder of the

said company at any stage.

21 The Ramat Hovav site includes a combined cycle unit and gas turbine units (without steam addition). See Section 7.1.1.2 for further

details. In Footnote No. 1 of the Outline of Understandings, the Ramat Hovav site was described in its condition then, and it was clarified that steam additions that would be built within stage B of the Emergency Plan at the Hagit and Eshkol sites would remain under the ownership of the Company. See Section 7.7.5 for details on the Emergency Plan and the said sites.

22 A unit of measurement of output of electrical power generation. One (1) megawatt is equal to one (1) million watts.

23 The fourth combined cycle of Alon Tavor is a combined cycle that is included in the Development Plan of the Company. See Section 7.7 for further details; see Section 7.7.5 for details on the Emergency Plan. (Combined cycle units are gas turbine combined cycle type generation units.) For details, see Section 7.1.1.2(B).

24 Project “D” is a project in future planning that is included in the Development Plan of the Company for the construction of two (2) additional generation units that are coal and gas powered within the Rothenberg Power Station complex; for further details, see Section 7.13.12.

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(4) The Company shall establish either a nuclear power station or power stations under its ownership

with an equivalent volume of 1,300 megawatts, in accordance with the needs of the Development

Plan, beginning in 2020.

(5) The Company shall be able to upgrade and replace power stations that it owns in accordance with its

needs, and upon the conclusion of the lifetime of the existing equipment.

(6) The essential ban against the construction of additional power stations by the Company shall be

cancelled.

(C) The Company shall be able to engage in the planning and construction of power stations, and in the field

of logistics, computerization and information in Israel and overseas and the existing restrictions on these

issues on the Company will be canceled.

(D) Except in accordance with that which has been set forth in Sections (A) and (B) above, no incorporation of

activities in the Company to subsidiaries shall be carried out, including the generation, transmission and

distribution activity and of the headquarters and service branches in the Company, and they shall remain

and shall be executed within the Company as a single company.

(E) The Company shall act through profit centers that will allow for full transparency and assignment of costs,

in a model that will be determined in accordance with the character of the activity of the Company,

under the supervision of the auditing accountant of the Company. The power stations shall be run within

regional stations as profit centers that will be controlled by the auditing accountant of the Company, with

the goal of providing for maximum transparency and assignment of costs before the system

administrator.

(F) Within the framework of the discussion of the issues set forth in Section (G) below, no discussion will be

reopened on the issue of the fundamental structure of the Electricity Sector as set forth in the Outline of

Understandings.

(G) All of the understandings and agreements on this outline are contingent upon agreement on all of the

components of the agreement (structural change, organizational change, cost savings, financial strength

and employees’ rights).

The Outline of Understandings has not yet been examined by the relevant competent government entities

and has not been approved by them, and is inconsistent with the provisions of the Electricity Sector Law.

The implementation of a structural change in the electricity sector in accordance with the Outline of

Understandings, if and insofar as a consensus is reached with respect to its full or partial implementation,

and giving this outline legal binding effect, shall require approvals of the competent entities of the State,

including approval of the Government, execution of required legislative amendments and executing

additional actions, none of which has been agreed to or adopted as of the date of this Prospectus and

whose fruition is unknown. As of the date of the Prospectus there is uncertainty as to whether and when

these understandings will be implemented, if at all, and whether these or other understandings or other

structural changes will eventually be implemented, all in accordance with the discretion of the competent

parties and subject to any law. If all of these are not fulfilled, then the Company may be required to

implement the Structural Change as dictated in the Electricity Sector Law, whether in the manner in which

the Company understands that the Electricity Sector Law may be implemented as described in Section

22.1 or in another outline.

In the weeks that preceded the date of the Prospectus, the Deputy Minister of Finance held discussions

with the goal of advancing issues that are related to a Structural Change with the Management of the

Company and the labor union. In this context, the Deputy Minister of Finance established a steering

committee that he headed, and as was announced to the Company, on May 16, 2012, a meeting of the

steering committee was held with the participation of representatives of the Companies Authority, the

Commissioner of Budgets, the Comptroller General, the Commissioner of Wages, the Ministry of Energy

and Water and the Electricity Authority. To the best of the Company’s knowledge, the State entities

mentioned above intend to hold discussions on these subjects, including with the Company.

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1.3.2.7 Effect of the Structural Change on the creditors of the Company

In the letter to the chairman of the Board of Directors of the Company dated February 28, 2007, with respect

to the enactment of Amendment 5 to the Electricity Sector Law, the Director General of the Companies

Authority clarified that the implementation of the reform in the Company in accordance with the Electricity

Sector Law, including Amendment 5 to the Law of that same day, would be undertaken while examining, inter

alia, the consequences of the Structural Change over the liabilities of the Company, this being, inter alia, with

the goal of not preventing the repayment of the loan, which the Company has taken.

In addition to this, in the opinion of the Board of Directors and management of the Company, the execution

and implementation of the Structural Change in the Company (in any form whatsoever) involves the handling

of issues that relate to the creditors of the Company, in view of the agreements with some of them, to the

extent that these will be affected by the execution of the Structural Change, subject to the provisions of the

law. See Section 19.5 for details on restrictions that apply to the Company pursuant to loans that it has taken

up.

As of the date of this Prospectus, the Company and the State have not yet completed the handling of the

issues set forth above.

1.3.2.8 Steps and actions that have been taken in the Company with respect to the Structural Change

In the past, no genuine progress has taken place in the Company in terms of the implementation of the

Structural Change, due to factors that are not under its control, inter alia, due to sanctions of the employees

on the issue of the Structural Change and due to the fact that negotiations that the Company held with the

various government agencies on the issues of the Structural Change did not mature into agreements. The

Company is acting and conducting discussions, to the extent that it can, with relevant entities in the State, in

the labor union and the Israel General Labor Federation, with the goal of reaching a consensual arrangement,

inter alia, with the employees of the Company, with regard to the consequences of the Structural Change on

the employees’ rights. In this context, an Outline of Understandings was crafted, as described above.

In December 2010, the Board of Directors of the Company resolved that the implementation of the Structural

Change execution would be advanced in 2011, including implementation of the Outline of Understandings,

which would include the execution of a comprehensive streamlining plan in the Company. The Board of

Directors has called upon all parties involved to cooperate closely and for this purpose, to immediately

engage in intensive discussions in order to promote the process that has been agreed to.

In April 2011, the Board of Directors resolved to appoint Mr. Amir Livneh to head the Structural Change

directorate. Within the framework of his function, Mr. Livneh is responsible, inter alia, for the following

issues: the planning, implementation and supervision of the measures that are required for executing the

Structural Change in the Company, monitoring the schedules for implementation, milestones and execution of

the changes and serving as the representative of the management with respect to contacts with outside

parties, the various authorities and Government ministries with which the connections will be managed

through the directorate. The head of the directorate assumes the status of a divisional manager, serves as a

member of management and is subordinated directly to the CEO. Under the head of the directorate a number

of subject matter teams operate, headed by team coordinators on the various issues of the Structural Change

(economic, organizational, legal, regulatory, etc.).

This resolution was adopted after a previous resolution of February 2007 to form a directorate for the

purpose of implementation of the structure change was not executed due to staff sanctions. See Section 14

for further information.

In November 2011, the Board of Directors of the Company instructed the management of the Company to

promote the Structural Change process in the Company, including in the event that the planned reform in the

Electricity Sector would not fully materialize during the coming year, and to fully exercise all legal options

existing in the budgetary and cash flow field of the Company, to reduce the need for recruiting additional

debt, as far as possible.

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In December 2011, the Board of Directors of the Company resolved, within the framework of the budget

discussions of the Company for 2012, to reduce 400 authorizations of permanent employees for the second

half of 2012 and stated that it would begin implementation of a multi-year plan for organizational change and

streamlining (“Tnufat Or”), which would be advanced at top priority within the implementation of the overall

reform plan of the electricity economy. For details on the streamlining plan, including the reduction of the

number of employees, see Section 14.10. The Company estimates that the costs of employee retirement,

whether within the application of the organizational change, to the extent applied, or within the framework

of implementation of the multi-year plan for organizational change and streamlining, with respect to which

the Board of Directors has decided that it will be performed in any case, may be material.

1.3.2.9 Implementation of the Structural Change - forward looking information

In the opinion of the board of directors and the management of the Company, the Electricity Sector Law, in its

current version, does not deal with all of the issues that the Structural Change causes in the Company, and

does not regulate in detail the manner of its execution. In their opinion, a real structural change in the

Company is vital to its ability to fulfill the functions that are imposed upon it by the Electricity Sector Law and

it intends to operate, to the extent possible, to advance a structural change in the real outline, with the

consent of the labor union.

In accordance with that which has been set forth, the Outline of Understandings, which is inconsistent with

the provisions of the Electricity Sector Law, has yet to be examined by all of the competent government

agencies or approved by them. Granting binding legal effect to the Outline of Understandings and

implementing the Structural Change in the Electricity Sector in accordance with the outline set forth require

regulatory approvals of the competent agencies of the State, including Government approvals, making

required legislative amendments and execution of additional actions, none of which has been agreed to or

adopted as of the time of this Prospectus and whose fruition is unknown. As of the date of the Prospectus

there is uncertainty as to whether and when these understandings will be implemented, if at all, and whether

these or other understandings or other structural changes will be eventually implemented, all at the

discretion of the competent entities and subject to any law.

If the provisions of the Electricity Sector Law are not modified (including for the purpose of implementation of

the Outline of Understandings) and/or the agreements required as described above are not obtained, the

Company may be required to implement the Structural Change as outlined in the Electricity Sector Law,

whether in the manner in which the Company understands that the Electricity Sector Law can be

implemented, as described in Section 22.1, or in another outline.

There is no certainty with respect to the final format of the Structural Change, its date of implementation or

its consequences over the Company, its business affairs and outcomes. For additional details, see Section

29.3.7.

The information with respect to the estimates of the Company with respect to the manner of implementation

of the Structural Change is forward looking information, as per its definition in the Securities Law. Such

information is based on future data whose materialization is uncertain and that is not under the control of the

Company, but rather it depends on the receipt of approvals and agreements as described above, and relevant

legislative changes, to the extent required. In addition, this information is based on estimates of the Company

at the time of this Prospectus, with respect to the factors affecting it and the character of the decisions that it

may adopt in accordance with those developments. The estimates in accordance with that which has been set

forth above may fail to materialize or may materialize partially or differently from the manner expected, due,

inter alia, to the duration of the progress in discussions between the parties, changes in the position of the

Government, the Ministers, the regulators who supervise the operation of the Company or the applicable law,

none of which are under the control of the Company.

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2. Fields of Activity

The Company operates, as set forth, the single combined, coordinated system that engages, as set forth, in the

supply of electricity to consumers, from the stage of generation of the electricity to its transmission, distribution,

supply and trade. In addition, the Company engages in the establishment of infrastructures that are required for

the operations that have been set forth above and operates as the administrator of the electricity system.

As of the time of the Prospectus, the Company has three (3) primary fields of activity, which are known as

segments in the Financial Statements, in accordance with that which has been set forth below25

:

2.1 Generation of electricity – the operations of the Company in this field includes all of the operations that are

involved in the generation of electricity at the generation sites of the Company. See Section 7 for further

information.

2.2 Transmission and transformation of electricity – the operations of the Company in this field includes the

transmission of electricity from the generation sites using high and extra high voltage lines to the switching

stations26

and major substations27

, and between the switching stations and major substations to the substations,

through high voltage transmission lines and transformation via connection transformers (from extra high to high

voltage) and output transformers (from high to medium voltage). See Section 8 for additional details.

2.3 Electricity distribution – the operations of the Company in this field includes the transfer of electricity from

substations to consumers via medium voltage lines and low voltage lines and the supply and sale of electricity to

consumers. See Section 9 for additional details.

With respect to financial information on the fields of operation of the Company, the principles and results of the

attribution of profit and loss and balance statements according to the segments of operation, see Section 22.5.2.2

and Notes 34 and 36 to the Annual Financial Statements and Notes 9 and 12 of the Quarterly Financial

Statements.

3. Investments in the Company’s equity and transactions in its Shares

To the best of the Company’s knowledge, during the two years that preceded the date of the Prospectus, no

investments were made in its equity and nor were there any material transactions in its shares.

4. Distribution of dividends

4.1 General

4.1.1 In accordance with the provisions of Section 33(C) of the Government Companies Law, a resolution of the Board

of Directors of a government company with respect to the assignment of profits or of distribution, as per its

definition in the Companies Law, requires the approval of the Companies Authority; in the case of a dispute

between the Board of Directors of a company and the Companies Authority, then a government company of the

type of the Company (which is not a company undergoing privatization) is to act according to the resolution of

the Companies Authority, as approved by the Government.

4.1.2 In accordance with the current policy of the Companies Authority, with respect to the assignment of profits for

payments of dividend (which policy may change from time to time), as determined in the Companies Authority

25 It shall be noted that the sectors of activity in accordance with the Electricity Sector Law include also system administration, supply

and trading of electricity. See Note 1 to the Financial Statements. As of the date of the Prospectus, the activity of system administration is included both in the generation segment and in the transmission segment and the activity of electricity supply and trading is included in the distribution segment.

26 A switching station is a station that has 161 kV input voltage.

27 In accordance with Section 2 of the Electricity Sector Law, a “substation” is a transformation station that connects electricity grids of

different types that has transformers that increase or decrease voltage.

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Circular (C2 – 97/1) dated February 9, 1997, the profits from which the dividend will be paid are divided into two

types:

4.1.2.1 Dividends from current profits – a public utilities company (like the Company) shall distribute a dividend from

current profits at a rate of 60% of its current annual net profit, before payment of a bonus out of the profits

to employees.

4.1.2.2 Dividends from accrued profits – with respect to each relevant company, a specific demand shall be

submitted. The amount of the dividend shall be determined while considering the provisions of the

foundation documents of the relevant company, the provisions of any law and the following figures: needs for

investment in the upcoming years; liquid means; cash reserves; cash flows; the existing / desired financial

gearing; the required working capital; and for the possibility of the privatization of the relevant company.

In contrast to that which has been set forth in Sections 4.1.1 and 4.1.2 above, in accordance with the

provisions of Section 302 of the Companies Law, a company is entitled to make a distribution from its profits

(as per its definition in Section 302 of the Companies Law) (hereinafter: the “Profit Test”) as long as there is

no reasonable fear that the distribution will prevent the Company from being able to fulfill its current and

expected liabilities once they mature (hereinafter: the “Solvency Test”). In order to perform a required

distribution, the Company must pass both the Profit Test and the Solvency Test (together: “the Distribution

Tests”). Notwithstanding that which has been set forth above, the Court may, at the request of the Company,

and after its Board of Directors has confirmed that the distribution fulfills the Solvency Test, allow the

Company to make a distribution that does not fulfill the Profit Test, as long as it is convinced that the Solvency

Test is fulfilled. In accordance with the Articles of Incorporation of the Company, each distribution must be

approved by the Board of Directors of the Company and by a meeting of the shareholders of the Company.

The Companies Law and the Articles of Incorporation of the Company prescribe that a meeting of the

shareholders of the Company cannot resolve to distribute a dividend in an amount in excess of the amount

that was recommended by the Board of Directors. The Company maintains, based on a legal expert opinion

that it received, that a government company will not be required or allowed to make a distribution if it does

not satisfy the distribution tests, and any distribution is subject to the distribution tests (unless the approval

of the Court to make a distribution even if only the Solvency Test is fulfilled has been given, as set forth).

Based on the understanding of the Company, the provisions of the Government Companies Law and the

provisions of the circular of the Companies Authority with respect to the reservation of profits for dividend

payments do not impose a duty upon the Board of Directors of a government company to resolve to

distribute a dividend, but do impose upon it a duty to obtain the approval of the Companies Authority for a

resolution of its Board of Directors on the matter, and in the case of a dispute between the Board of Directors

of the Company and the Companies Authority, the Company shall act in accordance with the resolution of the

Companies Authority, as the Government has approved it.

4.2 Details in respect of dividends that the Company has distributed in the two years preceding the date of the

Prospectus

For 2010 and 2011, the Company did not distribute or calculate a dividend, because in 2010 the Company

recorded a profit of only about NIS two (2) million in its Financial Statements, and in 2011 the Company recorded

a loss of approximately NIS 785 million, adjusted for December 31, 2011 (approximately NIS 788 million adjusted

for March 31, 2012). See the report of changes in the capital of the Corporation, which is included in the Annual

Financial Statements, for further information.

4.3 The assignment of profits for the years 2004-2009

The total amount of the dividend that was calculated by the Company for 2004-2006, in accordance with the

policy of the Companies Authority, is approximately NIS 2.5 billion. For 2007 no dividend was calculated, because

in accordance with the accounting principles that applied to the Company at that time, the Company had losses

during that year. The amount of the dividends that were calculated by the Company for 2008 and 2009 was

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approximately NIS 358 million (after an update for re-presentations that were made, the calculated amount would

reach approximately NIS 548 million) and approximately NIS 779 million (after an update for re-presentations that

were made, the calculated amount would reach approximately NIS 843 million), respectively.

In accordance with the Articles of Incorporation of the Company, and despite the policy of the Companies

Authority as set forth above, the Board of Directors of the Company has resolved not to recommend the

distribution of a dividend for the years 2005, 2006, 2008 and 2009. On the other hand, in 2005, the Board of

Directors of the Company recommended to the general meeting of its shareholders to distribute an amount of

approximately NIS 118 million from the profits of the Company for 2004, as in the opinion of the Board of

Directors of the Company, the reservation of the profit for the purpose of payment of a dividend and bonus to

employees for 2004 should be determined based on the outcomes of the ordinary activity of the Company,

without the impact of the change over the rate of corporate tax and without the impact of the implementation of

International Standard IAS-19. The Company has not distributed a dividend since 2004.

According to the circular of the Companies Authority of July 15, 2008 with respect to a bonus policy in government

companies, the distribution of a bonus to employees shall not be permitted unless a dividend has been distributed

in the year for which the bonus is requested. The Company did not distribute bonuses to employees in the years in

which no dividend was distributed. See Section 14.7 for further details on the conditions for distributing a bonus

to employees in government companies.

The Company applied to the Director General of the Companies Authority in April 2005, in order to obtain his

approval for a recommendation of the Company’s Finance Committee to distribute a dividend from the profits of

2004 in the amount of only NIS 110 million (as of the date of the letter set forth), although its current profits in

this year came to a total of approximately NIS 2,796 million. In addition, the Company applied to the Director

General of the Companies Authority in order to receive his approval for the non-distribution of a dividend from

accrued profits for the years 2005-2008 in view to the financial status and cash flow status of the Company.

According to letters of the Director General of the Companies Authority to the Company dated March 26, 2008,

and May 5, 2009, the examination of appropriation of profits for the years 2004 to 2008 would be conducted

taking into account inter alia the financing needs of the Company, from its own sources and from debt raising that

are required for its compliance with the provisions of the Electricity Sector Law, as amended, including with

respect to its preparations for implementing the Structural Change in the Electricity Sector and implementation of

the Development Plan and the Emergency Plan of the Electricity Sector. In his letter dated March 26, 2008, the

Director General of the Companies Authority informed the Company that in 2008 the Companies Authority had no

intention of demanding a distribution of dividends by the Company for the years 2005 and 2006. In his letter

dated May 5, 2009, the Director General of the Companies Authority informed the Company that in 2009 the

Companies Authority did not intend to demand a distribution of dividends by the Company for 2004-2008. In

addition, in view of the financial status and cash flow of the Company, the Board of Directors of the Company has

decided not to distribute a dividend for the profit of 2009, and on April 18, 2010, the Company applied to the

Director of the Companies Authority, in order to inform the Companies Authority of the resolution of the Board

not to distribute a dividend for the profits of 2009 and to obtain its approval. On May 23, 2012, the Director of the

Companies Authority informed the Company that the examination of the appropriation of the profits for 2009

would be made with attention to, inter alia, the financing needs of the Company, from its own sources and from

debt raising, required for compliance with the provisions of the Electricity Sector Law and its amendments,

including with respect to preparation for implementation of the Structural Change in the electricity sector and

implementation of the development plans of the electricity sector. In view of this, the Director of the Companies

Authority stated in his letter that in 2012 the Companies Authority did not intend to demand a distribution of a

dividend by the Company for 2009. On May 23, 2012, the Companies Authority informed the Company that in

2012 the Companies Authority had no intent to demand dividend distribution by the Company for 2009. See

Section 1.3 for details on the Structural Change; see Sections 7.7, 8.6 and 9.7 for details on the Development Plan;

see Section 7.7.5 for details on the Emergency Plan.

F-21

4.4 Distributable profits

The balance of the distributable profits of the Company as of December 31, 2011 is approximately NIS 15,170

million, adjusted for December 31, 2011 (approximately NIS 15,228 adjusted for March 31, 2012). The balance of

the distributable profits of the Company for March 31, 2012 is approximately NIS 13,760 million.

4.5 Restrictions on the distribution of dividends

In some of the financing agreements of the Company the Company undertook to act to the effect that its

subsidiaries would not execute transactions that would restrict their ability to distribute a dividend.

F-22

Part 2: Other Information

5. Financial information of the Company’s fields of activity (in NIS million)

Details on variable costs and fixed costs by segments follow:

For the three months ended March 31, 2012

In million NIS adjusted to NIS of March 31, 2012

Generation Transmission Distribution Total Fixed: Wages 523 92 398 1,013 Depreciation 690 224 292 1,206 Financing 218 107 152 477 Others -175 151 690 666

1,256 574 1,532 3,362 Variable: Fuels 5,102 - - 5,102

Total assigned costs 6,358 574 1,532 8,464


In million NIS adjusted to NIS of March 2012

Generation Transmission Distribution Total Fixed: Wages 365 62 275 702 Depreciation 597 221 319 1,137 Financing 211 106 140 456 Others 327 46 158 531

1,500 435 891 2,826 Variable: Fuels 2,217 - - 2,217

Total assigned costs 3,717 435 891 5,043

For the year ended December 31, 2011

Data for 2011 – segments

In million NIS adjusted to December 2011

Generation Transmission Distribution Total Fixed: Wages 1,369 230 1,007 2,606 Depreciation 2,283 889 1,154 4,326 Financing 994 501 690 2,185 Others 1,413 170 551 2,134

6,059 1,790 3,402 11,251 Variable: Fuels 12,707 - - 12,707

Total assigned costs 18,766 1,790 3,402 23,958

F-23



Generation Transmission Distribution Total Fixed: Wages 1,369 231 1,011 2,611 Depreciation 2,292 892 1,158 4,342 Financing 998 503 693 2,193 Others 1,423 171 553 2,147

6,082 1,797 3,415 11,294 Variable: Fuels 12,755 - - 12,755




In million NIS adjusted to NIS of December 2011

Generation Transmission Distribution Total Fixed: Wages 1,252 203 939 2,394 Depreciation 3,203 877 1,157 5,236 Financing 792 394 521 1,707 Others 1,013 141 366 1,520

6,260 1,615 2,982 10,858 Variable: Fuels 8,981 - - 8,981




Generation Transmission Distribution Total Fixed: Wages 1,252 204 943 2,399 Depreciation 3,215 880 1,161 5,256 Financing 795 396 523 1,714 Others 1,021 142 367 1,530

6,284 1,621 2,994 10,899 Variable: Fuels 9,015 - - 9,015


F-24



In million NIS adjusted to December 2011

Generation Transmission Distribution Total Fixed: Wages 1,183 194 881 2,258 Depreciation 2,081 861 1,144 4,087 Financing 1,197 579 736 2,512 Others 909 149 426 1,484

5,370 1,783 3,188 10,341 Variable: Fuels 9,098 - - 9,098




Generation Transmission Distribution Total Fixed: Wages 1,187 195 884 2,267 Depreciation 2,089 864 1,149 4,102 Financing 1,201 581 739 2,522 Others 913 150 427 1,490

5,391 1,790 3,200 10,380 Variable: Fuels 9,133 - - 9,133


The main types of expenses that the Company has are: fuels, depreciation, wages, financing, suppliers,

contractors, equipment and materials and other expenses. The costs of fuels in the Company are mainly variable

costs. Other costs are fixed costs.

Depreciation, wage, financing, supplier, contractor, equipment and material expenses are mostly fixed costs that

the Company cannot materially influence in the short term, for the following reasons:

(A) The costs of fixed assets that the Company has (depreciation).

(B) Employment agreements with most employees (wages and others).

(C) A loan that the Company has taken (financing).

(D) Purchase agreements from suppliers and other inevitable costs (such as municipal rates and guarding).

See Notes 34 and 36 of the Annual Financial Statements and Notes 9 and 12 of the Quarterly Financial Statements

for details on the rules and assumptions based on which the division into operation segments was made and

further information.

See the explanations in Board of Directors’ report for descriptive details provided by the Board of Directors with

respect to the developments that occurred in the financial outcomes of the Company as at December 31, 2011,

and as at March 31, 2012, Sections A2 and A3, respectively.

F-25

6. The general environment and the impact of external factors on the Company’s operations

The assessments of the Company with respect to the trends, events and developments in the macroeconomic

environment of the Company that have or may have a material impact on its business results or developments in

the Company as a whole and the implications in respect of them for the Company.

6.1 Regulation in the Company’s fields of activity

The operations of the Company depend to a great extent on the regulation applying to its operations, including

the provisions of the Electricity Sector Law and its regulations, pursuant to which it is given licenses for operations,

the policy and resolutions of the Government (including resolutions of the Ministry of Energy and Water and the

Ministry of Finance), the resolutions of the Electricity Authority (including with respect to the electricity charge

rate that is fixed by the Electricity Authority and collected from the customers of the Company), the provisions of

the Government Companies Law and the regulations thereof and resolutions of the Companies Authority (inter

alia, on the matter of the conduct of the Company as a corporation, the manner of adoption of resolutions by its

organs, the form to the financial Statement, appointment of directors and special functionaries and so on),

provisions of the Antitrust Law (pursuant to it being a monopoly or pursuant to its execution of agreements that

require the receipt of approval from the antitrust control mechanism), the provisions of the Securities Law

(pursuant to it being a reporting corporation) and regulation pertaining to business licensing, planning and

construction and environmental protection (see Sections 7.13, 8.9 and 9.11). See Section 22 for details on

restrictions to and regulation of the activity of the Company. See Section 1.3 for details on the main points of the

provisions of the Electricity Law pertaining to a structural change; see also Section 29.3.7.

6.2 The security and geo-political situation in Israel and in the region

The economic, political and security situation in the State of Israel directly affects the Company, whose assets and

operations are located in Israel. The emergence of major hostilities in the Middle East against Israel or

deterioration in Israel’s international trade relations may materially impair the operations of the Company. In

addition, the political situation in Israel is sometimes unstable and is affected by protracted security issues. Since

the founding of the State of Israel in 1948, Israel and its neighbors in Arab countries have been involved in a

number of conflicts and terrorist attacks. Escalation in the hostilities against Israel may affect the economic

situation in Israel and the business affairs of the Company, as well as the outcomes of its operations and its

financial position.

In view of the geopolitical situation in the State of Israel and its relations with its neighbors, in the case of a

disaster or other disruptions, the State of Israel has no backup to the electrical grid of the Company, and in effect

the electricity grid in the State of Israel is isolated in all matters relating to the generation of electricity and its

supply to residents, without an ability to purchase electricity or to secure a backup from other suppliers within

and outside of Israel.

The High Emergency Power Authority (for the Electricity Field), whose members are the CEO of the Company (the

Head of the Authority), Vice Presidents in the Company, the Emergency Economy Manager of the Company, the

Director of the Electricity Administration and the Director of the Electricity Affairs Administration at the Ministry

of Energy and Water holds discussions whose aim is to make resolutions on all matters related to the preparations

required for ensuring the preparedness of the power supply layout in an emergency.

Due to the essential services that the Company provides to the State of Israel and its residents, the Company may

be at risk and constitute a target for hostile actions that are directed against its facilities. The Company makes sure

to maintain an extensive guard over its facilities and receives directions from authorized parties on various

security issues, including the National Emergency Authority, the Ministry of Defense, the police, the Home Front

Command and others. With respect to the generation of electricity, the Company has assessed this threat and

takes preventive steps relating to staff at its facilities. The Company cannot anticipate with certainty whether or

not attacks of this kind against its facilities will occur in the future or if its facilities will be damaged in wartime and

what the effect of such damage, if any, will be. See also Section 29.1.2

F-26

In addition, in January 2011, a wave of violence started in Egypt, initiated by its residents, which led to the

dissolution of the Government of Egypt and the removal of Hosni Mubarak from his presidency and a change in

the regime. The said fact has influenced the Company’s transactions through an agreement to obtain natural gas

from an Egyptian company (EMG), and in effect, throughout 2011 and up to the date of the Prospectus,

disruptions have occurred in the supply of gas from Egypt which manifested in repeated terrorist attacks against

the gas pipeline, to the point of complete termination of the pumping of gas from this source as of the date of the

Prospectus. See Section 7.10.9.2 with respect to the agreement with EMG, the notice by the Egyptian gas suppliers

of cancellation of the gas sale agreement with EMG and the disruptions in the supply of Egyptian gas.

In addition, there is no certainty with respect to the impact that the political instability in Syria or other countries

in the region will have, if any, over the State and in general.

6.3 The shortage of natural gas

For the purpose of the generation of electricity, the Company depends to a great extent on the supply of natural

gas. As a result of this, the Company is affected by risks related to the limited number of gas suppliers and

disruptions in the supply of natural gas. These risks are compounded by the fact that the Company has no facilities

for the storage of natural gas. Disruptions in the supply of natural gas, including as a result of deliberate

explosions of the gas pipeline from Egypt, the depletion of natural gas deposits in Israel and violations of the

purchase contracts by the gas suppliers, have compelled and will compel the Company to generate electricity

using more expensive alternative fuels in the future that increase the cost of electricity generation significantly. In

general, the charge rate coverage mechanism gives the Company full coverage for the fuel costs, but because the

charge rate recognition is not immediate, a cash flow gap has resulted for the Company.

See Section 7.10.9.2 with respect to the extended disruptions that occurred in 2011 in the gas supply from Egypt,

the uncertainty with respect to its continued supply in the future and the complete termination of the pumping of

gas as per the notice of the unilateral cancellation of the agreement therewith by the Egyptian government gas

companies (Egyptian Natural Gas Holding Company and Egyptian General Petroleum Corporation) to EMG, which

supplies the Company with natural gas from Egypt; see Section 7.10.9.2 (a) with respect to the depletion of the

Yam Tethys natural gas deposit and its partial collapse due to increased extraction during the summer of 2011,

and the directives issued by the Director of the Electricity Authority in the Ministry of Energy and Water with

respect to monthly and annual restrictions in the scope of the use of gas from this field; see Section 7.10.9.2 and

Section 29.2.3 for the execution of an agreement for the supply of gas from the Tamar field.

6.4 Changes in the exchange rates

Because almost all of the revenues of the Company are quoted in NIS and approximately 49% and approximately

52% of the long term financial liabilities of the Company without permanent bonds and before executing

protective transactions were, as of December 31, 2011, and March 31, 2012, quoted in foreign currencies (mainly

dollars, euros and Japanese yen), the Company is exposed to changes in the exchange rates of these currencies.

The weighted depreciation rate of the shekel against the currencies in which the financial liabilities of the

Company are quoted in 2011 was approximately 8.1% compared with a weighted appreciation of approximately

5.0% in 2010. The fluctuations in the exchange rates affect the expenses of the Company (financial and others)

and the outcomes of its operation. However, most of these liabilities are covered in protection transactions and

using a hedging mechanism that is built into the electricity charge rate. See Section 29.1.5 for details on the

exposure; see Sections 7.1.3.2, 8.1.3 and 9.1.4 for details on the electricity charge rate.

In addition, the Company has expenses that are linked to the Consumer Prices Index; however these expenses are

relatively stable and as a result pose a lower accounting exposure for the Company than the fluctuations in the

currency exchange rates.

F-27

6.5 The policy of the Israeli Government with respect to increasing competition in the Electricity Sector and savings

in electricity consumption

As of the time of the Prospectus, the Company generates, transmits and supplies, in accordance with that which

has been set forth above, most of the electricity in the State of Israel. The policy of the Government, as reflected,

inter alia, in their resolutions and in the provisions of the Electricity Sector Law, is to allow competition in the

Electricity Sector. Therefore, the Government has established an objective of increasing the generation of

electricity by private producers from approximately 4% to 20% of the total installed electricity generating capacity

in the State of Israel through to 2020 and an increase in the share of private electricity producers that generate

electricity using renewable energies to 10% of the total electricity generation in the State of Israel through to

2020. As of the date of the Prospectus, the total potential generation capacities of the facilities according to

provisional licenses that have been given to entrepreneurs for construction of an electricity generating facility

(including from renewable energy) along with the generation capacity of the facility that will be constructed by

OPC Rotem Ltd. (hereinafter: “OPC”) in accordance with the generation license that has been issued to it

according to a tender that was published by the State in 2001, stands at 5,838 megawatts. If all of the project for

which provisional licenses have been issued and that have won the State tender (except renewable energy

projects whose energy availability depends on sunlight, water, etc.) materialize, they will constitute approximately

23% of the total installed generation capacity of the State of Israel, assuming that the Company will build all of the

substations in its approved Development Plan (including Alon Tavor combined cycle and Project D)28

. See Section

7.4 for details on the licenses that have been given to private electricity producers and entrepreneurs and their

generation capacity as of the date of the Prospectus. To the best of the Company’s knowledge, as of the date of

the Prospectus, two (2) of the private electricity producers reached financial closure, and other private electricity

producers are in various stages toward licensing, construction and operation of private power stations. In

addition, increasing interest in the market in producing electricity using renewable energies was demonstrated,

inter alia, as a result of the preferential charge rates that these producers received. See Section 7.4 for details.

In addition to this, the policy of an increase in competition in the Electricity Sector is reflected in the provisions of

the Electricity Sector Law, whereby the ownership of the various activities in the Electricity Sector shall be

decentralized. For example, in the field of generation it was determined that no generation license would be given

to a person holding 30% or more of the generation capacity of the Electricity Sector, which in effect would require

the generation field to have at least four (4) companies operating in it. See Section 1.3 for further information.

In addition, the State is operating to save consumption (reduce demand). Thus, among other things, the Ministry

of Energy and Water is taking steps to increase the awareness of energy savings (for example by a campaign for

the replacement of light bulbs, legislation that prohibits the use of incandescent bulbs, replacement of

refrigerators or air conditioners that consume too much electricity and so on). The Company is also acting in

accordance with this policy and is encouraging “intelligent consumption” of electricity29

.

See Section 6.8 with respect to the handling of the demand for electricity during the summer of 2012.

6.6 Difficulties in raising finances because of the global financial crisis

The Company is financing its operations, inter alia, using banking and/or non-banking credit. In view of the global

economic crisis that commenced in late 2008 and continued into 2009-2010, and although a recovery took place

during 2011, as a result of this economic crisis, banks in Israel and outside of Israel have imposed stricter

requirements for receiving bank financing. The costs of financing have increased in view of the increase of the

interest at the national level throughout the year, in periods in which the Company raised capital from

institutional entities, despite the decrease of interest in December. In addition, during 2011, a financial crisis

afflicted the financial markets of the euro bloc companies that led to a decrease in the international credit rating

of major countries in the euro bloc (including France, Spain, Italy, Ireland and Greece) and as a result led to a

reduction in the number of banks that were prepared to offer financing, a reduction in the valid time of the bank

28 The Company has no means of evaluating which of the projects, if any, will be established and when. 29 See the website of the Company: www.iec.co.il.

F-28

financing offers, an increase in capital raising costs through banks and imposition of demands by the banks to

retain a right to change the costs in the case of shifts in financial markets, and a European bank that recently won

the purchasing financing proceeding withdrew its offer. However, during 2011 the Company raised approximately

NIS four billion from institutional entities in Israel and an additional NIS one billion from Bank Hapoalim. During

2012 and up to the date of the Prospectus, the Company raised 0.5 billion U.S. dollars through the issue of bonds

overseas30

and also NIS 1.5 billion from institutional entities in Israel. See Section 28.5 for details. However, there

is no certainty that [even] if the global financial crisis does not intensify, the Company will not encounter

difficulties in raising capital.

6.7 Economic activity in the sector

In the years in which there is strong economic activity and positive growth in the Israeli economy, this manifests in

an increase in the consumption of electricity and an increase in demand. Conversely, in times of financial crises, or

difficulties, the electricity consumption decreases accordingly and demand plummets. As a result of this conduct,

plants may be closed, and the activity volume may decrease in certain divisions of these plants, sometimes to the

point of closure of activity.

6.8 Prevailing weather conditions in Israel

Over recent years, the State of Israel has experienced periods of “extreme” weather (a particularly harsh winter or

hot summer), in which there is a significant increase in demand and consumption, which may reach, in certain

situations, a level that the Company cannot withstand while providing all of the required electricity.

The examinations of the Company, as at the date of the Prospectus, as well as exercises that were conducted in

the last year to practice coping with electricity the demands that are expected for the summer of 2012, reveal that

in the 2012 summer months the available generation ability of the Company, considering an expected fault rate of

5%, is expected to exceed the peak demands for electricity by approximately one% (1%) only, and that if it is not

possible to supply gas at all and/or in the case of a fault in one of the generation units of the Company (beyond

the expected fault rate of 5% as set forth) and/or if extreme weather conditions occur that lead to an increase in

the demand for electricity relative to the expected peak demands, the available generation capacity of the

Company might be lower than the peak demands for electricity, in which case the Company will not be able to

satisfy all of the demand for electricity in the peak hours, and it will have to make scheduled power cuts for

consumers, and in extreme cases, for several hours as well.

The Company is preparing to address the acute crises in the electricity sector that are expected for the summer of

2012. In addition, in March 2012, the Company applied to the Ministry of Energy and Water with a request for the

Minister to exercise his lawful authority by declaring, with Government approval, a “state of emergency” in the

electricity sector and establishing instructions that would apply to the activation of the emergency economy for

the “State of emergency” (including issuing a permit for stopping the supply of electricity to consumers for periods

of time according to priorities to be determined), in a manner that will allow the Company to operate in the “state

of emergency” without violating the provisions of the law, the licenses pursuant to which it operates and its

contractual undertakings towards financing parties31

. The position of the State, as stated to the Company, is that

Section 58 of the Electricity Sector Law, in contrast to Section 39 of the Government Basic Law with respect to

emergency regulations, does not set provisions by which any law may be changed. The Company was also

informed that regarding the possibility of establishing emergency regulations, rulings established restrictions and

qualifications, inter alia, rulings established that the use of the means of emergency regulations does not stand if

the Government test of proportionality could initiate primary legislation. The Company was further informed that

it must take all possible actions in the circumstances of the matter within the existing law.

30 See Financial Statements published by the Company on February 7, 2012, and December 15, 2011, Reference Nos.: 2012-01-036933

and 2011-01-363897, respectively, for details. 31

See also the Immediate Report dated April 18, 2012 (Reference No.: 2012-01-104157).

F-29

On May 13, 2012, the Government of Israel adopted a resolution32

within which it imposed upon the various

ministers of the Government and other relevant parties a duty to conduct checks and/or examinations with

respect to taking steps for coping with the expected shortage of electricity during the summer of 2012, to allow, to

the extent possible, the continued regular supply of electricity to the residents of the State of Israel while

maintaining the survivability of the electricity system.

Among other things, the Government has decided as follows:

(A) To impose upon the Minister:

(1) To examine the possibility of regulating the use of natural gas to the effect that the volumes of natural

gas held by an essential service supplier would be transferred, in the period of preparation for the

shortage33

, to private power stations that are partly or fully shut down because of a shortage of natural

gas, so that they can be operated in accordance with the instruction of the System Administrator for

supplying electricity in accordance with the needs of the economy.

(2) To report to the municipal unions, the Ministry of the Interior and the Ministry for Environmental

Protection on any fault in the natural gas system in order to allow for the expansion of the use of the NOX

standard to the Hagit site and to allow for the utilization of 0.5% sulfur fuel oil at the Haifa C Power

Station.

(3) To examine ways of reducing the electricity consumption of major electricity consumers during

shortages34

of electricity under conditions that will be determined, and for coping with a shortage in the

supply of electricity during peak times.

(4) To examine making special arrangements for the period of preparation for the shortage, which will allow

for the supply of fuels to generation units of the essential service supplier, including provisions with

respect to priorities in fuel unloading, storage, conduction and pumping actions, to the extent required,

and provisions with respect to the construction and maintenance of fuel lines, inasmuch as and to the

extent required for this purpose, taking into account the aggregate of needs that the fuel economy

satisfies.

(5) For the purpose of reducing the demand for electricity during the summer of 2012 and in order to ensure

public awareness of the matter, to take actions on public information with respect to the shortage in

electricity and the need for saving in electricity, and shifting demands to off-peak times.

(6) To order an essential service supplier to act for the implementation of this decision as soon as possible,

including acting for the immediate connection of solar energy electricity generating facilities, to allow for

the supply of electricity from them during the summer of 2012.

(B) To instruct the Minister of the Interior to act to hold the discussions required in the National Planning and

Construction Council for providing easements for building portable gas turbines with an output exceeding 20

megawatts within a month of receipt of an application at the secretariat of the National Council.

(C) To direct the Minister for Environmental Protection to act to the extent required through July 1, 2012, to

allow for examination for the installation and operation of portable gas turbines at an output that exceeds 20

megawatts that will operate in backup format. The examination set forth will be executed with regard to the

environmental aspects of these turbines and in accordance with any law, including through legislative

amendment, if required.

(D) To direct the Minister for Environmental Protection to act in order to remove the restrictions on the number

of hours that have been prescribed by his Ministry with respect to the operation of the various electricity

32

Resolution No. 4623, dated May 13, 2012, on the matter of “Measures to cope with the anticipated shortage of electricity”. 33

The period of preparation for the shortage was defined in the Government Resolution as set forth, as the period from June 1, 2012,

to October 31, 2012. 34

A time of shortage was defined by Government Resolution as set forth, as periods of shortage in electricity during the period of

preparation for a shortage, in which the expected supply level exceeds expected demand by less than 600 megawatts.

F-30

generating units, including Reading, using backup fuel at the time of shortage in natural gas in the period of

preparation for the shortage, as long as the electricity generating units act according to the order of operation

that will be prescribed by the Ministry for Environmental Protection (after consulting the Ministry of Energy

and Water) with the goal of reducing to the extent possible the exposure of the population to air pollution

that is caused by the increased use of backup fuels, and remove the restrictions on the number of permitted

operating hours of backup units and diesel generators at the time of shortage.

(E) To direct the Electricity Authority to examine expansion of the arrangements for running the generators and

moving peak arrangements, including expansion of the hours of operation – in the period of preparation for

shortage, which will be run subject to the directives of the System Administrator, for implementing such a

Government policy.

In addition, the Electricity Authority has decided35

, in accordance with the arrangements previously set whose

purpose is to reduce demand at a time of shortage, to create an incentive to reduce consumption at a time of

shortage. The proposed arrangement, which is valid beginning on June 1, 2012, and ending on September 30,

2012, will provide a specific charge rate discount to consumers that pay at a domestic or general charge rate for

reduction in consumption during the summer of 2012 compared to consumption in the parallel period in the

previous calendar year.

For the purpose of preparation for the electricity consumption problem during the summer of 2012, a steering

committee was formed in the Company, headed by the Assistant CEO, consisting of eight (8) internal teams whose

function is to formulate a plan for the approval of the Board of Directors with the goal of ensuring execution of

actions by the Company that will ensure its ability to withstand the electricity demands during the summer of

2012. In addition, an inter-ministerial team, whose members include the Assistant CEO of the Company and is

which headed by the Director of the Electricity Authority, has been established, and holds weekly meetings for the

purpose of finding solutions. As part of the plan for expanding the generation capability for the next summer, the

Company is rebuilding some of the systems that were dismantled at the Reading Power Station to provide for the

combustion of fuel oil at this station; it is adding chilling systems to specific gas turbine units to increase their

generation ability during the summer; it is leasing salt-free water facilities for combined cycle sites; and it is

building water spraying systems for burners to reduce pollutants during the combustion of diesel fuel at combined

cycle sites. In addition, the Company is proceeding in the field of public information to prepare the public for

possible events during the summer and is encouraging consumers to reduce electricity consumption through a

discount plan, as part of promoting the decision of the Electricity Authority, as set forth.

On June 5, 2012, the Company received an instruction, as set forth above, from the Minister to proceed with the

immediate connection of solar energy electricity generating facilities, to allow for the supply of electricity from

them during the summer of 2012. The Company started processes of transacting with solar energy producers.

In June 201236

, the Electricity Authority approved an additional quota of 30 megawatts of electricity from

renewable energy for generating electricity during the summer of 2012, in order to allow for an additional, rapid

solution in preparation for the fear of the “electricity drought” during the summer of 2012. The Electricity

Authority stated in its decision that any essential service supplier must act to the best of its ability to integrate

solar devices into the electricity grid before August 1, 2012.

Information on the preparations of the Company with respect to the expected electricity shortages over the

summer of 2012 is forward-looking information as defined in the Securities Law. Such information is based on

future data whose materialization is not certain and is not under the control of the Company, but is based, inter

35

Electricity Authority Resolution No. 4, of Meeting No. 372 dated May 14, 2010, on the subject of “Extension of the registration date for the 20/20 arrangement for reducing demands and increasing the efficiency of consumption for the summer of 2012”. Electricity Authority Resolution No. 6, of Meeting No. 368 dated April 2, 2012 on the subject of “The 20/20 arrangement for reducing demands and increasing the efficiency of consumption for the summer of 2012”.

36 See on the Electricity Authority website: http://pua.gov.il/5512550-he/`Ele.aspx?pos=1 and Decision number 1 of meeting 375

dated June 4, 2012 on the matter of: “Advancing the date of charge rate arrangement for 2014 with respect to decentralized electricity generation for self consumption and transfer of surpluses to the grid through photovoltaic systems that do not exceed 50 KW for generating electricity in the summer of 2012”.

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alia, on demographic variables, economic variables (GDP), the weather and forecasts for electricity demand for the

upcoming summer (in three scenarios: extreme, heavy and below heavy heat loads), which naturally are uncertain.

These estimates may fail to materialize or may materialize partially or differently from the manner expected, due,

among other reasons, to changes in the demand for electricity, changes in the position of the Government, the

Ministers, the regulators and supervisors of the activities of the Company or the applicable law, none of which is

under the control of the Company.

See Section 29 for further information on the risk factors of the Company and their impact on its operations.

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Part 3: Description of the Business Affairs of the Company by Fields of Activity

A separate breakdown of each field of activity of the Company follows. See Part 4 for a description of matters relating to

the operations of the Company as a whole.

7. The generation segment

7.1 General information on the generation segment

7.1.1 General

In accordance with that which has been set forth above, the Company is engaged in the supply of electricity to

customers, that is, to all consumers in the State of Israel, from the stage of electricity generation, transmission,

distribution and supply and trading thereof. The Company also engages in the construction of the

infrastructures that are required for those operations and for the administration of the system.

The electricity generating system of the Company in Israel is based on five (5) steam driven power stations,

which are powered by steam force that turns the blades of turbines, and which are spread along the country’s

shores, located in Haifa, Hadera (hereinafter: “Orot Rabin”), Tel Aviv (hereinafter: “Reading”), Ashdod

(hereinafter: “Eshkol”) and Ashkelon (hereinafter: “Rothenberg”). The steam driven power stations are

powered by coal or natural gas, or fuel oil. In addition to the steam driven power stations, another generation

array of gas turbine generation units operates, which are powered by diesel or natural gas.

As of the date of the Prospectus, the Company possesses and operates seventeen (17) sites of power stations

(of which five are steam driven power stations sites as mentioned above) with a total installed generation

capacity of approximately 13,133 megawatts. The sites, which are located, in accordance with that which has

been set forth above, throughout the territory of the State of Israel, are located on land that is owned by the

Company or leased to it by the State. Each of the sites of the power stations of the Company has a single unit or

a number of separate units for electricity generation. As of the date of the prospectus, the Company had sixty

three (63) generation units, of which eighteen (18) are steam generation units; ten (10) are combined cycle gas

turbine units; sixteen (16) are jet gas turbine units37

; nineteen (19) are industrial gas turbine units38

, with four

(4) of those turbines (Tzafit, Ramat Hovav, Eshkol and Hagit) intended to work in combined cycle form. See

Section 7.1.1.1 for a table containing a breakdown of all of the generating units of the Company, their locations

and generation capacities. See Section 7.6.3 for details on the land used by the sites. See Section 7.10 for details

on the raw materials that are used by the Company in the generation of electricity.

As of the date of the Prospectus, the order of the costs of generation per kilowatt hour, from the least costly to

the most expensive, from among all the electricity generating options of the Company according to the terms of

the contracts that it executed to purchase raw materials for electricity generation, is as follows: (A) generation

by natural gas in combined cycle units; (B) generation by coal; (C) lower efficiency39

natural gas powered units;

and (D) generation by fuel oil and diesel oil.

With the rise of the demand curve40

, the Company runs the generation units in accordance with the criterion of

cost of fuels per generated kWh41

and considering operational constraints. Therefore, the Company runs at top

37

A turbine consists of a diesel powered aviation jet engine connected to a generator for generating electric energy. The costs of generation of these units are especially high due to the high cost of diesel fuel and the use made in stressful situations and at peak demand only. See Section 7.1.1.2 (B) for further details.

38 A turbine that is run by industrial jet engines, which are diesel powered, with an option for conversion to natural gas operation. 39 This term expresses the ratio between the amount of energy extracted and the amount of energy invested and is expressed in%. 40 The demand curve expresses the demand for electricity during the hours of the day. 41 Kilowatt hour (kWh). A “kilowatt” (kW) is a unit for measuring available electric energy. One (1) kilowatt equals a thousand (1,000)

watts. A “kWh” is a quantitative measure of electric current that is equal in value to continuous consumption of a kilowatt for one (1) hour.

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priority natural gas powered combined cycle units and coal powered steam generation units, after which gas

converted steam generation units are run, followed by natural gas powered turbine units. If need be, primarily

in peak demand periods, the Company runs the diesel oil powered units: industrial gas turbines and jet gas

turbines, whose operation may be initiated and stopped in a short time relative to the steam generation units,

albeit at a higher cost of operation.

The electricity generation volumes and timing are dictated by the figures of electricity consumption by the end

consumers at any given moment. See Section 12 for details on seasonality in the consumption of electricity. See

Sections 7.5 and 7.7.3.2 for details on developments in electricity consumption, recorded peak demands and

trends in demands.

The use of natural gas for the generation of electricity reduces air pollution and greenhouse gas emissions that

form during the process of generation of electricity and reduces the cost of generation.

Despite the transition process to the use of natural gas for producing electricity and the conversion of the steam

generation units to natural gas power, which started in February 2004 in accordance with that which is set forth

below, the Company decided to maintain the ability of the steam driven power stations to be “dual-fuel”42

(except for the Reading Power Station, which is powered by natural gas only and whose systems are being

reconstructed for burning fuel oil), and they will be able to generate electricity using both natural gas and liquid

fuel. This is in order to maintain their ability to generate electricity even during any time of shortage in natural

gas or because of a disruption in its supply.

As of the time of the Prospectus, in accordance with that which has been set forth above, the Company

generates most of the electricity in the State of Israel, while the balance of electricity, in insignificant amounts,

is generated by private electricity producers from which the Company purchases electricity at low rates

(approximately 0.54% and 4.7% of the total electricity that the Company supplied in 2010 and 2011,

respectively, and approximately 4% of the total electricity that the Company supplied in the first quarter of

2012). A few of them sell all of their output to the Company while others generate electricity for their own

consumption and sell only their surplus generation to the Company. In accordance with that which has been set

forth above, it is the policy of the Government to increase competition in the Electricity Sector and the objective

that it has set is that through to 2020, approximately 20% of the generation of electricity in the State of Israel

will be by private entities. In addition, the Government has set a guiding objective for the generation of

electricity from renewable energy43

at a volume of 10% of the electricity energy needs of the State for 202044

. In

addition, in accordance with the Electricity Sector Law, as an essential service supplier, the Company is

committed to purchasing electricity that is generated by private electricity producers. See Section 7.4 for further

information on private producers of electricity and the competition in the field of activity of electricity

generation.

7.1.1.1 A table follows that lists the generation units of all types, and the generation capacity in megawatts as of the

date of the Prospectus, including electricity that is purchased from a private producer (Etgal Ashdod Ltd.),

which is included in the Company’s load monitoring and control system:

42 A generation unit that can be powered by at least two (2) types of fuel. 43 Energy that is produced from a renewable source cannot be exhausted within a reasonable time (e.g.: solar radiation, wind, water

and waste). 44 Government Resolution No. 3484, “Government policy in the field of energy production from renewable sources”, dated July 17,

2011.

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Installed generation

capacity (in MW)

Number of units

Site Type of unit

Steam driven power station generation units

Coal powered units

2,590 6 Orot Rabin (Maor David A, B) Coal primary fuel, fuel oil secondary fuel

2,250 4 Rothenberg Coal primary fuel, fuel oil secondary fuel

4,840 10 Total coal units

Gas converted units

912

4

Eshkol

Gas primary fuel, fuel oil secondary fuel

282 2 Haifa Gas primary fuel, fuel oil secondary fuel

428 2 Reading Gas only; systems for burning fuel oil are being reconstructed

1,622 8 Total gas converted units

6,462 18 Total steam driven power station generation units

Gas turbines

Industrial gas turbine

436 4 Ramat Hovav

220 2 Tzafit

220 2 Alon Tavor

34 1 Eilat

68 2 Atarot

592 4 Gezer

1,570 15 Total industrial gas turbines

Jet gas turbines

40 1 Hartov

40 1 Eitan

11 1 Ra’anana

130 3 Caesarea

80 2 Haifa

80 2 Kinarot

15 1 Orot Rabin

40 2 Rothenberg

10 1 Eshkol

58 2 Eilat

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Installed generation

capacity (in MW)

Number of units

Site Type of unit

504 16 Total jet gas turbine

2,074 31 Total gas turbines

Combined cycle gas turbines

335 1 Ramat Hovav

1,019 3 Hagit

377 1 Eshkol

744 2 Gezer 3, 4

373 1 Alon Tavor

748 2 Haifa

3,596 10 Total combined cycle units

Gas turbines that are scheduled to operate in the future in combined cycle form

235 256 260 250

1 1 1 1

Tzafit Hagit Eshkol Ramat Hovav

4,597

13

Total combined gas cycle turbines and turbines scheduled to operate in the future in combined cycle form

13,133 63 Total generation units in the Company

26 1 Generation by private producers regulated by the Company (Etgal Ashdod Ltd.)

13,159 64 Total private producers regulated by the Company

7.1.1.2 A breakdown of the generation units of the Company follows:

(A) Steam generation units

The steam generation units of the Company, which generate electricity using gas turbines, are powered,

in accordance with that which has been set forth above, using coal as their primary fuel, or fuel oil or

natural gas. Some of the generation units, in accordance with that which has been set forth in the table

above, are “dual fuel”, that is can be powered both by coal (as a primary fuel) and fuel oil, or may be

powered both by natural gas (as a primary fuel) and diesel oil (liquid fuel) or fuel oil.

The steam generation units of the Company are designed to supply the basic levels of demand for

electricity, and as of the time of the Prospectus, their total installed generation capacity is approximately

6,462 megawatts. The dual fuel power stations, which are powered, as of the date of this Prospectus, by

coal, involve a high investment and a long construction time, but when they are coal powered, the cost

per generated kWh is low. The fuel oil powered generation units were used for generation of electricity at

baseline load until the energy crisis in the 1970s, following which it was decided to diversify the use of

fuels by constructing dual fuel power stations, which may be powered, in accordance with that which has

been set forth above, by coal as well. In accordance with the planning of the Company, when natural gas

is available for use in larger volumes, which the Company estimates will occur mainly after

commencement of the flow of natural gas from the Tamar gas deposit, another part of the fuel oil

generation units that have been converted to natural gas power will be run by natural gas. See Section

7.10.9.2 (C) for details on the Tamar deposit; see Section 7.1.1.3 for details with respect to the

procedures for conversion to use of natural gas for electricity generation.

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(B) Gas turbines

Gas turbines are divided into two (2) types: jet gas turbines and industrial gas turbines.

On the date of the Prospectus, the Company had four (4) industrial gas turbines (Tzafit, Eshkol, Ramat

Hovav and Hagit), which will be converted in the future to combined cycles, with a combined installed

generation capacity of approximately 1000 megawatts, the unit in Eshkol being scheduled for conversion

to gas in 2012 and the other units having been converted to gas during 2011. In addition, their conversion

to combined cycle units by steam addition is being planned through to the end of 2013. On the date of

the Prospectus, the Company had sixteen (16) jet gas turbines with a combined installed generation

capacity of approximately 504 megawatts.

In this context, in March 2011, the Company executed an agreement with Doosan Heavy Industries &

Construction Ltd., for building steam additions to gas turbines at the Ramat Hovav site (plus an option for

the Company to build a steam addition at the Alon Tavor site), in exchange for a total amount, for all sites

(not including Alon Tavor) of approximately 156 million dollars plus 114 million euros (approximately

NIS 1,136 million according to the rate of exchange as at March 31, 2012).

The construction of industrial and jet gas turbines entails relatively low investments and their

construction time is short. However, the generation of electricity using jet gas turbine units is more

expensive than its generation using steam generation units, the operation of jet gas turbines being more

expensive than industrial gas turbines. However, the operation of gas turbines may be initialized and shut

down in a relatively shorter time than the startup and shutdown of steam generation units. Because of

this, the Company usually runs its gas turbine units primarily in periods of peak demand.

(C) Combined cycle generation units

The combined cycle is a combination of an industrial gas turbine and a steam turbine. Using combined

cycle technology, the residual heat that is emitted from industrial gas turbines is exploited and used to

run an additional steam turbine with no addition of fuel, meaning that instead of the gases being emitted

into the air, they are used for additional generation of electricity. This action contributes to considerable

saving in the utilization of fuel and protection of the environment, because production capacity increases

without an increase of emission of pollutants into the air.

As of the date of the Prospectus, the Company had ten (10) combined cycle units, all of which are natural

gas and diesel powered and whose (combined) generation capacity is approximately 3,596 megawatts.

7.1.1.3 Conversion of generation units to natural gas combustion

The Company started to use natural gas in February 2004 at the Eshkol site and thereafter at the Reading

Power Station, the Gezer site, the Hagit site, the Tzafit site and at Ramat Hovav. In 2011, in August and

November, the combustion of natural gas commenced at the Alon Tavor and Haifa Power Station sites,

respectively.

As of the date of the Prospectus, approximately 50% of the total installed generation capacity of the Company

is by units that may be powered by natural gas, and the Company expects that through to December 31,

2012, approximately 52% of the total installed capacity of the Company will be by units that may be powered

by natural gas.

A table listing the generation units of the Company that may be powered by natural gas, as of the date of the

Prospectus, follows:

Name of site Number of generation units Total installed generation capacity (in megawatts)

Eshkol 5 1,289

Reading 2 428

Ramat Hovav 6 1,021

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Name of site Number of generation units Total installed generation capacity (in megawatts)

Tzafit 1 235

Hagit 4 1,275

Gezer 6 1,336

Alon Tavor 1 373

Haifa 4 1030

Total 27 6,705

7.1.1.4 Duration of use of the generation units

The Company periodically estimates the lifetime of its assets, based on international information and the past

experience of the Company. The accounting lifetime of a power station is approximately thirty (30) years at

least. The accounting lifetime of gas turbines is approximately twenty five (25) years for industrial gas turbines

and approximately fifteen (15) years for jet gas turbines. The Company maintains and invests in its generation

units on a regular basis, including beyond their accounting lifetime, in accordance with techno-economic

viability and engineering considerations. Based on the information available to the Company with respect to

the energy sector industry, the Company believes that the shutdown rates applicable to its units are good

relative to comparable electricity generators. See Note 2G to the Annual Financial Statements for details.

7.1.2 The structure of the field of activity and the changes that have occurred therein

In accordance with that which has been set forth above, as of the time of the Prospectus, the Company

generates most of the electricity in the State of Israel, whereas the rest of the electricity, to immaterial degrees,

is generated by private electricity producers. See Section 7.4 for further information. In 2011 and in the first

quarter of 2012, the Company continued to convert additional generation units to generating electricity by

combustion of natural gas. However, in view of the recurring disruption of the supply of gas from Egypt to the

point of complete termination of the supply of gas from this source and the lack of certainty with respect to its

continued supply (as described in Section 7.10.9.2, and in view of the depletion of gas in the Yam Tethys deposit

and its partial collapse due to increased extraction during the summer of 2011 (as described in Section 7.10.9.2),

in 2011 and in the first quarter of 2012 through to the date of the Prospectus, the Company was required to

generate electricity using fuel oil and diesel oil, which are more expensive fuels to use than natural gas, in

accordance with that which has been set forth above. For further information, see the Company’s Immediate

Reports dated February 5, 2012, and dated February 15, 2012 (Reference Nos. 2012-01-033294 and 2012-01-

046050, respectively).

7.1.3 Restrictions, legislation, regulation and special constraints applying to the field of activity

7.1.3.1 General, the licenses of the Company in the generation segment

The operations of the Company in the generation segment, like its other fields of operation, are contingent

upon the receipt of licenses pursuant to the Electricity Sector Law and is subject to various restrictions and

laws. See Section 22 for details.

As at the date of the Prospectus, the Company has generation licenses that have been granted separately for

each generation unit (hereinafter: the “Generation Licenses”). In March 2011, the Company received new

generation licenses (in addition to fifty six (56) existing ones), for six (6) generation units of the Company and

gas turbines that were synchronized to the grid: Ramat Hovav – Units 6, 7 and 8; Haifa – Unit 40; Hagit – Unit

1; and Eshkol – Unit 3. See Section 22.1.2 for details on the validity of the said generation licenses.

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7.1.3.2 The electricity charge rate

(A) General

(1) The manner of determining the charge rate

The revenues of the Company are based on the electricity charge rate that the Company charges

consumers. In accordance with the Electricity Sector Law, the electricity charge rates and their

manners of update are determined by the Electricity Authority. In accordance with the provisions of

the law, the Electricity Authority shall determine the electricity charge rates in accordance with the

following rules:

(a) The charge rates shall be determined based on the principle of cost, considering, inter alia, the

type and standard of services. Each price shall reflect the cost of the particular service, without

any price decreasing at the expense of increasing another.

(b) With respect to the cost, an adequate return on capital rate shall be taken into account,

considering the rights and duties of an essential service supplier license holder. The law does not

define what an adequate return on capital rate is.

(c) For the purpose of setting the charge rates, the Electricity Authority shall perform cost control

actions for the essential service supplier license holder. The Electricity Authority is entitled not to

take into account, for setting charge rates, expenses, in part or in full, which in its opinion are

not required for fulfillment of the duties of the essential service supplier license holder.

In accordance with these principles, the electricity charge rate should cover all of the costs sustained

by the Company due to the operation of its assets that are required for fulfilling the duties of the

Company as an essential service supplier. These costs consist mainly of the costs of fuels, costs of

operation and maintenance, and costs of capital (depreciation, financing and return on capital).

The resolutions of the Electricity Authority with respect to the setting of the charge rate bases state

that every few years, the Electricity Authority is supposed to establish a charge rate basis for a

certain test period (a period in which the charge rate basis will be valid). The charge rate basis has a

number of components, some applying to all activity segments and some relevant to only a certain

segment. The electricity charge rates for the various consumers are set in accordance with the type

of consumption and the supply voltage. The main charge rate types are: uniform charge rate

(domestic, general, street lighting and low voltage and medium voltage bulk) and load and time

charge rates (low voltage, medium voltage and high voltage). The electricity charge rate that is

derived from the charge rate basis is updated during the test period through regular updates and

annual updates in the manner explained in Subsection (2) below.

In addition, the Electricity Authority adopts, from time to time, various resolutions in which principles

that apply to the electricity charge rates are established, some of which pertain to the electricity

charge rate in general and some of which pertain to the electricity charge rate for a certain segment

of activity.

In accordance with the Electricity Sector Law, for the purpose of the discharge of the duty of the

Electricity Authority, the Authority will allow representatives of consumer organizations to bring

before it proposals and positions with respect to the setting of the charge rates, in the manner that

the Minister will prescribe (after consultation with the Minister of Finance and according to the

proposal of the Electricity Authority).

Prior to the adoption of any final resolution by the Electricity Authority with respect to the charge

rates and the Criteria45

, the Electricity Authority publishes a resolution proposal for public response

45

See Section 7.4.1.1 for details on the standards.

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(hearing), and only after the time that is prescribed for responses does the Electricity Authority

publish its financial resolution on the matter of the charge rates.

(2) Update of the charge rate

In accordance with the Electricity Sector Law, the electricity charge rates are to be updated according

to an update formula that the Electricity Authority will determine. In accordance with the provisions

of the Electricity Sector Law, the update formula may take into account a savings coefficient

(coefficient of reduction in the charge rate calculation mechanism), which will be decided upon after

consultation with the ministers. In the resolutions of the Electricity Authority with respect to the

electricity charge rates, it has been determined that the charge rate will be updated on an ongoing

annual basis, as follows:

(a) Annual update – each year, in April, the Electricity Authority is supposed to conduct an annual

update of various components of the costs recognized in the charge rate for the Company, in

accordance with the change in various components in the input basket of the Company46

. The

updated charge rates that stem from the annual update take effect from the date specified

therein. However, in the past, the annual update of the charge rate was performed late a

number of times. In these instances, the update was applied retroactively to the date on which it

was supposed to have been executed by the Authority.

(b) Regular update of the charge rate47

– the cost recognized for the Company is updated

theoretically twice a month: on the first day of the month for changes in fuel prices and on the

16th

day of the month for a change in the Consumer Price Index, changes in the average monthly

wage for employee positions in Israel48

and change in the foreign exchange rate (“the

Theoretical Update”).

On March 22, 201249

, the Electricity Authority issued a resolution updating the formula for the

date of regular update of the charge rates. It was determined that the charge rates would be

updated based on the earlier of the following events with respect to the valid charge rate input

basket, the decrease in the charge rate occurring only after concluding the collection of the

addition to the recognized cost of fuels within the charge rate outline as set in this resolution

(appearing in Section 6 below):

(1) A change in the recognized input basket cost of the entire system by at least 3.5%, as long as

four (4) months from the last update had elapsed.

(2) The annual update date starts with 2013.

Because the charge rate for consumers is not updated following each theoretical update, a gap

forms between the revenues for the actual charge rate and the theoretical update. This gap may

be positive or negative in accordance with the recognized cost for the Company. In accordance

with the accounting rules implemented by the Company, this gap is imputed to a controlled

asset (or liability) called “compensation for delay in update” and is included in the charge rate

calculation applying from the next annual update date. See Note 20d to the Financial Statements

46 Electricity Authority Resolution No. 1 of meeting No. 289 dated February 1, 2010 on “charge rate basis for the generation segment

for 2010-2014 and updates to the transmission and distribution segment; Electricity Authority Resolution No. 1 of meeting 110 dated July 1, 2002, on “the electricity charge rates and standards for 2002-2005 and their manner of update"; Electricity Authority Resolution No. 1 of Meeting No. 123 dated February 4, 2003 on “deferral of the annual update date of the charge rates”; Electricity Authority Resolution No. 4, of Meeting No. 125, dated March 25, 2003, on the matter of “Amendment to the resolution of the Authority with respect to the manner of conducting the regular update”.

47 Ibid., and Electricity Authority Resolution of Meeting No. 344, dated July 25, 2011, on “The charge rate update formula”, which took effect on September 1, 2011.

48 As published by the Central Bureau of Statistics. 49 Resolution No. 1 of Meeting No. 367, dated March 22, 2012, on the matter of “Spread of electricity charge rate increase for 2012-

2014 in the period of problems with the supply of natural gas to the energy sector in Israel”.

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for details on the controlled assets of “compensation for delay in update” in the Annual Financial

Statements and Note 5d of the Quarterly Financial Statements.

(3) The financial strength of the Company as a consideration within the framework of the setting of the

charge rate

In various resolutions of the Electricity Authority, with respect to the electricity charge rate, the

Electricity Authority states that its resolutions are adopted while balancing between the need to

allow the Company to execute its activity in the electricity chain segments while maintaining its

financial strength, and safeguarding of the interests of the consumers to minimize the costs of the

Company that are reflected in the charge rate.

In 2004, the Company petitioned to the Supreme Court against the Ministers50

following the denial of

a petition of the Company from the Ministers to exercise their power pursuant to Section 17(B) of

the Electricity Sector Law to exempt it from the effect of Accounting Standard 12 that was prescribed

by the Israel Financing Standards Board, which ordered the discontinuance of the adjustment to the

Financial Statements and transition to nominal reporting. In addition, the Company petitioned

against the Electricity Authority following the denial of a request of the Company of that the

Electricity Authority based the electricity charge rates on the cost of the Company, adjusted to the

nominal reporting method required by the Criteria and implemented in the Financial Statements of

the Company. The Supreme Court stated, inter alia, that the consideration with respect to the

safeguarding to the financial strength of the Company, albeit a relevant consideration in setting the

electricity charge rates, expresses only one facet of the public benefit with which the Electricity

Authority is entrusted in accordance with the Electricity Sector Law, and that in exercising its lawful

authority, the Electricity Authority must take into account within the framework of its considerations

a whole set of considerations that are intended to lead to “arrangement of the activity in the

Electricity Sector to the benefit of the public, while ensuring availability, quality, efficiency, and while

creating conditions for competition and minimization of costs” (Section 1 of the Electricity Sector

Law) (in this case, the High Court of Justice determined that the Electricity Authority and the

Ministers did take into account pertinent considerations, within the framework of their authority and

within the framework of the realm of reasonableness and therefore it did not intervene in their

discretion and dismissed the petition of the Company).

(4) Discounted social charge rates

The Electricity Sector Law states that a consumer who reaches retirement age and is entitled to an

income support pension (hereinafter in this section: “Eligible Person”) shall pay a reduced payment

of 50% of the domestic charge rate for the first 400 kWh consumed each month, for domestic use

only. The Electricity Sector Law empowers the Minister, after consulting with the Minister of Social

Affairs and with the consent of the Minister of Finance, to identify additional needy populations that

will be entitled to reduced payment, at a rate that will be set in the domestic charge rate, the

quantity of electricity for which it will be entitled to discounted payment, on the condition that the

total discount of the payments for electricity consumption does not exceed an amount equal to 1.5%

of the total payments made by all consumers for electricity consumption. The Electricity Sector Law

further states that in setting electricity charge rates for all consumers, the Electricity Authority shall

take into account the decrease in the electricity charge rates that Eligible Persons pay pursuant to

the said regulations.

The granting of discounted payment to Eligible Persons is regulated in the regulations made under

the Electricity Sector Law51

in 2007, including provisions with respect to the proof of eligibility from

the National Insurance Institute, including directives to the essential service supplier regarding the

50 High Court of Justice 7976/04 Israel Electric Corporation Ltd. v. the Public Utilities Authority - Electricity (published in Nevo

September 12, 2004) 51 Electricity Sector Regulations (Methods of Proving Eligibility for Discounted Payment) - 2007.

F-41

manner of notification to eligible parties and the manner of transfer of information with respect to

eligibility. In addition, in the resolution that the Electricity Authority published in July 200752

, the

Criteria with respect to the implementation of eligibility for a Reduced Payment were updated, and

the manner of application of the discounted payment within the framework of the consumption

account of the consumer and the manner in which the costs sustained by the essential service

supplier due to providing the said discount are regulated, among other things. In June 200853

, the

Electricity Authority decided to add to the arrangement under certain conditions, secondary

consumers living in the consumption site registered to the title of an Eligible Person, who comply

with the conditions of eligibility for a reduced payment and who have a meter installed for recording

their domestic electricity consumption.

In addition, in 2010 and 2011, regulations took effect with respect to discounted payment for Eligible

Persons who are disabled pursuant to the Nazi persecutions and war54

and regulations with respect

to discounted payment for disabled persons who receive an old age pension for the disabled55

,

respectively, which regulate the giving of discounted payment to these population groups too, under

conditions that are identical to the conditions stated above.

As of December 31, 2011, the Company created a regulated asset56

in the amount of NIS 105 million

adjusted to the NIS of December 2011 (NIS 106 million adjusted to the NIS of March 2010) for 2010,

an amount of NIS 109 million adjusted to the NIS of December 2011 (NIS 109 million adjusted to the

NIS of March 2012), for electricity discounts for needy individuals who had not yet been recognized

for the electricity charge rate. See Note 20 to the Annual Financial Statements and Note 5 to the

Quarterly Financial Statements for details.

As of March 31, 2012, the Company created a regulated asset in the amount of NIS 123 million in

March 2011 (the amount of NIS 104 million adjusted to the NIS of December 2012), for electricity

discounts for needy individuals who had not yet been recognized for the electricity charge rate.

Within the framework of Amendment 10 to the Electricity Sector Law, the circle of parties eligible for

reduced electricity bill payment was expanded by including an addition of various eligible groups. In

addition, within the amendment, a clause was added, stating that the Electricity Authority would

publish each quarter figures, in accordance with information that it would receive from the

Company, with respect to the total reduction from the payments for electricity consumption,

according to the groups enumerated in this addition. If it is learned that in a certain quarter of the

year, the total reduction exceeds 1.4% of the total payments made by all consumers for electricity

consumption, the group last incorporated into the addition will be excluded.

(5) The current electricity charge rate

(a) The current electricity charge rate is: the uniform domestic charge rate – 50.83 agorot per kWh

(not including Value Added Tax) and the general uniform charge rate – 53.91 agorot per kWh

(not including Value Added Tax).

52 Resolution No. 4 of Meeting No. 189, dated July 18, 2007, on the matter of “Changes in criteria: implementation of eligibility for

discounted payment”. 53 Resolution No. 1 of Meeting No. 218, dated June 18, 2008, on the matter of “Addition to Criterion No. 30 ‘Manner of charging’”. 54 The Electricity Sector Regulations (Discounted Payment for Nazi Persecution and War Disabled Persons) - 2010. 55 The Electricity Sector Regulations (Discounted Payment for Disabled Persons Receiving an Old Age Pension for Disabled Persons) -

2011. 56 In accordance with the accounting rules applying to the Company as a regulated corporation, the Company notes a regulation asset

or liability for certain costs that are discounted as an asset instead of being recognized as an expense, with the goal of reflecting and creating an adequate parallel between the expenses and incomes resulting from the Company according to their dates of recognition in the electricity charge rate.

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(b) Annual update –

The last annual update of the electricity charge rate was made in August 2011 (an annual update

that was supposed to be made in April 2011) and applied retroactively from April 2011. The

overall charge rate update led to an increase in the charge rate at 9.89% on average from August

14, 2011, compared with the previous annual update that took effect in March 2011. This annual

update took included an update of elements such as: recognized financing costs for 2011, the

recognized final fuel mix for 2010, advanced recognized fuel mix for 2011, recognized cost of

active assets for 2011 and return of costs for purchases of electricity from private producers and

for additional arrangements that were made in 2010. The Company has objections to some of

the resolutions of the Electricity Authority that were adopted within the framework of this

annual update. See Section 22.2 with respect to the contentions of the Company towards the

Electricity Authority with respect to this charge rate. Also, see Note 3 to the Financial Statements

with respect to the objections and their consequences over the Quarterly Financial Statements.

Later on, in its resolution dated March 22, 201257

, the Electricity Authority stated, with respect

to the spread of the increase in the electricity charge rates for the years 2012-2014, that on the

annual update date for 2012 it would update the cost recognized for the generation segment

including fuel cost. Differences that would form between the cost recognized on the 2012

annual update date and the cost recognized pursuant to this resolution would be expressed in

the annual update for 2013. In addition, as indicated in the resolution, the Electricity Authority

would also examine the natural gas incentive formula and the contention of the Company of an

increase in the costs of fuels that arises from assumptions made by the Electricity Authority with

respect to power station maintenance times. In addition, the annual update for 2012, which was

supposed to occur in April, is to be deferred until after receiving the information required of the

Company and execution of costs as required. The Company applied to the Electricity Authority

on March 29, 2012, with a request to obtain details of any information that was required by the

Electricity Authority for the purpose of executing this annual update, and as at the date of the

Prospectus, the Company is in the midst of discussions on the matter with the Electricity

Authority.

(c) Regular update –

The last regular update of the electricity charge rate for 2011 took place in October 2011 and led

to an average increase in the charge rate of 4.72%, effective November 1, 2011. Following this

was another update, in March 2012, which led to an additional average increase in the charge

rate of approximately 8.9%, effective April 1, 2012 (see Subsection 6 below for further details).

The update was made following the increase in the charge rate in August 2011, which applied

the additional fuel cost due to a decrease in the quantity of natural gas that was supplied by the

Egyptian gas supplier.

(6) Spread of increase in the electricity charge rates for the years 2012-2014

On March 22, 201258

, the Electricity Authority adopted a resolution outlining a gradual increase of

the electricity charge rates for the years 2012-2014 (hereinafter: the “Period” and the “Resolution”,

respectively). In accordance with the Resolution, the charge rate will increase each year during the

period relative to the previous year, at a rate of 8.9% in 2012, 4.4% in 2013 and 3.7% in 2014

(hereinafter: the “Charge Rate Increase”).

(a) The Charge Rate Increase is for an update of the recognized costs and the spread of the

additional fuel cost as follows:

57 Resolution No. 1 of meeting 367 dated March 22, 2012 on the matter of: “spread of cost of electricity charge rates for the years

2012-2014 in the period of problems in natural gas supply to the energy sector in Israel.” 58 Resolution No. 1 of Meeting No. 367 dated March 22, 2012 on: “Spread of electricity charge rate increase for the years 2012-2014 in

a period of distress in natural gas supply to the energy sector in Israel”.

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(1) The Electricity Authority will admit an addition to the recognized fuel cost for the Company

for 2012, of NIS 7.7 billion at current prices relative to the recognized cost in the last charge

rate update (hereinafter: the “Addition to the Fuel Cost”). The Addition to the Fuel Cost will

be spread across the electricity charge rates for the years 2012-2014.

(2) The Electricity Authority will also recognize an addition to the recognized cost of other

production cost components that would be expected to be updated within the framework

of the next annual update, in the amount of approximately NIS 400 million in sold quantities

based on the charge rate (2006 quantities) relative to the cost recognized in the last charge

rate update. The addition contributes to an increase of approximately 2% for the electricity

charge rate. This addition includes, inter alia, an estimate of payments for 2012 to

conventional private producers of electricity, cogeneration producers and solar technology

producers that are connected to the distribution grid in accordance with the Electricity

Authority Resolution of Meeting No. 304, dated August 2, 2010, and in accordance with the

Electricity Authority Resolution of Meeting No. 315, dated November 5, 2010.

(3) In addition, the Electricity Authority will also recognize an addition to the cost in the

transmission and distribution segment for 2012 in the amount of approximately NIS 240

million in sold quantities of the charge rate basis (2006 quantities). The addition contributes

to an increase of approximately 1.2% to the electricity charge rate.

The Charge Rate Increase is based on the following work assumptions: there will be no expected

supply of natural gas from Egypt during the period; decreasing quantity of natural gas from the Yam

Tethys reservoir during the period in accordance with the forecast of Noble Energy, the last of which

was dated March 7, 2012; in the first half of 2013, LNG gas supply will commence; from mid-2013,

natural gas supply to the Electricity Sector in Israel will start from the Tamar deposit; an updated

demand curve for March 2012.

In addition, the Charge Rate Increase is based on assumptions with respect to government aid,

including: an increase in the rate of exemption from excise, giving of guarantees, spread of VAT

payments, spread of income tax payments and extension of the validity of the Government

Companies Regulations (Rules for Compiling Financial Statements of Israel Electric Corporation Ltd.)

(Provisional Order) - 2004. See Section 28.4.5 for details about the Government aid. The Government

aid as set forth was made contingent upon the Company taking of certain steps, particularly the

taking of economization steps, the continuation of raising credit, the execution of actions for

developing the Electricity Sector, including the entry of private electricity producers, and use in

accordance with the measures available to it by law of the escrow account money deposited for

benefits and bonuses to Company employees for non-pension components that have not been

recognized for deposit in a central pension fund (see Section 14.6.7 for details on the escrow

account). As of the date of the Prospectus, some of the said steps have been taken by the

Government and the Company. See Section 28 for details on the assumptions that served as a basis

for the scheduled Charge Rate Increase.

(b) The costs that were established in the resolution are estimates and will be updated in

accordance with the update mechanisms and considering the following:

(1) Annual updates – see Subsection (A)(5)(b) above.

(2) Regular updates – see Subsection (A)(5)(c) above.

(3) The recognized costs for the transmission and distribution segments, including the addition

in accordance with the resolution, shall stand without a decrease coefficient until the

setting of a new base for these segments that will be valid from April 1, 2012.

(4) An update mechanism in the case of a change of circumstances – in the case of an extended,

significant resumption of natural gas supply to the Electricity Sector in Israel before mid-

2013 or another material change in the estimate of fuel costs (except for reasons of the

F-44

Company not satisfying the conditions of the resolution), the need to update the recognized

fuel mix for the Company for 2012, and as a result, a shortening of the period of refund of

these costs to the Company, shall be examined.

(c) Cash flow bridging measures

(1) The monthly deposits for the special purpose account for Stage B of the Emergency Plan

(hereinafter: the “Special Purpose Emergency Plan Account”) in the amount of NIS 167

million for January through June 2012 will be deferred. The Company will resume the

deposits in August 2012 through January 2013. The total deferrals in these deposits are

NIS 1 billion.

(2) The Electricity Authority will formulate an outline for the release of up to NIS 600 million

from the existing cash balance in the Special Purpose Emergency Plan Account for the use of

the Company, subject to various conditions as they have been prescribed in the resolution,

and subject to the Special Purpose Emergency Plan account returning to its financial volume

at the end of 2012 as it was prior to the execution of the bridging of cash flow described in

this Section.

On May 24, 2012, the Electricity Authority released the amount of NIS 600 million from the

balance in the special purpose account for Stage B of the emergency plan.

(d) Special purpose fuel account:

In accordance with the resolution, a unique mechanism will be established for managing the

surcharge money for the fuel cost. Among other things, it was stated in the resolution that the

Company would open a separate, special purpose account for purchasing the addition to the fuel

cost (hereinafter: the “Special Purpose Fuel Account”) and that the Company would deposit in

this account the debt raising amounts backed by Government guarantees, the addition to the

fuel cost in the charge rate, and the amounts that were supposed to be deposited in April and

May 2012 in the Special Purpose Emergency Plan Account. The Special Purpose Fuel Account will

be managed by the Company and will be monitored by the Electricity Authority, which will

supervise the deposits into the account and the release of the money from it in accordance with

a reporting mechanism that is elaborated below.

The release of the money from the Special Purpose Fuel Account will be carried out in

accordance with the expenses recognized by the Electricity Authority for fuel consumption, less

the charge rate revenue that was collected from consumers for the fuel component, without

“the addition to the fuel cost” at the time, and mutatis mutandis, or based on another

mechanism that will be determined by the professional team at the Electricity Authority.

On April 18, 2012, the Company forwarded a detailed response on this issue to the Electricity

Authority, dealing mainly with a request that the Electricity Authority publish an updated

resolution on the subject whereby the fuel purchase control mechanism be based on post

factum control and reporting, and that the money not be managed in a special purpose account.

This is because a control method differing from this would create major difficulties for operating

the fuel purchase system and may cause failures and impaired reliability of electricity. After the

Company and the Electricity Authority conferred, the Electricity Authority forwarded to the

Company a list of principles with respect to the management of the Special Purpose Fuel

Account, as follows:

(1) In accordance with Electricity Authority Decision No. 367, the Company will dedicate a

special purpose bank account that will be used only for the management of the fuel money

and will inform the Electricity Authority of the details of the account.

(2) The Company will forward a report to the Electricity Authority on all of the deposits that

were to have been made into the Special Purpose Fuel Account to date and the expense for

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the surplus fuel purchase up to the same date, in accordance with the principles in

Subsection (4).

(3) Money will be deposited into the Special Purpose Fuel Account from the following sources:

(a) Debt raising operations that are backed by Government guarantees.

(b) The amounts that were supposed to be deposited to the Special Purpose Emergency

Plan Account in April-May 2012.

(c) The surplus fuel cost calculated by generated kWh. In 2012 the calculation will be made

based on 2.2 agorot per generated kWh and in total NIS 1.3 billion, in accordance with

Electricity Authority Decision No. 367. The money will be transferred to the Special

Purpose Fuel Account fifty (50) days from the end of the month, because of recognition

of collection days.

(4) “The addition to the fuel cost” that will be recognized for the Company will be established

as set forth below:

(a) The recognized basic cost will be determined each month according to the base basket

that as was known in November 2011 before the fuel crisis (with no addition for fuels),

that is, 23.63 agorot per kWh generated.

(b) The actual cost will be determined in accordance with the actual fuel consumption and

the marginal fuel price (LIFO) at the first stage, and later the Electricity Authority will

check and decide the manner of recognition of the fuel cost.

(c) The recognized surplus cost will be the difference between the cost calculated in

Subsection (b) and the cost calculated in Subsection (a).

(5) The Company will be allowed to withdraw money from the Special Purpose Fuel Account

only for the surplus cost stated in Subsection (4) (c) above, including inventory for that use.

The withdrawal shall be made on the fifth day of each month according to forecast data and

the principles set forth above, and the final consideration according to actual data will be

made on the fifth day of the following month. Due to expedited purchase of fuel by the

Company during the summer months of 2012 and the delay in raising cash, the final account

reckoning for the summer months of 2012 will be completed in early October 2012.

(6) The Company will forward to the Companies Authority within 14 days of the date of the

demand any information that it possesses and that is required for the Electricity Authority

for the purpose of monitoring the Special Purpose Fuel Account.

(7) The Electricity Authority will be allowed, at any time, to instruct the Company to make

offsets or to take other actions with respect to the Special Purpose Fuel Account for which

proper clarifications have not been given and which deviate from the uses according to

Electricity Authority Decision No. 367, including inventory. In any case, the mechanism will

not be run before October 2012.

(8) These principles are used by the Electricity Authority for the purposes of deposits and

withdrawals from the Special Purpose Fuel Account and not for purposes of charge rate

recognition of the fuel basket.

According to the resolution, an update of the recognized costs for the Company at an average

rate of 8.9% will apply once this resolution takes effect on April 1, 2012.

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(B) The generation segment charge rate

(1) General

On February 1, 2010, the resolution of the Electricity Authority was adopted with respect to the

update of the charge rate basis for the generation segment for 2010-2014 (the Test Period)59

in

accordance with the "charge rate basis book – recognized costs for the generation segment for 2010-

2014” (in this Prospectus, “the New Generation Charge Rate Basis Book” and “the New Generation

Charge Rate Basis”, respectively), which canceled the previous charge rate base for the generation

segment (see also the Immediate Report dated March 11, 2010 (Reference No.: 2010-01-411228))

for further information. This resolution and the charge rates derived from it took effect on February

15, 2010.

In the resolution of the Electricity Authority on the update of the charge rate basis it was determined

that the resolutions of the plenum of the Electricity Authority were determined while balancing

between the need of the Company to establish and operate its generation array in the upcoming

years while maintaining its financial strength, and the right of the electricity consumers to a decrease

in charge rates due to a reduction in the costs of the fuels as a result of the increased use of natural

gas on the other hand. The Electricity Authority noted that within the framework of some of its

resolutions that are cited in the New Generation Charge Rate Basis Book, the use of financial

incentives for improving the performance and saving of the Company was increased and that the

charge rate signals pose for the Company norms for the cost of construing power stations while

keeping to schedules, norms for capital raising based on quotes from the financial markets and

charge rate signals for the operation and maintenance of the power stations – during a proceeding

for saving and minimization of costs. In addition, it was made clear that the setting of the charge rate

basis for the generation segment would be valid until December 31, 2014, but would remain in effect

after this date, as long as the Electricity Authority did not decide otherwise.

The new generation charge rate basis states the cost basket recognized for the Company in the

generation segment for 2010-2014, including costs of capital, costs of operation, the fuel mix and

more. The recognized costs were determined after control of the costs of the Company that were

carried out by the Electricity Authority, as they were listed in the books of the Company for the

period from 2002 to 2009 with respect to the capital costs and for the period from 2002 to 2006 with

respect to the operation costs. The Company disputes the recognition of its costs and in its opinion,

within this cost control, the following costs have not been recognized by the Electricity Authority: (A)

fixed assets: non-recognition of all construction costs of new generation units. As a result of this

there is a gap of approximately NIS 1 billion between the recognized construction costs and the costs

expected by the Company relative to generation units that have been operating and generation units

that have not yet been operating but whose construction has started. In addition, there are specific

investments for which the Electricity Authority stated as having no charge rate coverage, such as:

costs of the combined cycle supply division in Haifa, gray water arrangement at Alon Tavor and some

gas conversion costs at the Gezer site. From the recognized construction costs of the new units, the

Electricity Authority has deducted the pension costs of first and second generation employees in the

amount of approximately NIS 350 million until making a final resolution on this matter; and (B)

operational expenses: the Electricity Authority is basing the recognition on the operation costs for

2010-2014 on the average operation costs of the Company in 2002-2006, while applying an annual

depreciation coefficient of 2%. In 2011, the lack of coverage of operation costs was estimated at

approximately NIS 200 million (adjusted to New Israeli Shekels for December 2011 and March 2012),

most of which stemmed from non-coverage of renovation costs of approximately NIS 140 million

(adjusted to New Israeli Shekels for December 2011 and March 2012). In addition, the Electricity

59 Resolution No. 1 of Meeting No. 289, dated February 1, 2010: “Charge rate bass for the generation sector for 2010-2014 and

updates to the transmission and distribution segment” and updates in the “charge rate structure” book.

F-47

Authority recognized only half of the capital costs for spare part inventory. The amounts that have

not been recognized stand at approximately NIS 30 million per year for the current charge rate

period. In addition, the Electricity Authority does not recognize the costs of free electricity for

employees benefit, which are higher than the average domestic consumption.

The capital and operational costs recognized for the Company based on the new generation charge

rate have increased relative to the previous charge rate at approximately 10.6%, and reflect an

addition of costs for the operations of the Company. Conversely, in view of the significant increase in

the use of natural gas and the operation of high efficiency combined cycle generation units, the cost

of the fuel basket of the Company based on the new generation charge rate has decreased by a rate

of approximately 24.6%. The total change in the generation segment charge rate (relative to the

previous charge rate), including fuels, was of a rate of 14% per net generated kWh.

See Note 3.F in the Quarterly Financial Statements for details with respect to a petition that was filed

by the Company, which addresses the Company’s request to order the Electricity Authority to

provide it with all of the minutes of Electricity Authority plenum meetings with respect to the

Electricity Authority decision of February 15, 2010, in regard to the charge rate basis for the

generation segment for 2010-2014.

(2) Components of the generation charge rate basis

Details on the main components of the generation charge rate basis follow:

(a) Fuel mix

(1) Calculation of the fuel mix

The fuel mix will be calculated each calendar year (January – December) within the

framework of the annual update for the charge rate, as an average of the fuel mix according

to the forecast of a representative load curve that will be chosen out of the load curves in

accordance with different climates. At the end of each year, the fuel mix will be calculated in

retrospect (ex-post facto) in accordance with the demand curve that actually materialized

that year and updates due to new relevant professional information. Within the framework

of the annual update of the subsequent year, account reckoning will be conducted

according to the difference between the revenues of the Company from the fuel mix in

retrospect (ex post) and the revenues of the Company from the fuel mix that was calculated

in advance. The difference will be returned to consumers or to the Company through the

charge rate mechanism, plus interest and linkage.

In addition, the fuel mix will apply in calendar terms to January through December.

(2) Gas incentive

The Electricity Authority has established a gas incentive with the goal of encouraging the

Company to increase its use of natural gas in the upcoming years, as a result of an increase

in the demand for natural gas due to the expected entry of additional generation units that

are expected to run on gas in the upcoming years. The gas incentive mechanism is intended

to encourage the Company to sign additional, long term gas agreements, at relatively low

prices, which are expected to reduce the average gas price, reduce the cost of electricity to

consumers, in such a matter that some of the savings will remain in the possession of the

Company, while contributing to environmental protection due to the exchange between gas

and polluting fuels of fuel oil and diesel type. The gas incentive has been restricted to new

gas agreements only, beyond the existing agreements (the agreement with the Yam Tethys

Group of 2002 and with EMG, the Egyptian gas supplier, of 2005). The incentive that is given

to the Company in accordance with the savings achieved in the expansion of the use in

generation of natural gas, which savings is divided between the consumers and the

Company. The amount of the incentive depends on the fuel price and quantity in

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accordance with the new agreement and decreases over the years until the expiration of

the effect of the gas incentive mechanism. The gas incentive mechanism was supposed to

be in effect in 2009-2012. However, the gas incentive for 2011 was cancelled in August 2011

within the framework of the annual update for the charge rate in 2011. The reason for the

cancellation was that the gas charge rate was based on the assumption that the supply of

gas in the old contracts was regular, but given the disruptions in the supply of natural gas

from Egypt and the reduction in the supply of natural gas from the Yam Tethys deposit (see

on this matter Section 7.10.9.2), this assumption was not fulfilled in 2011 – which caused

the gas incentive to have particularly high values and the Electricity Authority believed that

it would not be proper for consumers to bear this within the framework of an increase in

the charge rate. Following the cancellation of the gas charge rate in 2011, the Company has

applied to the Electricity Authority on numerous occasions, requesting to receive a gas

incentive for that year.

It shall be noted that in 2009-2010, the formulas that were prescribed in the gas incentive

mechanism left the Company with zero incentive only.

In the resolution of the Electricity Authority dated March 22, 2012, it was established that

on the date of the annual update, the Electricity Authority would update the natural gas

incentive formula.

(b) Recognized assets and depreciation

The assets that were recognized in the new charge rate basis in the generation segment were

established according to a future outline for 2010-2014. The recognized cost for the generation

units was established according to a plan that includes the list of the recognized generation units

and their operation dates. The Electricity Authority has determined that the recognized cost for

active assets will relate to two generation categories: (1) “old” generation units – generation

units that were run before December 31, 2002; and (2) “new” generation units – generation

units that were run after December 31, 2002. The recognition of the costs of the “old”

generation units is based mainly on the costs listed in the books, whereas the recognition of the

costs of the “new" generation units is in accordance with normative parameters such as

operation dates, construction times and normative interest rates – as prescribed by the

Electricity Authority.

The Electricity Authority has determined that in the case of the actual costs for the construction

of the units being excessive in the opinion of the Company and not being included in the

normative cost basis, the Company would be entitled to ask for the Electricity Authority to

recognize these excessive costs after the unit operation date.

See Note 3B to the Financial Statements for details on the manner of recognition of recognized

assets and depreciation, including with respect to the manner of recognition of the equipment

costs and the development and assembly costs, and with respect to reductions made in the

Annual and Quarterly Financial Statements.

(c) Normative operation times of the new generation units and their consequences for the charge

rate

The Electricity Authority has established normative operation dates for the operation of the

generation units that are expected to operate in the test period (2010-2014). These dates are

relevant for recognition of the charge rate of the costs of assets and depreciation, financing

costs and the fuel basket with respect to these generation units.

If the Company does not uphold the normative schedules that were established for the

operation of the new generation units of the Company, the recognized costs for the Company in

the charge rate will be decreased by the decreasing mechanism that the Electricity Authority has

prescribed. The decrease model forms an affinity between the duration of the delay and the

F-49

amount of the decrease to the effect that the greater the delay time, the greater the decrease

rate accordingly.

On March 24, 201160

, the Electricity Authority issued a resolution in which it updated the

normative operation times of the generation units that were prescribed in its resolution based

on the charge rate for the generation segment, whose operation date deferral had been

approved by the Minister.

In view of this, the exposure of the Company for the fines has developed compared to the

estimate from the time of the publication of the charge rate basis book for the generation

segment in February 2010.

The Company has not complied with the normative operation dates that were set for Generation

Units 6 and 7 at Ramat Hovav (which are included in Stage A of the emergency plan) because of

statutory delays. As a result of this, the recognized costs for the Company in the charge rate

were reduced in accordance with the reduction model prescribed by the Electricity Authority to

a total amount of approximately NIS 48 million (adjusted to New Israeli Shekels for December

2011 and March 2012). The costs reduced by the Electricity Authority for failure to comply with

the normative operation dates were shown as an expense in the profit and loss report of the

Company, giving due disclosure with respect to the exposure of the Company to being charged

for a reduction in costs for not meeting the schedule.

In addition, within the framework of a resolution of the Electricity Authority dated March 7,

201161

, on the subject of spreading of the debt of the Company to consumers (a debt that stems

from excess billing in the charge rate that occurred in 2009 for the fuel basket - see details on

this matter in Section 7.7.5 of this Prospectus), the Electricity Authority stated that the Company

would be given a "grace" period prior to the activation of the reduction mechanism for a delay in

the schedules for the construction of 3 steam additions included in Stage B of the Emergency

Plan (for which the debt was spread), which would be for forty five (45) days after the operation

dates specified in the resolution. In addition it was determined that in the case of a delay of

more than a year in the time of synchronization of each of the steam additions, the amount

would be decreased by 2% per year out of the debt spread amount for each steam addition.

As of the date of the Prospectus, the Company has not met the normative operation date that

was set for Generation Unit No. 3 in Haifa, which is included in the Development Plan of the

Company. Accordingly, there is exposure to an estimated reduction of approximately NIS 89

million (adjusted to New Israeli Shekels December 2011 and March 2012) in the recognized cost

in the charge rate. In addition, the Company expects another delay in the operation date of the

combined cycle plant that is scheduled to be constructed in Alon Tavor, and accordingly, there is

exposure to an estimated reduction of approximately NIS 389 million (adjusted to New Israeli

Shekels for December 2011 and March 2012) in the cost recognized in the charge rate.

In May 2012, the Company approached the Director General of the Ministry of Energy with a

request to delay the dates of operation of the combined cycle at Alon Tavor to sustainable,

flexible dates, and to determine that the unit would be up and running within a defined number

of months after the date on which the Company would be required by the Minister to set it up,

taking into account, inter alia, the statutory processes, the procurement situation, and the

finding of a financing solution required for setting up the production units in question.

See Note 3.B. 3(2)(B) to the Quarterly Financial Statements for further information.

60 Resolution No. 1 of meeting 331 dated March 24, 2011, on the matter of “Generation licenses for Israel Electric Corporation Ltd.” 61 Resolution No. 1 of Meeting No. 328 dated March 7, 2011, on the matter of “Spread of the debt of Israel Electric Corporation for

prevention of electricity shortage”.

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The estimate of the Company with respect to the expected delay in the date of operation of the

combined cycle at Alon Tavor and the reduction of the recognized cost in the charge rate as a

result of this is forward looking information as this has been defined in the Securities Law, which

is based on information that is in the possession of the Company, such as obtaining the financing

required for the construction of the combined cycle, receipt of the licenses and permits required

for building the combined cycle, resolutions of the Electricity Authority with respect to the

reduction of the recognized cost and more. Therefore, the Company has no certainty that its

estimates and expectations will actually materialize.

(d) Financing costs (recognized return rate)

The return rate recognized in the charge rate for assets is intended for the purpose of the

calculation of the financing component of he capital services that are derived from the value of

the recognized values of the Company in the charge rate. The recognized return rate is used

from the resolution of the Authority with respect to the generation charge rate basis as a basis

for recognition of capitalization (discounting) of financing costs of assets at the time of their

construction. The rate of return recognized in the charge rate is derived from three (3) variables

In accordance with that which has been set forth below:

(1) The financial leverage level

The leverage level recognized in the charge rate is one-third (⅓) equity capital and two-

thirds (⅔) foreign capital.

(2) The return on equity capital rate (gross)

The return on equity capital in the generation segment will be 7.8% after tax (9.5% before

tax). The total recognized costs of financing will be the product of the weighted recognized

return rate (equity capital and foreign capital) multiplied by the aggregate of recognized

assets, from which the reserve for deferred taxes will be deducted.

(3) Interest on foreign capital

(a) The recognized return on foreign capital is derived from three (3) components:

(1) Shekel financing basket – represents loans that are raised in Israel in Israeli

currency in an index linked channel. For this financing basket, an average real

shekel interest rate will be recognized.

(2) Hedged financing basket – represents raising of foreign capital overseas in foreign

currency, which is protected by a hedging mechanism within the framework of

which index basket differentials and interest differentials that accumulate to the

debit / credit of consumers relative to the Company are calculated (which are

supposed to be noted as a regulation asset / liability in the balance sheet of the

Company). See Section B below for details with respect to the hedging mechanism.

(3) Increased interest shekel financing basket – represents the raising of capital in

foreign currency, which is translated into shekel terms by recognition of additional

costs that stem from overseas raising, against which the Company is required to

perform protective transactions. For this basket, an average increased real shekel

interest rate shall be recognized. The recognized return rates for index- and

foreign-currency-based foreign capital were established at the baseline point based

on the average return rates for 2008 and the marginal for 2009, using an update

formula with respect to the following years, as is performed for each annual

update. The average return rates for 2008 were derived from the Financial

Statements for 2007.

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(b) The hedging mechanism

The purpose of the hedging mechanism in the charge rate is to prevent acute

fluctuations in the profitability of the Company in periods of major differences between

the rate of change in the Consumer Price Index and the rate of change in the exchange

rate, because the assets of the Company are adjusted to the Index while a major

portion of them is financed by foreign currency loans. In the view of the Electricity

Authority, in recent years, there has been a development in the local financial markets

for capital raising and for financial markets for derived financial instruments for hedging

of exchange rate risks, and therefore it has decided to cancel the hedging mechanism.

Accordingly, according to the new charge rate basis book for the generation segment,

the current hedging mechanism (as prescribed in the charge rate basis book for 2002-

2005 dated July 1, 2002) has been cancelled, but a new hedging mechanism has been

established, which will be gradually cancelled within three (3) years, until 2013, in order

to allow the Company to prepare for its own hedging of the exposures to the foreign

currency exchange rate that are currently hedged using the existing hedging

mechanism. The main points of the new hedging mechanism follow:

(1) The amount of the hedge fund will be updated on the annual update date in

accordance with the recognized assets and the decreasing outline that the

Electricity Authority published (until the absolute cancellation of the mechanism).

(2) The interest differentials between the foreign currency interest and the real shekel

interest will also be part of the hedged amount and will be spread until the end of

the hedging mechanism period.

(3) The exchange rate of the effective basket and the foreign currency interest will be

linked to the dollar and the euro, at rates of 75% and 25%.

(4) The amounts that will accumulate to the credit or debit of the Company shall be

spread until the end of the hedging mechanism in April 2013. However, it was

noted in the charge rate basis book for the generation segment that in view of the

expected structural changes, the Electricity Authority is freezing the incremental

outline of the shekel financing basket until March 31, 2011 or until the kickoff date

of the Structural Change, whichever is earlier. The said freezing expired in March

2011, as set forth, as a result of which the shekel financing%age increased.

(5) No depreciation coefficients shall apply to the hedged amount.

In accordance with the resolution of the Electricity Authority in the charge rate basis

book for the generation segment, the debt that has accrued for consumers for the

cancellation of the hedging mechanism in its current format will be spread over a

period of five (5) years. See Note 3B.2 (D) to the Annual Financial Statements for further

information.

(c) The operation costs

The recognized operation costs for the test period are derived from the average

operation costs according to the stamens of the Company for 2002-2006 while

separating work costs and other costs and after performing certain adjustments, in

accordance with the increase in sales. A depreciation coefficient of 2% per year is

applied to these recognized costs.

(d) Pension costs

Through to the date of publication of the final resolutions of the Electricity Authority,

the recognized costs of operation for the generation segment shall include the pension

costs in accordance with the amendment published in 2009 and the recognized asset

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cost in the generation segment of the combined cycle generation units whose

operation commenced after 2002 (“the New Units”) shall only include costs of

accumulating pensions of third generation employees. The costs shall not include

actuarial pension costs of first generation employees, second generation employees or

third generation employees (actuarial pension costs relating to free electricity, gift for

holidays and bonuses).

The recognized costs of the assets of the generation units that commenced operation

through to 2002 (hereinafter: the “Old Units”) was taken off the books of the Company

and included the pension costs of the employees of the Company.

The examination of the pension costs has not yet been completed by the Electricity

Authority in accordance with that which has been set forth above, and this issue is still

being discussed between the Company and the Electricity Authority. Upon the adoption

of a final resolution on the matter of recognized pension costs of first and second

generation employees and pension costs for free electricity, gift for holidays and

bonuses of third generation employees, this component shall be updated accordingly.

(E) Development and assembly costs

The normative development and assembly costs have been divided into two (2) groups:

(A) the costs of company employees that are linked to changes in the average monthly

wage for an Israeli employee position. (B) Costs of contractors, which are linked to the

residential construction input index.

(3) Special and one-time additions to the charge rate

In addition to the general framework for setting and updating the charge rate, as described

above, and following requests of the Company, the Electricity Authority has included in

certain cases additional components in the charge rate for financing of construction costs.

See Section 7.7.5 for details with respect to recognition of costs of the Emergency Plan of

the Company.

(4) The position of the Company with respect to the new generation charge rate basis

The Company has many reservations with respect to the new charge rate basis for the

generation segment, which it believes may have a material effect over the Company, inter

alia due to non-recognition of the full costs of construction and operation of the generation

units of the Company; the mechanism of reduction of costs recognized in the charge rate in

the case of the Company will not meet the normative operation dates that have been

prescribed for the new generation units of the Company; the non-recognition of all capital

costs for spare parts inventory; the non-recognition of extraordinary costs of the Haifa and

Gezer combined cycle stations and the Alon Tavor steam addition; non-recognition of costs

of building a potable water cooling unit at Alon Tavor; computational errors in the files of

the Electricity Authority when setting the charge rate basis book for the generation segment

and so on. According to the position of the Electricity Authority, the new charge rate basis

for the generation segment reflects the costs required for this segment. To the best of the

Company’s knowledge, as part of its regular work, the professional staff at the Electricity

Authority is examining the qualifications of the Company with respect to certain elements as

set forth.

See Note 3.A.3 of the Annual Financial Statements for details on the highlights of the

consequences of the new charge rate basis over the financial outcomes of the Company.

See Section 22.2 for details on the contentions of the Company with respect to the

electricity charge rate.

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7.1.4 Changes in the volume of operation and in its profitability

The Company estimates that there are various factors that may affect the volume of operation in and the

profitability of the field, including changes in the volume of electricity consumption, changes in the electricity

charge rates that are established by the Electricity Authority, changes in the supply and/or prices of the raw

materials that are required for the generation of electricity and the entry of competitors (including private

electricity producers) into the electricity generating field. See Sections 6.5 and 7.4 for details.

The installed generation capacity of the Company has increased from approximately 10,487 megawatts as of

December 31, 2006 to approximately 12,759 as of December 31, 2011, expressing an annual increase of 4%. The

increase stems from the construction of new generation units and the execution of improvements to existing

generation units.

Changes in the volume of operation in the electricity generating field during 2011 and the first quarter of 2012

and changes expected during 2012:

During 2011, a number of units were synchronized (that is, integration of generation units in the generation

array of the Company) as follows:

A steam addition of Unit No. 4 at the Haifa Power Station site to an output of approximately 136 megawatts;

and of these units or combined cycles, all powered by natural gas: Unit No. 1 at the Hagit site; Combined Cycle

No. 3 at the Alon Tavor site; Gas Turbine Unit No. 8 at the Ramat Hovav site; Combined Cycle No. 4 at the Haifa

Power Station site.

In 2012, Haifa Combined Cycle No. 3 went into operation with output of approximately 374 megawatts, and the

process of converting the Haifa Generation Unit 3 to natural gas was completed, with the result that as at the

date of the Prospectus, the unit can be powered by natural gas and by fuel oil.

7.1.5 Developments in markets in the field of activity or changes in the characteristics of its customers

See Section 7.10.9.2 for details on the disruptions in the supply of gas from Egypt to the point of complete

termination, and the depletion and partial collapse of the Yam Tethys reserve because of increased extraction

during the summer of 2011, which led to changes in the distribution of use of fuels for electricity generation

during 2011 and through to the date of the Prospectus.

7.1.6 Critical success factors in the field of activity and the changes that have occurred therein

The Company assesses that the business success of the generation segment depends, inter alia, on the costs of

raw materials for the generation of electricity, primarily natural gas, the availability of the gas from the suppliers

of the Company, and in the case of unavailability, on the cost of alternative fuels, on the implementation of the

generation segment Development Plan, including the Emergency Plan, on the recognition of the total costs

required for the generation of electricity in the electricity charge rate and on the level of demand for electricity.

See Sections 7.7.3 and 7.7.5 for further information. See Section 7.7 for details on the Development Plans in the

generation segment.

7.1.7 Changes in the array of suppliers and raw materials for the field of activity

The suppliers and the raw materials for this field of operation are suppliers of coal, fuel oil, natural gas and

diesel oil, which are used for the generation of electricity. See Section 7.10.9.2 for details with respect to the

array of suppliers and raw materials, including recurring interruptions from 2011 to the date of the Prospectus

in the supply of gas from Egypt, which is supplied to the Company in accordance with an agreement with EMG

(including with respect to the termination of the pumping of gas from EMG following the cancellation of the gas

agreement between EMG and its gas suppliers), as well as a reduction in the supply of gas from the Yam Tethys

natural gas reserve from 2011 up to the time of the Prospectus in view of the depletion of this reserve.

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7.1.8 The main barriers to entry and to exit for the field of operation and the changes that have occurred therein

7.1.8.1 Entry barriers

By the Company’s assessment, entities that operate in the field of electricity generation are required primarily

to make an initial investment of significant amounts of capital, whether by way of investment in shareholders’

equity or by way of banking or other financing, for the purpose of the construction of generation facilities,

and are later required to have the financial strength for the purpose of their regular maintenance. In addition,

the field has complicated regulation, owing to which an entity that wishes to generate electricity is required

to undergo a procedure for receiving an electricity generation license from the Electricity Authority (which is

performed in a number of stages over a long period), to comply with strict quality requirements and

standards, to receive permits with respect to environmental protection, the location of sites and the receipt

of construction permits, to ensure the availability of raw materials and their costs. In addition, professional

knowledge and experience in the field of electricity generation, a good reputation in the industry and

availability of land for constructing the electricity generating facilities are important. Moreover, the

uncertainty on the issue of the supply of natural gas may also constitute an entry barrier to the field relating

to the generation of electricity based on natural gas.

7.1.8.2 Exit barriers

The regulation regulating the operations of the Company and the fact that it is an “essential service supplier

license” holder, in accordance with the Electricity Sector Law and the provisions of its licenses, requiring it to

generate electricity for the public as of whole, reliably and efficiently, in accordance with the terms of its

license, are the primary exit barriers of the field of operation.

7.1.9 The structure of the competition in the field and the changes that have occurred therein

As of the date of the Prospectus, the field of electricity generation in Israel features a very low level of

competition. In effect, the Company generates most of the electricity in Israel and its only competitors are the

private electricity producers, which at this time generate insignificant volumes of electricity. In view of the

Structural Changes that are required according to the provisions of the Electricity Sector Law, including the

incorporation of generation units within the framework of separate subsidiaries, which in accordance with the

Electricity Sector Law, cannot all be subsidiaries of the Company, and in view of the policy to encourage

competition in the electricity market as a whole and in the generation segment in particular, through the entry

of private electricity producers, the Company cannot estimate at this stage what the consequences might be for

itself with regard to the entry of such private electricity producers and future competition. See Section 7.4.4 for

a description of possible consequences for the Company following the entry of the private electricity producers.

See Sections 6.5 and 7.4 for further information.

7.1.10 Alternatives to the products in the field of operation and the changes that have occurred therein

Electric energy has alternative energy sources, such as natural gas, solar energy and fuels for heating buildings

and water. However, as of the date of the Prospectus, there is no practical alternative to electricity for industrial

machines, lighting, office equipment, air conditioning and home maintenance.

7.2 Products and services

In accordance with that which has been set forth above, the Company operates for the supply of electricity to

consumers, from the generation of electricity at the generation sites, continuing through its transmission and

transformation, to its distribution and supply to the end points of all consumers. The electricity that is generated

at the generation sites of the Company is not sold to outside parties but is moved to the end consumers via the

transmission and transformation segment, and is supplied to them through the distribution segment. See Section

7.1 for further information on the electricity generating operation. See Sections 8 and 9 for further information on

the other segments.

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7.3 The distribution of revenues and profits from products and services:

7.3.1 Revenues

The (net) revenues of the Company in 2011 from sales of electricity that were assigned to the generation

segment (based on the assumptions stated in Note 36 to the Annual Financial Statements) for sales of

approximately 53,062 million kWh came to a total of approximately NIS 19,904 million, adjusted to New Israeli

Shekels of December 2011 (approximately NIS 19,980 million. adjusted to New Israeli Shekels of March 2012),

compared with approximately NIS 15,096 million, adjusted to New Israeli Shekels of December 2011

(approximately NIS 15,153 million, adjusted to New Israeli Shekels of March 2012), for sales of approximately

NIS 52,037 million kWh in 2010. This represents an increase in revenues of approximately NIS 4,808 million and

approximately NIS 4,827 million, respectively; an increase of approximately 24%.

The (net) revenues of the Company in the three-month period that ended on March 31, 2012, from sales of

electricity that were assigned to the generation segment (based on the assumptions stated in Note 12 of the

Quarterly Financial Statements) for sales of approximately 13,844 million kWh came to a total of approximately

NIS 5,361 million, compared to approximately NIS 4,116 million, adjusted for March 2012, for sales of

approximately NIS 12,599 million kWh in the parallel quarter the previous year. This represents an increase in

revenues of approximately NIS 1,245 million; an increase of approximately 30%.

7.3.2 Profit from ordinary operations – the generation segment

The profit from ordinary operations in the generation segment in 2011 amounted to approximately NIS 2,260

million (adjusted to New Israeli Shekels of December 2011 (approximately NIS 2,267 million, adjusted to New

Israeli Shekels of March 2012), compared to approximately NIS 771 million, adjusted to New Israeli Shekels of

December 2011 and approximately NIS 774 million, adjusted to New Israeli Shekels of March 2012 in 2010. This

represents an increase of approximately NIS 1,489 million and approximately NIS 1,493 million, respectively; an

increase of approximately 193% and approximately 193%, respectively.

The loss from ordinary operations in the generation segment in the three-month period that ended on March

31, 2012, came to a total of approximately NIS 748 million compared to a profit of approximately NIS 635 million

adjusted to the NIS of March 2012 in the parallel period the year before, representing a decrease of

approximately NIS 1,383 million.

7.4 Competition

7.4.1 General; the Company as a monopoly; private electricity generation – the Government policy and the

resolutions of the Electricity Authority

7.4.1.1 General

In accordance with that which has been set forth, as of the date of the Prospectus, the Company generates,

transmits, distributes and supplies most of the electricity consumption in the State of Israel and it was

declared in January 1999 by the Antitrust Commissioner as a monopoly in the Electricity Sector, inter alia, in

the following fields: supply of electricity – generation of electricity and its sale, transmission and distribution

of electricity and provision of backup services for electricity consumers and producers. See Section 22.10 for

further information on the declaration of the Company as a monopoly and the consequences of this

declaration.

Since the enactment of the Electricity Sector Law, it has been the policy of the Government of Israel to

encourage competition in the Electricity Sector while increasing the electricity generation capacity by private

electricity producers62

.

62 In accordance with the Electricity Sector Law, a private electricity producer holds a generation license or licenses. In this Prospectus

the term is also used to describe an entrepreneur or a party that takes actions to establish a private generation facility.

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In accordance with that which has been set forth below, as of the date of the Prospectus, the objective for

increasing the generation capacity of private electricity producers is 20% of the installed generation capacity

in the State of Israel by 2020 (today, the total installed generation capacity of private electricity producers

stands at approximately 4%), in later resolutions a guiding objective for generation of electricity from

renewable energy was set at 10% of the electric energy needs of the State for 2020. In accordance with the

Government resolution on this subject, this objective is expected to be achieved by generating electricity to

an installed output of approximately 2,760 megawatts. In addition, there is a guiding intermediate objective

of generation of 5% of electricity in Israel at the end of 2014 by renewable energies. This objective may be

achieved by generation of electricity by generation units of an installed output of approximately 1,550

megawatts. The Government further decided to regulate the encouragement of the construction of facilities

for energy production from renewable sources, in accordance with the objectives of the Government. With

the intent of realizing the said policy, it has been decided to direct the Electricity Authority to act within the

framework of its authority in accordance with the Law, including by completing the update of charge rates

and criteria to the extent required, by division into quotas in accordance with that which has been set forth in

the resolution.

Accordingly, the Government of Israel and the Electricity Authority have been taking steps, including

legislative changes, promulgation of resolutions, adoption of resolutions and other arrangements (including

published tenders) whose aim is to encourage the entry of private electricity producers into the Electricity

Sector, thus encouraging competition in the generation segment essential service supplier.

As part of the steps described above, in 2005 the Electricity Authority added Chapters E and F to the Book of

Criteria (which is updated from time to time), which regulate, inter alia, the provision of infrastructure

services by which private electricity producers may sell energy either to the system administrator or to

suppliers, in order to supply electricity to end users through the Company’s transmission grid, the manner of

operation of private electricity producers in the Electricity Sector and the charge rate that the Company will

charge for transmission of electricity in accordance with the charge rate that will be determined from time to

time by the Electricity Authority (hereinafter: the “Criteria”).

In accordance with the provisions and regulations of the Electricity Sector Law, a private electricity producer

may sell electricity to an essential service supplier license holder, in accordance with the terms of its license

(and in accordance with the restrictions prescribed in the Electricity Sector Law and in the regulations set

thereunder). In addition, a private electricity producer can obtain a license to supply electricity and to sell

electricity directly to end consumers.

7.4.1.2 Pursuant to these arrangements, the Company is required, as an essential service supplier63

and as a

transmission license holder, as follows:

(A) To purchase electricity from private electricity producers in accordance with the regulations pursuant to

the Electricity Sector Law and the license conditions of private electricity producers, at charge rates and

63 The Electricity Sector Regulations (Conventional Private Electricity Producer) 2005 and the Electricity Sector Regulations

(Cogeneration) 2004 state that transactions for purchasing electricity from producers shall be done by the system administrator (and not by a transmission license holder). The system administrator is defined in accordance with the Electricity Sector Regulations (Conventional Private Electricity Producer) 2000 and the Electricity Sector Regulations (Cogeneration) 2004, as follows: “The director of the supervision, control and command of loads center at the Electricity Authority, of the transmission license holder, or of a party that has received a license for system administration”. The transmission license holder has been defined within the said regulations as follows: “An essential service provider license holder that has received a license to convey electricity, from a facility using electricity grid lines of high voltage and extra high voltage to a substation and that concentrates more than half of the transmission capacity in the electricity sector”. As of the date of this Prospectus, the State has founded a system administration company that to the best of the Company’s knowledge is inactive. Therefore the Company, as the transmission license holder, bears the duties that apply to a system administrator in accordance with the Electricity Sector Law and the regulations promulgated thereunder, in accordance with the decision of the Ministers dated February 2009. Upon the commencement of the activity of the system administration company, the rights and liabilities of the Company in accordance with the agreements with these private electricity producers shall be converted.

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in proceedings that are regulated by legislative arrangement, that is, in the regulations and rules64

that

were promulgated pursuant to the Electricity Sector Law and the Criteria prescribed by the Electricity

Authority and which apply to the Company and to private electricity producers.

(B) To connect the private electricity producers to its distribution and transmission grid, and to provide the

infrastructure services in order to allow the private electricity producers, inter alia, to transact with

suppliers65

or to supply electricity by themselves to end consumers.

(C) To provide backup services for the supply of electricity to the consumers of the private electricity

producers (hereinafter: “Backup Services”) in accordance with the charge rates of ancillary services and

backup (which have not yet been determined by the Electricity Authority).

7.4.1.3 The private electricity producers operate pursuant to generation licenses that they have received as part of

the undertaking of the State of Israel further to tenders for the generation of electricity that have been

published by the State of Israel or pursuant to generation licenses or provisional generation licenses that have

been given to them in accordance with the Electricity Sector Law and the regulations promulgated

thereunder.

For each type of private electricity producer, in accordance with the classification provided below, the

Electricity Authority has prescribed a different charge rate arrangement as described below.

In addition, as part of the policy to encourage the entry of private electricity producers, in July 2009, the

Electricity Authority published an update66

to its resolution on the issue of the charge rate arrangements

supporting financing for private electricity producers. The resolution was intended to provide a safety net to

private electricity producers and serves as an additional link in the government operation to create conditions

to promote private entrepreneurship in the Electricity Sector. Within the framework of this resolution, the

Electricity Authority has established as follows:

(A) An essential service supplier shall deposit, for each private electricity producer, an amount of money in a

special purpose account, which will be administered by a trustee constituting a third party, equivalent to

the amount of the bi-monthly payments for the electricity that the private electricity producer is

expected to sell to the essential service supplier. These amounts of money will be used as collateral for

the payments to the essential service supplier67

. The Company has applied to the Electricity Authority

with a request to change this mechanism for securing the payments of the Company to the essential

service suppliers. The resolution of the Electricity Authority on the matter has not yet been received.

(B) The responsibility for any act or default of an essential service supplier, the gas conduction company or a

third party that impairs the generation ability of the private electricity producer will be assumed by the

essential service supplier, that is, as of the time of this Prospectus, the Company.

(C) Upon the occurrence of a force majeure event that impairs the competency of the private electricity

producer generation facility, the essential service supplier must pay the senior debt (the primary source

of financing) for the private electricity producer in the period of the event. Upon the restoration of

operation of the private electricity producer, it will be required to return to the Company only 40% of the

amount that was paid by the Company for it, and the Electricity Authority will consider compensation for

the Company for the remaining 60%. In the case of such an event that will cause the conclusion of the

agreement with the private electricity producer, the Company will be responsible for the balance of the

64

The Electricity Sector Rules (Transactions with Essential Service Provider) - 2000, state that if a tender has been published, a

contract will be signed for purchasing electricity in accordance with the terms of the tender, and that in such a case the consideration that the essential service provider must pay the producer for electricity will be in accordance with the prices that the winner of the tender has offered and in accordance with the conditions of the contract therewith.

65 “Supplier” – a holder of a license to sell electricity to consumers (supply license).

66 Electricity Authority Resolution No. 1 of Meeting No. 268, which was held on July 31, 2009 on the matter of: “Charge rate arrangements that support financing for private electricity producers”.

67 As of the date of the Prospectus, no such amounts have been deposited, because none of the private electricity producers has fulfilled the Criteria that have been prescribed by the Electricity Authority for the purpose of depositing such amounts.

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senior debt of the private electricity producer, while transferring the ownership of the generation facility

of that private electricity producer to the Company. The Electricity Authority will consider recognition of

the costs that the Company will sustain due to that which has been set forth above, based on criteria that

have been established on this matter.

Within the framework of the resolution, the Electricity Authority has clarified that its resolution applies to

producers that complete financial closure by no later than June 1, 2012. Following a public hearing that was

held by the Electricity Authority for continuing the form of application of the resolution of the Electricity

Authority with respect to financing support protections for private electricity producers68

, the Electricity

Authority decided in June 201269

to extend the deadline for completing the financial closure to October 1,

2012.

7.4.2 Types of private electricity producers

7.4.2.1 The legislative and regulatory arrangements that apply to the private electricity producers have been

established with a distinction between the various generation technologies that the private electricity

producers use, and between the different voltage levels to which they will be connected (according to the

facility output). Accordingly, the relevant arrangements vary in accordance with the main private electricity

producer types, as follows:

(A) Conventional private electricity producer – a producer of electricity facilities that do not operate by

cogeneration or by a renewable energy source (and that is not pumped energy), which is usually

connected to the “high voltage”70

transmission system.

(B) Private electricity producers that generate using cogeneration facilities – facilities that produce from one

energy source, simultaneously, electrical energy and useful thermal energy (that is mostly used for

industrial and private purposes). Usually connected to the “high voltage” transmission system: facilities

that are located on the premises of consumers and that supply steam and energy to them.

(C) Pumped energy (hereinafter: “Stored Energy”) private electricity producers - a producer that generates

electricity by exploiting height differences between two water reservoirs. The water descending from the

top to the bottom reservoir via pipes runs a turbine for generating electricity. The water pumping from

the lower reservoir to the top reservoir is performed by the same turbine, which is run as an electric

pump. The facilities will be connected to a “high voltage” transmission system.

(D) Renewable energy private electricity producers – a producer whose energy source is, inter alia: the sun,

wind, water, waste, biomass, except fossil fuel. The timing of the electricity generation by these

producers depends on the availability of the energy source on which they base their work (thus, for

example, it is not possible to generate electricity by wind if no wind is blowing). Because the availability is

partial, these producers sell their energy to the system administrator only. Some of these producer

facilities will be connected to the transmission system and some to the distribution system.

(E) There is an additional category of major plants that built their own power stations for which they have

received an independent generation license. The electricity generated by these power stations is used by

the plant only.

7.4.2.2 Conventional private producer

In accordance with the Electricity Sector Regulations (Conventional Private Electricity Producer) - 2005, (in this

Sectio: “Conventional Producer Regulations”) and the Criteria, a purchase transaction will be performed in

accordance with one of the following two methods:

68 http://pua.gov.il/56-2479-he/Electricity.aspx?pos=2 69

Electricity Authority Resolution No. 2 of Meeting No. 375 dated June 4, 2012, on the matter of: “Amendment to Authority

Resolution of Meeting No. 268 dated July 19, 2009, with respect to charge rate arrangements that support financing for private electricity producers”.

70 The regulation applying to a private electricity producer OPC, although the facility is conventional, because it won a tender that was published by the State, the provisions that apply to it are the provisions of the tender.

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(A) The sale of available capacity and energy – whereby a private electricity producer will extend to the

system administrator available supply capacity in accordance with a generation plan whose form will be

determined by the Electricity Authority, and sell it electrical energy upon a demand on the part of the

system administrator; or

(B) The sale of energy – under this method, a private electricity producer sells electric energy or part of it to

the system administrator in accordance with the terms of the Conventional Producer Regulations and in

accordance with a generation plan whose form will be prescribed by the Electricity Authority.

According to the Criteria, a conventional private electricity producer must choose in advance from two (2)

tracks and notify of this: the first, reservation of 10% of the facility power for sale to suppliers, with allowance

to increase this quantity to 30%. The remaining output will be available to the system administrator (this part

is known in the Criteria as “fixed available capacity"). The other is reserving all installed output for sale to

suppliers.

In the cases in which within the framework of the quota that is intended for sale to the supplier that the

producer has announced in advance has no potential buyer, the producer must offer the energy that it has

been unable to sell to the system administrator.

In November 2011, the Electricity Authority published a resolution proposal for hearing, for public comment71

to restrict the granting of conventional generation licenses insofar as the constant level of availability of all

facilities that would be set up pursuant to these licenses would be up to 1,000 megawatts.72

7.4.2.3 Cogeneration

In accordance with the Electricity Sector Regulations (Cogeneration) - 2004 (hereinafter: the “Cogeneration

Regulations”), a cogeneration transaction will be conducted based on one of the following methods:

(A) Sale of energy – a transaction for purchase whereby an electric energy producer sells electricity to the

system administrator in accordance with the terms of the Cogeneration Regulations and an appropriate

generation plan, whose features will be determined by the Electricity Authority.

(B) Sale of available capacity and energy – as is the case for a conventional producer, this transaction

requires the approval of the Electricity Authority, and in contracts for selling available capacity and

energy exceeding 50 megawatts, the approval of the Manager of the Electricity Administration is also

required.

In May 2008, the Electricity Authority published a resolution73

on the matter of charge rates for the purchase

of energy from cogeneration facilities whereby the charge rates for producers were determined based on the

technology of the facility and the annual energy quantity sold to the system administrator. With respect to

cogeneration producers that are connected to the grid by high voltage, there is a restriction as to the sold

quantity, according to the length of the transaction period with the system administrator, while with respect

to producers that are sold by medium or low voltage lines there is no restriction and they are allowed to sell

all of the energy generated at the facility.

7.4.2.4 Pumped storage

The regulation of this technology within the framework of special provisions in the Electricity Sector

Regulations (Conventional Private Electricity Producer), 2005. In November 2009, the Electricity Authority

published a resolution74

with respect to a charge rate arrangement for generation of electricity using the

pumped storage method and sale of constant available capacity to the system administrator, with all of the

71 See Section 28.4 for details on the meaning of the resolution proposal for hearing for public comments. 72 http://pua.gov.il/56-2394-he/Electricity.aspx?pos=1 73 Resolution No. 1 of Meeting No. 211 dated May 1, 2008, in the matter of “charge rates for purchase of energy from cogeneration

facilities”. 74 Resolution No. 2 from Meeting No. 279 of the Electricity Authority that was held on November 15, 2009 in the matter of “Charge

rate arrangement for a private producer of electricity that uses pumped storage technology”.

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dynamic and planning benefits of the generation unit or within the framework of variable available capacity,

and criteria were established for the conduct of the private electricity producers, which are updated from

time to time.

7.4.2.5 Renewable energies

In the Government Resolution dated July 17, 2011, on the subject of the Government policy in the field of

energy production from renewable sources (Decision No. 3484), quotas were set for production using various

renewable energies. This Resolution constitutes a continuation of a previous resolution on the subject dated

January 29, 2009, and is based on a policy document of the Ministry of Energy for combining renewable

energies in the electricity generation array in Israel.

In view of that which has been set forth above, the Electricity Authority has established various charge rate

arrangements for each of the quotas as determined in the Government decisions.

The highlights of the charge rate arrangements that have been determined are as follows:

(A) Medium sized solar facilities (that are to be connected to the distribution grid): In December 2009, the

Electricity Authority published an arrangement for medium sized solar facilities (greater than 50

kilowatts) that were connected to the distribution grid75

.

(B) Major solar facilities that are connected to the transmission grid: There are two (2) types of facilities –

one is thermosolar facilities: solar energy is converted into thermal energy and then in a suitable process

into electrical energy. The other is solar or photovoltaic facilities in which solar energy is converted to

electrical energy. In January 2011 the Electricity Authority published a charge rate arrangement76

for

solar facilities that were connected to the transmission grid.77

(C) Wind facilities: The additional arrangement relates to wind turbines of greater than 50 kilowatts, for

which different charge rates and quotas have been set78

.

(D) Bio-gas: In July 2011 the Electricity Authority published a charge rate arrangement for bio-gas electricity

generation facilities using anaerobic digestion facilities79

.

As a rule, the charge rates that the renewable energy producers receive are significantly higher than the

charge rates that other private electricity producers or the Company receive. The charge rates that are given

to owners of renewable energy electricity facilities range from approximately 200 agorot per kWh to

approximately 65 agorot per kWh, compared with the weighted generation component of the Company,

which is approximately 35 agorot per kWh alone.

Exceptions:

There are facilities that generate electricity using renewable energies, for which some of the arrangements

are stated in the Rules of the Electricity Sector (Transactions with an Essential Service Supplier), 2000, do not

apply:

(A) Photovoltaic and wind turbine facilities (these two (2) facility types are limited to a 50 kilowatt output per

facility): the Electricity Authority has drafted special regulation80

81

with respect to electricity consumers

75 Resolution No. 2 of Meeting No. 284 of the Electricity Authority that was held on December 28, 2009, on the matter of

“Arrangement for solar electricity production facilities larger than 00 kW”. 76 Resolution No. 2 of Meeting No. 325 of the Electricity Authority that was held on January 24, 2011, on the matter of “Update of the

arrangement for electricity production facilities with production licenses which are connected to the conduction grid by means of solar technologies”.

77 Resolution No. 2 of Meeting No. 347 of the Electricity Authority that was held on January 24, 2011, on the matter of “Update of the

arrangement for electricity production facilities with production licenses which are connected to the conduction grid” 78 Resolution No. 1 of Meeting No. 349, dated October 10, 2011, on the matter of “setting of charge rate and regulation for a wind

farm of more than 00 KW output” 79

Resolution No. 2, adopted at Meeting No. 344 on July 25, 2011, on the matter of: "Rate determination and arrangement for facilities which produce electricity from biogas in anaerobic digestion facilities”

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that has allowed for the construction of electricity facilities of up to 50 kilowatts size per facility for

internal consumption and transfer of energy surpluses to the grid. In accordance with this arrangement,

the consumers have not been required to receive a generation license. A quota has been set for the total

consumers that may be included in this arrangement. This number is changed by the Electricity Authority

from time to time in accordance with the resolution of the Government.

(B) Producers that set up facilities following the acquisition of a tender that the State published for the

Ashalim site including two thermo-solar facilities of 120 megawatts output each, and a photovoltaic

facility of 30 megawatts output, to which the provisions of the tender, some of which are not consistent

with the provisions of the rules and the Criteria on the issue, shall apply.

(C) “Veteran” private electricity producers – renewable energy private energy producers, which started to

work before the application of the arrangements for renewable energy generation, are not included in

these arrangements and the payment to them is based on a charge rate that is calculated in accordance

with the generation component of the Company, plus a premium for generation by renewable energy,

subject to a resolution of the Electricity Authority of July 200482

within which the principles by which the

said premium is to be calculated were prescribed, among other things.

7.4.3 Private electricity producers – the actual situation

7.4.3.1 General

In accordance with the Electricity Sector Law, the Company, as an essential service supplier, is required to

purchase electricity from a private electricity producer. As has been elaborated above, in accordance with the

Electricity Sector Law, a private electricity producer is a party that has received a generation license (that is,

has built and started to run the generation facility)83

. To receive a generation license, the entrepreneur is

required to submit a request in accordance with the Electricity Sector Regulations (Terms and Procedures for

Granting Licenses and Obligations of the License Holder), 1997 and meet minimal conditions. To the extent

that these have been fulfilled, in accordance with the resolution of the Electricity Authority, with the approval

of the Minister, a provisional license is given to it84

. The provisional license holder must satisfy the milestones

for building the facility as elaborated in the provisional license. Only after they are all fulfilled and the facility

has been built is it given a generation license by the Electricity Authority, which is given effect by the approval

of the Minister.

7.4.3.2 Entrepreneurs with provisional (that do not yet generate electricity)

As of the date of the Prospectus, the total output of entrepreneurs with provisional generation licenses that

have been issued to them by the Electricity Authority and approved by the Minister with producers that have

won a tender stands at approximately 5,838 megawatts using various electricity generation technologies,

divided as follows:

(A) The volume within the framework of provisional licenses of conventional producers – approximately

3,284 megawatts.

80 Resolution No. 1 of Meeting No. 216 of the Electricity Authority dated June 2, 2008 “Arrangement for decentralized production of

electricity for in-house consumption and transfer of surplus to the grid, by means of small facilities using photovoltaic technology”. 81 Resolution No. 1 of Meeting No. 275 of the Electricity Authority dated September 7, 2009 “Arrangement for decentralized

production of electricity for in-house consumption and transfer of surplus to the grid, by means of small wind turbines”. 82 Resolution No. 3 of Meeting No. 145 of the Electricity Authority dated July 13, 2004. 83 In this chapter, the use of the term “private electricity producer” was made broadly, including both an entrepreneur and a producer

with a provisional license. 84 Section 4 of the Electricity Sector Law grants the Electricity Authority power to issue licenses for activities in the electricity sector

and to establish their conditions. The Rules of the Electricity Sector (Transactions with Essential service Provider) 2000 and following them also the Electricity Sector Regulations (Conventional Private Electricity Generator), 2005, and the Electricity Sector Regulations (Cogeneration) 2004, have stated that a provisional generation license is a temporary licenses that is given by the Minister in accordance with the regulations set forth, for the purpose of construction of a generation facility, whereby, upon the fulfillment of the conditions prescribed therein (including fulfillment of milestones as stipulated in the provisional license and in the regulations) and the provisions of the law, that person shall be issued a generation license.

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(B) The volume within the framework of provisional licenses of cogeneration producers – approximately 713

megawatts.

(C) The volume within the framework of provisional licenses of pumped storage producers – approximately

600 megawatts.

(D) The volume within the framework of provisional licenses of renewable energy producers – approximately

1,241 megawatts.

The Company cannot anticipate how many projects will be completed through to 2020.

See Section 7.4.3.3 with respect to producers that have signed, as of the date of the Prospectus, an

agreement with the Company for the sale of capacity availability.

In addition to this, in March 2008 a tender was published for the construction of up to three (3) solar power

stations in the Negev, two (2) solar-thermal power stations of up to 120 megawatt output each, and another

30 megawatts by photovoltaic energy. In accordance with the Government resolution dated March 200885

,

the power stations will be built in the Ashalim complex in the Negev covering an area of approximately 4

million square meters.

Two (2) groups participated in the tender for solar-thermal stations and six (6) groups for photovoltaic

stations. In March 2012, Ashalim Sun PV Ltd. was chosen as the winner of the tender for the construction of a

photovoltaic power station with an output of 30 megawatts. As of the date of the Prospectus, besides an

announcement in the press whereby the proposal of one of the groups that had participated in the tender for

the solar thermal stations had been disqualified, the Company has no data with respect to the results of the

tender with solar-thermal technology or the publication date thereof. It should be noted that the scheduled

date for the publication of the results of the tender with respect to solar-thermal stations was the fourth

quarter of 2011.

7.4.3.3 Description of the private electricity producers with which the Company has executed agreements:

(A) OPC won a public tender that the State published in 2001 for private electricity producers to build a

combined cycle power station of 440 megawatts at Rotem Plain.

In November 2009, the Company executed an agreement with OPC. OPC has warranted that the power

station that it was constructing would be ready for commercial activity within 49-52 months of the date

of the execution of the agreement (early 2013).

(B) In August 2010, the Company executed an agreement with Dorad Energy Ltd. with regard to the purchase

of available generation capacity and energy of approximately 850 megawatts and the provision of

infrastructure services, which is due to end in 2013.

(C) In May 2012, the Company signed agreements with two co-generation producers – Ramat Negev Energy

(120 megawatts output) and Ashdod Energy (55 megawatts energy). To the best of the Company’s

knowledge, the expected operation time of these producers is 2014.

(D) In May 2012, the Company executed an agreement with Dalia Power Energies Ltd. with regard to the

purchase of available generation capacity and energy of approximately 870 megawatts and the provision

of infrastructure services, which is due to end in 2014.

(E) In June 2012, the Company executed an agreement with Ashalim Sun P.V. Ltd. (which won the tender

published by the State of Israel) with regard to the purchase of energy (30 megawatts output), which is

due to end in 2015.

(F) In addition, the Company signed contracts with a large number of producers that have intermediate

photovoltaic facilities, which will be connected to the distribution grid (high or low voltage).

85 Resolution No. 3338 dated March 27, 2008, on the matter of “tenders for the construction of solar power stations”.

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7.4.3.4 Producers with generation licenses86

The installed generation capacity volume of private electricity producers (except photovoltaic facility owners

of up to 50 kilowatts without a generation license) that sell electricity to the Company constitutes, as of the

date of the Prospectus, approximately 238 megawatts, constituting approximately 1.8% of the total installed

generation capacity of the Company which, as set forth, is approximately 13,133 megawatts. The total volume

of private producers operating as of the date of the Prospectus, including independent producers, stands at

approximately 518 megawatts, constituting approximately 3.9% of the installed generation capacity of the

Company.

In the year ended on December 31, 2011, the Company purchased approximately 344 million kWh from

private electricity producers, compared with approximately 300 million kWh purchased in the year ended

December 31, 2010. The average price that the Company paid to the private electricity producers in 2011

(including small photovoltaic facilities whose generation in 2011 came to a total of approximately 160 million

kWh) was 131 agorot per kWh compared with 89 agorot per kWh in 2010. This increase is accounted for

mainly by high charge rates that are paid to photovoltaic consumers. The electricity that is purchased from

private producers and from small photovoltaic facility owners in 2011 constitutes approximately 0.7% of the

electricity that the Company supplied in that year, and approximately 0.3% of the electricity that the

Company supplied in 2010.

In the three-month period that ended on March 31, 2012, the Company purchased approximately 148 million

kWh from private electricity producers, compared to approximately 57 million kWh that was purchased in the

parallel quarter the year before. The average price that the Company paid to private electricity producers in

the first quarter of 2012 (including small photovoltaic facilities whose generation in the first quarter of 2012

came to a total of approximately 65 million kWh) was 113 agorot per kWh compared to 110 kWh in the

parallel quarter the year before. This increase is accounted for mainly by an additional entry of photovoltaic

facility owners. The electricity that was purchased from private producers and from small photovoltaic facility

owners in the first quarter of 2012 constitutes approximately 1.1% of the electricity that the Company

supplied in this quarter and approximately 0.5% of the electricity that the Company supplied in the parallel

quarter the year before.

7.4.3.5 As of the date of the Prospectus, the private electricity producers that sell electricity to the Company can be

classified into four (4) key categories:

(A) Private electricity producers that operate pursuant to the arrangements that have been prescribed by the

Electricity Authority (wind, water, solar) and that win tenders that receive payment based on the

generation component charge rate for the sale of energy plus a premium for renewable energy producers

with which the Company has signed agreements for a total output of approximately 54 megawatts.

(B) Two diesel power stations, a fuel oil powered generator, both of which are owned by Shikun U’Binui Ltd.

– “Etgal” in Ashdod, with an output of approximately 26 megawatts and Noga Paz in Akko, with an output

of approximately 16 megawatts. The Electricity Authority has established the charge rate for these power

stations based on their actual generation costs. As of the date of the Prospectus, the Company has an

agreement with these producers for a period of twenty (20) years that ends in 2024, whereby these

producers will sell to the Company available energies at the demand of the system administrator in

accordance with the price to be determined by the Electricity Authority.

(C) Cogeneration producers – IPP Delek Ashkelon (with roughly 87 megawatt output) and Ashdod Refineries

(with roughly 49 megawatt output), which operate at high voltage and sell surplus generation to the

Company.

(D) A self-use electricity producer Mashav Enterprising and Development Ltd. (Nesher, Ramla, with a 48

megawatt output). In July 2010 an agreement was signed with it for the sale of surplus electricity to the

Company for a one year period. The agreement with this producer ended on December 31, 2011, without

86 Meaning those that actually generate electricity.

F-64

being renewed for 2012. The purchases of electricity from this producer are not included in the charge

rate. The Electricity Authority has set a price limit (that must not be exceeded in payments).

Consumers who own photovoltaic devices - in addition, as of the date of the Prospectus, the installed output87

of small photovoltaic systems at medium and low voltage, which run generation surpluses to the grid (up to

50 kilowatts per facility) is approximately 195 megawatts.

7.4.4 Repercussions for the Company

The Company assesses that in the upcoming years a significant increase can be expected in the installed

generation volume of the private electricity producers, including generation using renewable energies. The

Company assesses that such an increase may have a number of repercussions, including the following:

(A) The Company expects in the upcoming years a significant increase in the installed generation capacity of

the private electricity producers, including generation using renewable energies, and it estimates that part

of the electricity consumption currently supplied by it and the increase in electricity consumption at the

national scale will be supplied in the future by the private electricity producers. As a result of this, there will

be a reduction in the actual generation of electricity by the Company, and accordingly a decrease in the

revenues of the Company in the generation segments and thus to a potential loss of strategic consumers.

(B) However, as of the date of the Prospectus, and due to the uncertainty involved in private electricity

producer projects, whose completion is not under the control of the Company, the Company cannot predict

how many projects will be completed or when.

(C) Because most private electricity producers use the transmission and/or distribution grid of the Company,

and are committed to infrastructure charge rates, the Company assesses that the revenues of the Company

in the transmission and distribution segments may increase. See Sections 8.3 and 9.3 for details. The

increase in the generation capacity in the national economy, whether by private electricity producers or by

the Company, requires enhancement of the distribution and transmission system.

(D) Insofar as the Company is required to serve as a backup electricity source in the case of the failure of

private electricity producers to supply electricity to consumers, it is required to maintain high levels of

generation capacity as a reserve; the Company estimates that upon the entry of private electricity

producers to significant volumes into the Electricity Sector, the Electricity Authority will update the

electricity charge rates in a manner that will compensate the Company, partially at least, for costs that it

will sustain in view of the need to maintain such generation capacity reserves.

(E) In order to comply with the policy of the Government, the Electricity Authority has established

arrangements that allow renewable energy generation facility owners to be compensated by higher

electricity charge rates than those that are paid to the Company. However, any increase in the costs for the

Company as a result of payments to the owners of renewable electricity facilities will be recognized by the

Electricity Authority within the framework of the charge rate. Accordingly, the expenses that will ensue

from the transition of the Electricity Sector to “greener” electricity generation will be included within the

framework of the charge rate so that the consumers bear the surplus costs. Notwithstanding that which has

been set forth above, a time gap may form until the Company expenses are covered by the charge rate.

(F) Within the framework of implementation of the provisions of the law and of Government Resolutions, the

Electricity Authority encourages the entry of private electricity producers into the Electricity Sector. Within

this context, a safety net and preferential conditions have been extended to the private electricity

producers, covering, inter alia, the use of the transmission and distribution system of the Company and a

commitment of the Company to serve as a backup source in the case of failure of private electricity

producers to supply electricity to consumers. Because there is no certainty with respect to the structure of

the Company after the Structural Change, if and to the extent implemented (in accordance with that which

has been set forth in Section 1.3) and the length of time for which preferential (better or similar) conditions

87 Installed and running systems, after passing facility tests and integration of the facility with the grid.

F-65

will be given, there is no certainty that the Company will be able to compete with the private electricity

producers.

(G) The expected increase in the competition poses financial risks for the Company as it creates uncertainty

with respect to the amount of the electricity that the Company will be required to generate in the future.

(H) Notwithstanding the above, the Company assesses that the entry of private electricity producers into the

Electricity Sector in Israel will not change the monopolistic status of the Company in the field of generation

in the Electricity Sector in the coming years either.

This information with respect to the expected increase in the installed volume of generation of private electricity

producers and its consequences for the Company and in particular the Company’s expectations of an update in

the charge rates is forward looking information, as per its definition in the Securities Law, which is based on

information that is in the possession of the Company as of the date of the Prospectus and on forecasts of the

Company whose materialization depends on factors over some of which the Company has no control, such as:

the methodology of definition of operation regimes for the various generation technologies, an estimate of

possible times for commencing the generation at the power stations of the various private electricity producers,

an estimate of the odds for implementation of each private electricity project, the existing charge base and past

experience. Therefore, the Company has no certainty that its estimates and expectations will indeed actually

materialize in view of the existing uncertainty with respect to the future regulation, including new charge rate

arrangements, to the extent that they are formed, the economic and political reality, including the consequences

for the volume of electricity consumption on the national economy.

7.5 Generating capacity

The table below shows the installed generation capacity of the Company (including Etgal Ashdod Ltd., which is a

private electricity producer that has negligible generation capacity of approximately 26 megawatts that is included

in the load monitoring and control system of the Company) and the peak demand, in megawatts in 2011 and in

2010, and in the first quarters of 2011 and 2012:

For the three months ended on March 31

For the year ended on December 31

2012 2011 2011 2010

Installed generation capacity (the Company + Etgal Ashdod Ltd.)

13,159 12,940 12,785 12,795

Peak demand throughout the sector 11,090 9,725 11,070 11,530

Of which: generation by the Company 10,620 (***) 9,395 (****) 10,450 (**) 10,950 (*)

Generation capacity available at peak demand times 11,000 10,420 11,112 11,520

(*) This peak demand was measured on August 19, 2010. (**) This peak demand was measured on July 31, 2011. (***) This peak demand was measured on January 22, 2012. (****) This peak demand was measured on February 3, 2011.

As of December 31, 2011, the installed generation capacity of the Company has decreased by approximately 1088

megawatts, compared with December 31, 2010. This difference is a result of an increase by approximately 140

megawatts in the installed capacity of the combined cycle unit in Haifa (No. 4) on the account of the

synchronization of the steam addition (total of approximately 374 MW in 2011 compared with approximately 234

MW in 2010) and a reduction of approximately 150 for the Eshkol B units, giving a total reduction of

88 Without calculation of Eshkol B (2X75 megawatts).

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approximately 10 MW. As of March 31, 2012, the installed generation capacity of the Company increased by

approximately 219 megawatts, in comparison with March 31, 2011. This difference arises mainly from the

introduction into operation of Haifa 30 Combined Cycle, to an installed output of approximately 374 megawatts.

7.6 Fixed assets, land and facilities

7.6.1 General

All assets of the Company are divided into five (5) main types:

7.6.1.1 Power station – a generation facility that is used for the generation of electricity at an output exceeding 5

megawatts, including structures, machines, conductors, transformation facilities, cooling facilities and systems

used for this purpose. The power station includes large tracts of land, some of which have large buildings on

them and generation units are located on them, including many diverse buildings and facilities that serve it,

including regulators that include, inter alia, transformers, electricity pylons and other accessories for

electricity transmission that are interconnected using power lines. In addition, a power station site has

extensive areas that are used for outdoor storage and for actions ancillary to electricity generation, and large

areas are vacant of any object or property and are unused.

7.6.1.2 Substations and switching stations – facilities that are used in the transmission segment and connect the

various electricity grids and have a process of transformation of electricity voltage from extra high voltage

(400 kilovolts) to high voltage (161 kilovolts) or from high voltage (161 kilovolts) to medium voltage (33 or 24

kilovolts). The area of the facilities consists of a yard, some of which have pylons that are interconnected with

overhead and/or underground cables. The switching stations and substations feature large land areas, some

of which have regulators that include, inter alia, connection boxes, transformers, pylons, anchors and other

accessories for electricity transmission, which are interconnected by electricity lines, whether by overhead

grid or underground grid. These stations usually have buildings, but their area is small relative to the total

area of the facility, except closed or combined substations in which the structure may also be on a relatively

large area.

7.6.1.3 Transformation rooms – enclosed rooms that are used in the distribution segment and are in the street or in

part of a residential building, containing transformers whose function is to adjust the voltage conveyed in

medium voltage lines to a voltage that is usable by electricity consumers (low voltage). Transformation lines

may be located inside a single building or as a separate building that provides the needs of a number of

streets.

7.6.1.4 Utility lines – overhead or underground power lines that are used in the transmission segment (up to the

transformation station) or distribution segment (from the transformation station) of electricity and that

include pylons.

7.6.1.5 Administrative logistic sites – warehouses, offices and other such properties that are used by the three

activity segments of the Company, that is, generation, transmission and transformation and distribution.

The number of sites mentioned above that are used for all of the activity of the Company is extensive, including

approximately 20 power stations; approximately 150 substations and switching stations; approximately 12,000

transformer rooms; approximately 900 pylons89

(which are charged municipal tax by law) and approximately

150 administrative logistic sites, and in total approximately 13,500 properties, which include dozens to

hundreds of facilities and properties of various kinds.

7.6.2 The breakdown of the fixed assets and facilities described below relates to the property and assets that are held

by the Company and/or that are used by it in the field of electricity generation operation, disregarding the

differences of opinion between the Company and the State with respect to the rights of the Company to such

property and assets, which it possessed at the time of expiry of the concession (see Section 15.3 with respect to

the “property settlement” and its consequences for the Company).

89

Pylons for which the Company is required by law to pay municipal tax.

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7.6.3 A breakdown of the power stations used by the generation segment at the different sites follows:

Name of site Location Type Area of the site

in m2

Land rights

1 Rothenberg

Power Station Ashkelon Power station 1,442,600

Most of the area is leased from the Israel Land Administration (ILA) by three (3) lease contracts, two (2) of which are ending in 2032, and one in 2054. The three (3) contracts have an option for extension of the lease by 49 years more; Some of the area is by authorization from EAPC until 2017

2 Reading

Power Station Tel Aviv Power station 227,861

Most of the area is being leased from the State of Israel by an unsigned lease contract, for periods that have expired and for periods of concession extension, some by expropriations. With respect to this property, there is an outline plan under advanced proceedings, whereby large areas of the land are scheduled for expropriation, which if approved will require the Company to relocate facilities from the areas scheduled for expropriation, which will require the Company to make significant investments. The Company has filed its objections to this plan.

3 Haifa

Power Station

Shemen Beach,

Haifa Power station 355,964

Owned by the Company, except a certain plot being leased from ILA until 2016

** 4 Hagit

Power Station

Next to

Elyakim

Interchange

Power station 735,844

About half of the area is being leased from ILA until 2051; the rest is owned by the Company (some of the ownership rights have not yet been registered to the title of the Company)

5 Gezer

Power Station

Next to Nesher

plant in Ramla Power station 451,200

The rights of the Company to this property have yet to be regulated. The Company is conducting negotiations to sign a lease agreement with the ILA.

6 Eshkol

Power Station Ashdod Power station 470,055 Owned by the Company

7 Orot Rabin

Power Station Hadera Power station 2,024,940

About half of the area is owned by the Company (ownership rights have not yet been registered to the title of the Company; about a fifth is being leased from ILA until 2040; the rest is being leased from the Caesarea Development Fund under two contracts, one until 2042 and the other until 2048. There is a cautionary remark to the benefit of the Company in the Land Registration Bureau for all of these lease agreements. An area of approximately 71,000 m

2 of

land is used by H2DI Ltd. for seawater desalination purposes. See Section 23.1 for details.

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in m2

Land rights

* 8

Substation90

and

gas turbine

Raanana

Industrial Zone Gas turbine 27,631 Owned by the Company

** 9 Ramat Hovav

Gas Turbine

Ramat Hovav

Industrial Zone

Gas turbine /

switching 251,960

Lease from ILA by two contracts until 2028 and 2029 (there is an option for the Company to extend the lease by 49 years more); the Company has a right to obtain a lease contract (pursuant to a transaction approved at ILA) for approximately 50,000 m

2 of the area until

2058 plus an option for 49 years more.

* 10

Atarot

substation and

gas turbine

Atarot Industrial

Zone Gas turbines 38,194

Leased from ILA until 2022 (there is an option for the Company to extend the lease by 49 years more). The lease rights are registered at the ILA only.

* 11

Kinarot

substation and

gas turbine

North of Tiberias Gas turbine 29,870

About half of the area is being leased from Mekorot

91. The rest is under

authorization from Mekorot for the period of the concession of the Company, that is, until March 4, 1996, and the extension or renewal period of the concession of Israel Electric Corporation (ending as stated on March 4, 1996), with the effect of the Electricity Sector Law.

* 12

Hartov

substation and

gas turbine

Beit Shemesh

Industrial Zone Gas turbine 28,470

Leased from ILA in three agreements until 2018, 2020 and 2021 (there is an option for the Company to extend the lease by 49 years more).

13 Alon Tavor

Gas Turbine Alon Tavor Gas turbine 142,660

Leased from ILA until 2039 (there is an option for the Company to extend the lease by 49 years more). There is a cautionary remark to the benefit of the Company at the land registration bureau.

* 14

Eitan

substation and

gas turbine

Moshav Eitan Gas turbine 41,704

The lease rights to this property are from the ILA and were valid until 1996. The lease is registered in the Land Registration Bureau until 2295.

* 15

Eilat

substation and

gas turbine

Eilat Gas turbine 67,600

Leased from ILA until 2028 (there is an option for the Company to extend the lease by 49 years more). Lease rights registered

* 16

Tzafit

substation and

gas turbine

Tzafit Gas turbine 232,970

Most of the area is leased from ILA until 2034 (there is an option for the Company to extend the lease by 49 years more); the rest is by authorization from Moshav Mevo Beitar

* 17

Caesarea

substation and

gas turbine

Caesarea Gas turbine 228,500

Subleased from the Caesarea Development Fund until 2048. The rights of the Company are registered with the

90 Substation. 91 In accordance with an agreement with Mekorot dated March 1979, the Company has a right to possess and use “for a defined

period under the condition that it does not exceed the primary lease period that will be registered to the benefit of Mekorot at the Land Registration Bureau”. As of the time of this Prospectus, no primary lease has been registered to the benefit of Mekorot for the land.

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in m2

Land rights

Caesarea Development Fund. For part of the lease contracts a cautionary remark to the benefit of the Company has been registered at the Land Registration Bureau.

Total area: 6,798,023

* This station also has sub-stations. ** This station has both sub-stations and switching stations.

See Section 8.5 with respect to fixed assets and facilities in the transmission and transformation segment.

All of these properties and rights have floating charges applying to them, which the Company created as

collateral for some of its liabilities (see Note 18E to the Annual Financial Statements) and some of these

properties (three turbines for generation of electricity that were purchased by the Company from Siemens that

were constructed at the Ramat Hovav, Eshkol and Hagit sites) have fixed charges that the Company created as

collateral for its liabilities towards various financing parties.

7.7 The development of the Electricity Sector – the generation segment

7.7.1 General

In accordance with Section 19(A) of the Electricity Sector Law, the Minister, after consultation with the

Electricity Authority, is entitled to demand of a holder of an essential service supplier license to submit for his

approval, in the manner and time that he demands, a Development Plan, complete or in parts, for the purpose

of operations of the essential service supplier in accordance with the provisions of the License; if the Minister

has approved the plan after consulting the Electricity Authority, a vital service provider license holder shall not

act other than in accordance with the approved plan. And in the event that no such plan is submitted, the

Minister is entitled, following consultation with the Electricity Authority, to prescribe to such a license holder a

Development Plan that it must act by. The Company is committed to full observance of the Development Plan as

part of its duties as an essential service supplier, inter alia in accordance with Section 17(A)(4) of the Electricity

Sector Law, Section 19 of the Electricity Sector Law and the terms of its license. The Company must execute the

Development Plan as the Minister prescribes, from time to time, and meet the schedules prescribed therein.

Such a demand is also included in the provisions of the generation licenses that have been given to the

Company, whereby, among other things, the license holder, which is also an essential service supplier, will

submit to the Minister once every five (5) years a Development Plan with respect to its operation in accordance

with the License and a duty is prescribed in the Electricity Sector Regulations (Terms and Procedures for

Granting Licenses and Obligations of the License Holder) - 1997. The Company is complying with this condition

with respect to the submission of a development plan.

In accordance with that which has been set forth above, the supply of electricity is divided into three (3) primary

segments: generation, transmission and distribution. The reliability of each of these segments determined the

reliability of the entire system. To ensure the reliability of the supply, the Development Plan for each of the

segments is made out in accordance with the demand forecasts and primarily the peak demand and to ensure a

generation reserve. The Company makes out long term Development Plans for the expansion of its generation,

transmission, distribution and supply capacity, in order to satisfy the needs of the Electricity Sector in Israel. The

purpose of the Development Plans that are made out by the Company is to achieve optimal stability and

economic efficiency in the supply of electricity, in the long term and short term. The Development Plans serve as

a basis for making decisions of the Minister on the addition of generation units, including their type, location,

generation ability, date of commencement of operation and the type of fuel that powers them for generating

electricity, including additional measures that are required in the distribution and transmission segments.

The Development Plan for the generation segment is drafted by the Company with respect to the need of the

entire Electricity Sector for the construction of additional generation units. The Company regularly warns the

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Minister of the expected shortage in the generation capacity and the possible impairment in the reliability of

the supply and for recommending solution methods. Usually the Company shows the minister a Development

Plan for the generation system for twenty (20) years and more. The Minister approves updates and additions to

the Development Plan from time to time.

Until the end of 2008, as is elaborated below, the Development Plans for the generation segment of the

Electricity Sector include the construction of power stations, whether by the Company or by other parties

(private producers). In accordance with a Government resolution of June 200892

, as adopted in Section 60(D5) of

the Electricity Sector Law, the Company has no approval to build additional power stations besides those which

were approved for it by January 1, 2009. See Section 7.4 for further information on the forecasts of the

Company for the construction of additional power stations other than by the Company.

7.7.2 Manner of the determination of the Development Plan for the generation segment

The main goal of the planning of the generation system in the long term is to constitute a basis for making

practical decisions with respect to the addition of the generation units that are required in the system, their

type, output, date of operation and location, while determining an optimal mix of fuels that is required for

powering them. Most of the planning includes coping with the uncertainty relating to all of the input data: the

demand for electricity, the prices of fuel, techno-economic data of candidates for development of the

generation system, competitive factors and more. Therefore, planning is commonly carried out for various

future scenarios. In view of that which has been set forth above, there is a constant need for periodical updates

of the Development Plan and there may be changes that may be material.

7.7.3 The main assumptions on which the development program was based and its implications for the level of the

reserve capacity and reliability in the generation segment:

7.7.3.1 The development of electricity consumption is affected by economic, climatic and demographic factors. The

connection between the consumption of electricity and these varying factors is expressed through an

economic model that has been developed with the help of an external consultant in conjunction with the

Company. Energy saving in electricity consumption over the years has been taken into account in the future

demand forecasts and, as a result of this, in the design of the generation system as well.

Because the planning range of the generation system is particularly long and involves a high level of

uncertainty with respect to the future economic situation of the State of Israel and with respect to climatic

conditions, the conducting of a broad risk analysis within a process of optimization of development of the

generation system while considering the distribution of the electricity demand forecasts, is of great

importance93

.

The demand forecast has been built up in a basic economic scenario that assumes an average annual increase

of approximately 4% in the GDP94

, meaning an annual increase of approximately 2.4% in the GDP per capita

alongside an annual increase of approximately 1.6% in the population.

The climatic uncertainty underlying the demand forecast is greater than the uncertainty with respect to

economic and demographic developments. Therefore, to reduce the said climatic uncertainty, the forecast

has been built up based on three (3) different climatic scenarios for the summer, which have been established

based on a statistic analysis of the sum of the differences between the heat load forming in the third quarter

and the heat load of twenty seven (27°C) degrees Celsius (which is the average temperature at which air

conditioners are operated). From this statistic analysis, three (3) levels of heat load during the summer have

been derived, which are defined as a scenario with extreme heat load (48°C), heavy heat load (44°C) and

medium heat load (40°C). In view of the heating trend that has been recorded in Israel over the last twelve

92 Government Resolution No. 3705: draft of the Electricity Sector Law (Amendment No. 8) - 2008 – approval of the resolution of the

Ministerial committee for Legislation and Law Enforcement Affairs, dated June 30, 2008. 93 The demand is affected primarily by: increase in the population and its geographic dispersal, the weather, living standards and

consumption habits, economic activity, electricity charge rates and technological developments. 94 Gross Domestic Product.

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(12) years, the probabilities of extreme and heavy heat load have been estimated at approximately 16.5%,

while the probability of medium heat load has been calculated as being approximately 67%.

The forecast demand, which is used for long term planning of the generation system, assumes a mean annual

increase of approximately 3.3% in the peak demand for electricity and an average annual increase of

approximately 3.7% in the required electric energy from 2012 to 2020.

7.7.3.2 The forecast for gaps between peak demand and generation capacity for the years 2013-2016

A table that summarizes the predicted available capacity of the generation units of the Company, compared

with peak demand forecast during the summer for the entire national economy for the years 2013-2016, in

megawatts95

(based on the median scenario) follows.

The data of the forecast of long term electricity demand (except 2013, for which a short term forecast is being

made) of installed generation ability, available capacity during the summer and the gap between the peak

demand of the national economy and the generation ability of the Company during the summer in the system

in 2013 to 2016 is as follows:

Year Peak demand forecast

in the national economy

[MW]

Company capability during the summer [MW] Gap between available capacity

taking into consideration

downtime and peak national

demand during the summer

[MW]

Available capacity

during the summer

taking into consideration

downtime assuming a fault in the major unit

[MW]

Gap between available capacity

taking into consideration downtime and

a fault in a major unit and peak national

demand during the summer

[MW]

Installed capacity

Available capacity

Available capacity

taking into consideration downtime for implementing

emission abatement products at existing coal

power stations

2013 12,606 13,396 12,663 12,663 57 12,088 (518)

2014 13,184 13,910 13,137 12,562 (622) 11,987 (1,197)

2015 13,594 13,910 13,137 12,562 (1,032) 11,987 (1,607)

2016 13,801 14,024 13,247 11,977 (1,824) 11,402 (2,399)

The assumptions that have been used in preparing this table:

(A) The peak demand forecast is in the scenario that assumes reasonable economic development and

extreme weather during the summer. The values relate to peak demand in the national economy96

.

(B) The forecast for installed capacity of the Company has been based on the forecast for the initial

operation of new generation units in accordance with the Development Plan of the Company, including

the Emergency Plan. See Section 7.7.5 for further information on the Emergency Plans. The installed

ability shown is at the time of occurrence of the peak demand during the summer.

(C) The available capacity during the summer period is obtained when the output that is subtracted for

industrial gas turbines and combined cycle units as a result of the effect of high ambient temperature is

deducted from the installed capacity.

95 Negative numbers appear in parentheses. 96 Arrangements for the management of demand loads with large consumers, such as a moving peak arrangement, arrangement for

operation of independent generators that are run during peak hours and that contribute to a decrease in demand.

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(D) A fault in the major unit – a fault in the largest unit is a common way of examination of immediate risk to

available capacity in this system, as such as fault is enough to reduce the generation capacity

immediately. The major unit in the generation system is a coal powered unit whose output is 575

megawatts, meaning that a fault in it may reduce the available capacity by approximately 575 megawatts

each year.

(E) The installed available capacity shown is of the Company only.

In addition to the generation capacity of the Company, there are private and independent electricity

producers that are based on thermal energies [source] in amounts of approximately 500 megawatts, and

private producers that are based on renewable energy sources in amounts of approximately 240

megawatts.

With the entry of private energy producers to the electricity generation system97

in early 2013, the

operation of OPC (440 megawatts) is expected, and in early 2014, the operation of Dorad (850

megawatts) is expected. During that period, the operation of additional private producers is expected, to

the best Company’s knowledge.

(F) The Company estimates that any exposure that it might have will be in the case of it being allowed to

attribute the failure to satisfy the electricity demands to the non-construction of the Alon Power station,

which was supposed to be built in July 2012 (with an output of approximately 250 megawatts for that

time) or failure to comply with another commitment that it has in accordance with its licenses, the

development plan or the provisions of the law.

7.7.4 The expected development of additional generation capacity

In accordance with the current Development Plan for generation capacity, that is, the plan that was approved by

the Minister in December 2010, the Company is expected to complete the construction of one (1) combined

cycle unit with an output of approximately 377 megawatts at the Tzafit site by the summer of 2012.

In addition, the operation of the Project D coal power station is being planned, for the purpose of the

diversification of the energy sources and maintaining the option of generation using coal in order to avoid too

much dependence on natural gas, which may endanger the reliability of the supply of electricity to the national

economy. This station, which was included in the Development Plan by the Minister as a coal powered station

back in 2001, includes two (2) generation units with an output of approximately 630 megawatts output each

and its location has been set to the Rothenberg site in Ashkelon. In view of the discovery of new natural gas

deposits off Israel’s shores, and based on a decision of the Minister of Energy and Water98

, the previous

planning proceeding of Project D as a coal power station has been stopped, and Project D is expected to be built

as a dual fuel power station that will be powered by natural gas and that may also be coal powered. The

construction of the project is in a new planning proceeding at the National Planning and Construction Council, at

the review preparation stage.

7.7.5 The Emergency Plan

In August 2008, the Minister approved an addition to the Development Plan of the Company (“the Emergency

Plan”), considering the low reserves in the electricity generation system that endanger the reliability of the

electricity supply in the upcoming years. The Emergency Plan stated that it would be performed in two (2)

stages in order to prevent an “electricity drought” and lead the installed electricity generation capacity to a level

that would ensure the supply of electricity at reasonable reliability and availability.

In accordance with the Emergency Plan, the Company was required to develop the generation segment at an

expedited rate and special arrangements were established for the plan in order to provide for their financing

and construction by the Company.

97

These figures are based on forecasts of the Company, which may change from time to time and also fail to materialize altogether. 98 Approval of the Development Plans for the electricity sector dated December 15, 2010.

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In recent years, the Company has been given a permit to build the following power stations: in November 2007,

the Company was given an approval by the Minister to build two (2) industrial gas turbines at the Ramat Hovav

site at an output of approximately 125 megawatts each. In August 2008 the Minister approved the construction

of three (3) combined cycles (at Ramat Hovav, Eshkol and Hagit) at a total output of approximately 375

megawatts per combined cycle, which are to be constructed in two (2) stages: at Stage A, a gas turbine of

approximately 250 megawatts output and at Stage B, a steam addition of approximately 125 megawatts more.

In December 2008 the Minister gave an approval for the construction of a combined cycle at the Alon Tavor site

with an output of approximately 375 megawatts, in accordance with the construction outline described above

(at Stage A: a gas turbine with a 250 megawatt output for operation in July 2012 and at Stage B: a steam

addition for operation in July 2013).

The outputs specified above are the outputs of the units when powered by natural gas, assuming that natural

gas is available at all electricity generating sites during the period indicated above. As of the date of the

Prospectus, there is uncertainty with respect to the construction of a combined cycle at Alon Tavor by the

Company99

. On May 29, 2012, the Company applied to the Director General of the Ministry of Energy and Water

with a request to defer the times of operation of the combined cycle at Alon Tavor to sustainable flexible times,

and to determine that the unit be built within a defined number of months from the time that the Company is

required by the Ministry to build it, considering, inter alia, the statutory processes, the purchasing state and the

finding of the financing solution required for the building of the said generation units.

As part of the first stage of the Emergency Plan, in 2009 and 2010, gas turbine units were run at the Eshkol and

Ramat Hovav sites (units 6, 7 and 8) and at the Hagit site.

At the second stage, steam additions are to be built at the sites that will allow for the operation of the units in a

combined cycle at Eshkol (from December 2013), Ramat Hovav (from July 2013) and Hagit (from August 2013).

In view of the accelerated development needs that the Company has required and still requires within the

framework of the Emergency Plan, in accordance with that which has been set forth above, the Electricity

Authority adopted, in October 2008100

, a resolution with respect to the financing of the construction of Stage A

of the Emergency Plan (that is, the construction of two (2) gas turbines at Ramat Hovav 6 and 7 and three (3)

gas turbines at the Eshkol, Ramat Hovav - Unit 8 and Hagit sites), as approved by the Minister. The total

investment that was expected at the planning stage of the Emergency Plan stood at approximately NIS 3.6

billion, and its financing was set as per the following breakdown: (A) approximately NIS 0.9 billion that was

received through financing from foreign banks; (B) approximately NIS 2 billion that was collected over a period

of approximately two years from January 2009, by recognition of financing costs for the Emergency Plan within

the electricity charge rate in accordance with the said resolution of the Electricity Authority. Through to

December 31, 2011, the Company deposited in a special purpose account regulated by the Electricity Authority

the full amount of NIS 2 billion and in a resolution dated March 2011101

, the Electricity Authority allowed the

Company to release the amount from the special purpose account for regular use for Stage A of the Emergency

Plan and for additional projects that are included in the development budget of the generation segment for

2011; (C) the rest of the amount – will be financed from the Company’s own internal sources.

Within that resolution dated March 2011, it was determined with respect to the balance in the special purpose

bank account for Stage A of the Emergency Plan that this balance would serve for the purposes of development

of the Electricity Sector only, for projects appearing in the budget book in the generation segment for 2011.

The Electricity Authority further determined in that resolution that as an outline for the financing of Stage B of

the Emergency Plan, the debt of the Company to consumers (as a result of excess collection from consumers

within the electricity charge rate in accordance with that which has been set forth above) in the amount of NIS 2

billion would be spread until the end of 2025 for the purpose of financing Stage B of the Emergency Plan. The

99 See Section 1.3.2.5. 100 Resolution No. 1 of Meeting No. 238 that was held on October 30, 2008. 101 Resolution No. 1 of Meeting No. 328 that was held on March 7, 2011.

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Electricity Authority made the spread of the debt conditional, inter alia, to the presentation of an economization

plan of the Company. In addition, synchronization times were set for the three (3) steam additions, on the

following dates: July 15, August 15 and December 1, 2013, without specific assignment to any unit.

These dates have also been included in another resolution of the Electricity Authority dated March 2011102

, with

respect to the update of the normative operation dates of the generation units. See Note 3 to the Quarterly

Financial Statements for further information.

Further to this, in March 2011, the Board of Directors of the Company adopted a resolution that confirms to the

management of the Company to commence with execution of the construction of the three (3) steam additions

that are included in Stage B of the Emergency Plan, whose financing shall be conducted in accordance with the

resolution of the Electricity Authority, in accordance with that which has been set forth above.

The estimated expense for Stage B of the Emergency Plan is approximately NIS 3.2 billion, without interest

during the construction time, out of which approximately NIS 1.5 billion is in 2012. The financing of Stage B in

the Emergency Plan is scheduled as follows: approximately NIS 2 billion is to be financed through the spread of

the debt of the Company to consumers in the electricity charge rate; approximately NIS 1.1 billion is to be

financed through specific loans for financing fixed assets or equipment; and approximately NIS 0.1 billion from

the Company’s own internal sources.

See Section 28.2.5 for details on the approval of the Electricity Authority for deferring deposits into the Special

Purpose Emergency Plan Account (Stage B).

7.7.6 Financing of the Development Plan

The Development Plans require material capital investments and require both the investments in the power

stations that are to be built by the Company in accordance with the Development Plan and the investments for

the actions required for building power stations and facilities that stem from the environmental protection

statutes applying to the Company, for the purpose of the implementation of the Development Plan. The

Company is preparing short term capital investment plans (up to a year) and long term ones (up to five years).

The Company is financing the Development Plans by revenues from its activity, through the charge rate. In the

past, and the Company expects that this will be the case in the future, as well – the Development Plans were

financed in part by the taking of loans from domestic and foreign financial institutions and from raising debts

from public or private issues, in Israel or overseas.

In July 2010, the Board of Directors adopted a resolution whereby the Company would be responsible for the

planning and the execution and operation of the Development Plans, subject to the financing being provided by

the Government. It was further noted in the resolution that the Company would continue to finance

Development Plans that were included in the budget for 2010 and as an alternative to the Government

financing, the Company would cooperate with third parties that would assist in the financing of the

Development Plan and will receive part of the title in accordance with their investment. The Development Plans

that had commenced as of the date of the resolution, or Development Plans that the Company must execute by

law (with the exception of those which are in accordance with the Electricity Sector Law, primarily plans that are

required on the basis of environmental protection laws and regulations that apply to the Company) are not

included in this resolution. The contracting with third parties that the Company will transact with, if transacted,

for financing of the Development Plans, is subject to the receipt of the required approvals. The development

budget for 2011 and 2012 has been adjusted by the board of directors of the Company in order to reflect a

certain decrease in investments. Although the Development Plan of the Company requires material capital

expenses, the board of directors of the Company has stated that the Company shall not finance certain projects

with the goal of avoiding an increase in the liabilities of the Company and in order to encourage the Company

and the Government to seek external financing sources.

102 Resolution No. 1 of Meeting No. 331 dated March 30, 2011 on the matter of “update of normative operation dates of the

generation units”.

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Further to that resolution, on December 15, 2010, the board of directors approved for the management of the

Company an outline for financing of a steam addition project, in the amount of approximately NIS 3.5 billion,

within Stage B of the Emergency Plan. The project financing was made contingent upon the fulfillment of a

number of conditions. On March 17, 2011, further to a resolution of the Electricity Authority dated March 7,

2011, the resolution of the board allowing the management of the Company to operate to establish three steam

additions was made, through financing of the project by spreading the debt of the Company in the electricity

charge rate in the amount of approximately NIS 2 billion, through to the end of 2025, financing of approximately

NIS 1.1 billion through specific loans for financing fixed assets or equipment and the balance of the financing, in

the amount of approximately NIS 1.1 billion, shall be extended by the Company.

The budget of the Company for the Development Plan in 2012 stands at NIS 6 billion (in current shekels). See

the Immediate Report of the Company dated December 1, 2011, (Reference No.: 2011-01-349938) for details on

components related to the Development Plan in the budget of the Company. The investment forecast of the

Company for the Development Plans for 2012-2015 stands at a mean annual expenditure of approximately NIS

6.6 billion (in current shekels).

7.7.7 The forecast investments that will be required in order to execute the Development Plan for the generation

segment

In accordance with the financial planning of the Company for 2012-2016 that was executed in August 2011, but has

not yet been brought forth for the approval of the Board of Directors of the Company, the scope of the investment

plan of the generation system will be on average approximately NIS 4.4 billion per year (in current shekels).

Without the D project and Alon Tavor emergency combined cycle, the scope of investments in the generation

system will be on average approximately NIS 2.8 billion per year (in current shekels). As of December 31, 2011, an

amount of approximately NIS 1.8 billion (adjusted to New Israeli Shekels for December 2011 and March 2012) has

been invested in development. See Section 7.7.6 for details on the financing sources for development.

7.7.8 Forward looking information

The estimates that have been set forth above with respect to the Development Plan for the Electricity Sector –

generation segment, constitute forward looking information, as per its definition in the Securities Law, which are

based on the forecasts and assumptions described above, which the Company has as of the date of the

Prospectus, and at the end of the building of an updated investment forecast or due to instructions that will be

given to the Company by the Minister as an essential service supplier with respect to the Development Plans that

it must implement, the Company will be required to make investments that differ from those set forth above.

This information includes forecasts, subjective assessments, estimates and other plans of the Company as of the

date of the Prospectus with respect to the working assumptions that it used in the development of the forecast

and the dates of materialization of those assumptions. Such information is based on future figures whose

materialization is not certain and that are not under the exclusive control of the Company.

The main factors that may affect the non-materialization of the forward looking information or changes

occurring in the estimated schedule for the execution of the Development Plan and the investments for it, as

described above, include, inter alia, : a change in the expected rate of increase in the demand for electricity; the

implementation of the Structural Change of the Electricity Sector and of the Company (see Section 1.3); the

availability of natural gas for the use in the generation system; difficulties in securing licensing or changes in

regulations in the field of environmental protection and licensing; the absence of appropriate charge rate

coverage (see Note 3 C to the Annual Financial Statements) and the ability of the Company to raise the financing

required for the execution of the Development Plan.

7.8 Intangible assets

See Section 16 for details on intangible assets.

7.9 Human capital

The organizational structure of the generation segment:

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Roster of employees (positions): 2,449

Vice President, Generation and

Transmission

Generation

Branch

Tzafit Ramat Hovav

Hagit Alon Tavor

Technical Control

Project Advancement and Control

Finances and

Economics

Fuel Administration

Key to

symbols

VP

Dept Mgr

Brch Mgr

Unit

Dpy Brch Mgr

Haifa Power Station

Reading Gezer Power Station

Eshkol Power Station

Rothenberg Power Station

Power Station at Orot Rabin

site

Gas Turbines

Deputy for Operations

Deputy for Machinery

Generation and

Transmission Personnel

North

Generation and

Transmission Personnel

South

Deputy Manager for Electricity,

Control and IT

Field of Activity – Generating Segment

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As at March 31, 2012, the generating segment employs 2,310 permanent workers and 139 temporary workers,

compared with 2,318 permanent workers and 151 temporary workers as at March 31, 2011. The number of

employees relates to the organizational assignment in the generation branch and does not include employees who

are assigned to other branches who work for the segment. See Sections 14.5 and 14.6 for details on benefits and

the nature of the employment and transaction agreements with workers of various kinds, the investment of the

Company in training and instructing and further information.

7.10 Raw materials and suppliers

7.10.1 The raw materials that are used by the Company to generate electricity are fuels of various kinds: coal, fuel oil,

natural gas and diesel oil.

7.10.2 The table below shows the distribution rate of generation (in percent) by the types of fuels that have been used

in the generating segment for electricity generation in 2011 and 2010 and for a period of three months ended

on March 31, 2012 and 2011:

For the period January – March

For the period January – December

2012 2011 2011 2010

Coal 61.25% 63.62% 61.5% 61%

Fuel oil 7.85% 0.24% 1.8% 0.9%

Natural gas 17.15% 35.61% 31.9% 36.6%

Diesel 13.75% 0.53% 4.8% 1.5%

Total 100% 100% 100% 100%

Fuel expenses constitute the biggest operating expense of the Company and constituted approximately 64.6%

of the operating expenses of the Company in 2011 compared with approximately 54.6% in 2010 and

approximately 64.9% of the operating expenses of the Company in the first quarter of 2012 compared to

approximately 55.9% in the parallel quarter the year before. The decrease in the use of natural gas in 2011 and

the increase in the use of diesel oil stemmed from the frequent disruptions in the supply of Egyptian gas, the

depletion of gas from the Mari B field owned by Yam Tethys and the directives of the Electricity Administration

in the Ministry of Energy and Water with respect to monthly and annual restrictions as to the extent of the use

of gas from that field. See Section 7.10.9.2 (A) for details.

7.10.3 The table below shows the total costs of fuels (including attributed salary costs) that were used for the

generation of electricity in the generating segment in 2011 and 2010 and in the three-month periods that ended

on March 31, 2012 and 2011:

Three months ended on December 31, in NIS million

(in shekels of March 2012)

Year ended on December 31, in NIS million

(in shekels of March 2012)

Year ended on December 31, in NIS million

(in shekels of December 2011)

2012 2011 2011 2010 2011 2010

Coal 1,814 1,430 6,469 4,700 6,444 4,682

Fuel oil 807 23 656 235 653 234

Natural gas 383 684 2,743 3,020 2,733 3,009

Diesel 2,148 116 3,026 1,195 3,015 1,190

Transfer of fuels to regulation oversight

(1,269) - - - - -

Total 3,883 2,253 12,894 9,150 12,845 9,115

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See the description below for each separate raw material on explanations on the differences in costs.

7.10.4 The following table shows the average costs of fuels used by the Company for 2011 and 2010, and in the three-

month periods that ended on March 31, 2012 and 2011:

Three months ended on

March 31

in agorot of March 2012

per kWh

Year ended on

December 31

in agorot of December 2011

per kWh

Year ended on

December 31

in agorot of March 2012

per kWh

Power stations powered by:

2012 2011 2011 2010 2010 2011

Coal 19.63 16.54 18.31 13.67 13.73 18.41

Fuel oil 68.14 69.10 62.21 47.48 47.68 62.59

Natural gas 14.81 14.14 14.98 14.66 14.71 15.05

Diesel 103.55 162.46 110.37 141.74 142.56 110.92

A graph showing the reductions in prices in 2010 to 2011, during the period January to March 2012 and in the

parallel period the year before follows, for primary raw materials that the Company uses:

Average adjusted annual cost per ton

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* Coal: standard ton: upper caloric value – calculated as per 6,240 calories per ton. Following a Government

resolution dated July 2010, there was an increase in the purchase tax for coal from NIS 10 per ton in 2012 to NIS

45 per ton in 2011.

** Diesel: an order was signed in 2011, reducing the sales tax for diesel imported from abroad, to 31% of the

amount of the sales tax formerly imposed on imported diesel, and this was for the period February through

December 2011. In addition, with the approval of the Knesset Finance Committee, the excise tax on local diesel

oil was reduced at an identical rate and for an identical period. In 2012 it was decided to extend the reduction of

the sales tax for diesel imported from abroad and the excise tax on local diesel and to set the reduction rate at

88% until the end of 2012.

*** Within the gas agreements of the Company with the Yam Tethys Group, part of the price consists of fixed

dollar prices and part is in accordance with a formula that changes with the variation of the elements that

constitute it (prices of crude oil and distillates thereof).

**** Although it is a material expense with a cash flow influence, in general the Company receives

compensation for all expenses for fuels.

7.10.5 As of the date of the Prospectus, all of the types of fuels that are used by the Company in the generation field of

activity are purchased, directly or indirectly, from sources outside of Israel, except for natural gas, which is

purchased as of the date of this Prospectus from the local gas supplier – the Yam Tethys Group. As a result of

this, the Company and the State of Israel have almost no control over the availability of fuels in general or over

any particular type of fuel in particular, and any disturbance in the supply of fuels, which are imported as set

forth, including in the case of a long war and closure of seaports and airports as a result, may have an adverse

effect (as of the date of the Prospectus or in the future) over the ability of the Company to supply electricity in

accordance with the criteria of availability and reliability and over the financial results of the Company. To

reduce the adverse effect of such disturbances, the Company maintains limited reserves of all of the fuel types

that are used for the generation of electricity, except for natural gas, which it cannot store. The Company

estimates that its inventory of coal, fuel oil and diesel oil will suffice for at least a month and a half of

consumption, while the minimal diesel oil and fuel inventory that it keeps, which is in accordance with the

directives of the Ministry of Energy and Water, will also be enough for about a month. For further information

on the holding of inventories, see Section 7.11.

See Section 7.10.9.2 for details on the agreement with respect to the supply of gas from the Egyptian pipeline

and disruptions and a cessation of supply. See Section 7.10.9.2 and Section 29.2.3 for details with respect to the

supply of gas from Yam Tethys and the depletion of this source. See Section 7.10.9.2 for details on the

agreement for purchasing Tamar natural gas.

See Section 17 for details on the procedure for the Company for work with suppliers outside of Israel.

7.10.6 Coal

In each of the twelve (12) month periods ended on December 31, 2010 and 2011, the Company consumed

approximately 12.3 and approximately 12.6 million tons of coal, respectively. In each of the three-month (3)

periods that ended on March 31, 2012, and 2011, the Company consumed approximately 3.3 and approximately

3.1 million tons of coal, respectively.

The Company purchases all of the coal that it needs through the National Coal Supply Corporation Ltd.

(hereinafter: the “Coal Corporation”), which is a fully owned subsidiary of the Company, in accordance with an

agreement that was signed between the parties in July 2004 for the purchase of coal and its supply to the power

stations of the Company that consume coal – Orot Rabin in Hadera and Rothenberg in Ashkelon. The agreement

is valid from December 31, 2003 and for as long as the Company has generation licenses for the said power

stations. The Company has a right to cancel the agreement at any time by giving one (1) year’s advance notice.

The consideration that is paid by the Company is calculated based on cost plus agreed profit, and is subject to

the price of coal approved for the Company by the Electricity Authority.

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The Coal Corporation is responsible for the transport of the coal to the Company’s power stations and for

covering it with appropriate insurances (to the benefit of the Company), in the case of any loss or damage to the

coal, and is also responsible for carrying out all of the operations which are necessary for the release of the coal

cargoes and the transfer of ownership thereof to the Company upon the removal thereof from the ship’s

storerooms by means of the cranes on the jetty, including the payment of imposts, fees and taxes. In

accordance with the agreement, the ownership of the inventory of coal passes to the Company over the rail,

which unloads the coal in the unloading port, pursuant to the amendment dated January 2011. Prior to the

amendment in question, the ownership of the coal was transferred to the Company in the port of origin, so that

the Company’s balance of current debt to the Coal Corporation also included a charge for the amount of “the

stock en route”.

The Company has applied to the Coal Corporation and negotiated with it a deferral of payments for coal that

was supplied to the Company in November 2011, to a volume of approximately NIS 142 million. This amount

was returned to the Coal Corporation in two installments in February 2012, the interest for which was returned

to the Coal Corporation in one installment, in March 2012. See Note 1.F.1(B) to the Quarterly Financial

Statements for details.

The average adjusted cost per ton of coal in 2011 stood at approximately NIS 506 per ton, compared with

approximately NIS 380 per ton in 2010. The increase stems from an increase in the coal prices in the world. The

average adjusted cost for a ton of coal as of March 31, 2012, was approximately NIS 544 per ton, compared to

approximately NIS 463 per ton as of March 31, 2011.

The Coal Corporation purchases coal from a number of sources overseas, the main ones being Africa, Colombia,

Russia, Indonesia and Australia. The Coal Corporation enters into commitments with the coal suppliers based on

contracts for a term of at least one (1) year. The representatives of the Company participate in the negotiations

that the Coal Corporation conducts with its suppliers, particularly on issues of quality, availability and price.

As of the date of the Prospectus, the Coal Corporation has no dependence on any of its suppliers and there is no

single supplier that supplies it with more than 27% of its total annual coal purchases. The coal purchases are

made via the world’s largest and most reliable coal suppliers. The policy of the Coal Corporation is to

decentralize coal purchases between countries and within countries to the extent possible, in accordance with

the restrictions as to the quality of the coal that can be burned at the power stations.

The main coal suppliers of the Coal Corporation for 2011 and 2012 are: (1) BHP Billiton Marketing International

AG, which supplies approximately 25% of the total coal purchases for these years, (2) Glencore International AG,

which supplies approximately 21% of the total coal purchases for these years, and (3) Interocean Coal Sales, LDC

(hereinafter: “Interocean”) (which is a subsidiary of Drummond Company, Inc., which gave a guarantee against

execution of all of the undertakings of Interocean towards the Coal Corporation under the coal purchase

agreement), which supplies approximately 21% of the total coal purchases for these years.

Most of the purchases of coal in accordance with the documents for the purchase of coal are made by the Coal

Corporation on a FOB103

price basis, whereby all of the costs involved in the sea transportation and unloading of

coal at the generation sites of the Coal Corporation are added to the purchase price of the Company, while the rest

of the remaining purchases are made by the Coal Corporation on a CIF price basis104

, whereby the purchase price

includes the costs involved in the sea transport of the coal. With respect to most of the quantity of coal, prices are

negotiated every six months, and with respect to the other part, the price is linked to international indices of coal

prices. In accordance with the policy of the Coal Corporation, some of the purchase and sea transport agreements

are at fixed prices and periods. See Note 24 A.4 to the Annual Financial Statements for further information.

103 Free On Board – a term from the sea freight or international commerce field that refers to the delivery of the goods to the buyer

once the goods cross the rail of the vessel at the port of origin, the rail of the vessel constituting the critical point at which the risks, expenses and responsibility are moved to the buyer.

104 Cost insurance and freight – a term from the freight or international commerce field that means that the seller makes sure to transfer the goods to the vessel that will transport the goods to the buyer, insurance and freight and transport costs until the goods reach the port of the buyer.

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In addition, most of the coal purchase agreements include a standard force majeure clause, whereby the

occurrence of defined events that are not under the control of the parties to the agreement may justify a delay

in the supply of coal or in certain conditions cause the cancellation of the agreement.

In accordance with the provisions of the outline that applies to the Orot Rabin power station, the Company is

required to use low sulfur coal at this site with maximal sulfur content of approximately 0.69%, and by average

each year not more than 0.43%. The Company purchases from the Coal Corporation coal with different sulfur

content percentages and burns different coal types, which ensure compliance with these instructions. See

Sections 7.13, 8.9 and 9.11 for additional details on the impact of the environmental protection laws with

respect to the use of coal and additional fuels.

7.10.7 Fuel oil

Upon the commencement of the use of natural gas for the generation of electricity by the Company from early

2004, the scope of consumption of fuel oil was reduced from more than two (2) million tons per year to the

quantities in accordance with that which has been set forth below. The Company uses fuel oil mainly as a

backup fuel for operational purposes at the coal power stations. Following disruptions that have occurred in the

natural gas supply, from early 2011, the Company has increased its use of diesel and fuel oil. During 2013, the

gas supply is expected to increase again, subject to the commencement of the gas supply in accordance with the

agreement with Tamar. See Section 7.10.9.2 (C).

In each of the twelve-month (12) periods that ended on December 31, 2010, and 2011, the Company consumed

approximately 119 and approximately 246 thousand tons of fuel oil, respectively. In each of the three-month (3)

periods that ended on March 31, 2012, and 2011, the Company consumed approximately 269 and

approximately 9 thousand tons of fuel oil, respectively. The average adjusted cost per ton of fuel oil as of

December 31, 2011, stood at approximately NIS 2,662, compared with approximately NIS 1,974 as of December

31, 2010. The average adjusted cost of a ton of fuel oil as of March 31, 2012, was approximately NIS 2,999,

compared to approximately NIS 2,665 as of March 31, 2011. The average adjusted cost of a ton of fuel oil as of

December 31, 2011 (adjusted to the NIS of March 2011), was approximately NIS 2,672, compared to

approximately NIS 1,982 as of December 31, 2010 (adjusted to the NIS of March 2012).

In December 2010, the Ministry for Environmental Protection issued a transverse “personal order” (hereinafter:

the “Transverse Order”) pursuant to the Hazard Prevention Law - 1961, applying to all of the power stations of

the Company and among other things requiring it to use a more expensive fuel mix, and use, in certain cases,

diesel oil before fuel oil at the dual fuel power stations of the Company. The Transverse Order defines the use of

natural gas as a primary fuel once it reaches some of the generation units, except in the situations defined in the

Order, in which natural gas cannot be burned and in which backup fuel (fuel oil and diesel oil) will be used. The

need for backup fuel in a number of power stations of the Company has increased significantly, inter alia, due to

the shortage in natural gas. Accordingly, from time to time, individual temporary approvals are issued by the

Ministry for Environmental Protection for using backup fuel. See the Immediate Report of the Company of

December 27, 2010 (Reference No.: 2010-01-733074) for further information.

Due to the continued shortage of natural gas and the applications of the Company on the subject, in April 2012

the Director General of the Ministry for Environmental Protection established a current procedure for using

backup fuel during a time of a fault or shortage in the supply of natural gas to the electricity system105

. In

addition, on May 24, 2012, the approval of the Ministry for Environmental Protection was obtained for the

operation of the Company’s power stations using backup fuel at a time of shortage in natural gas during the

summer of 2012 (in June-October), in accordance with the order of action that was set in this procedure and

including operation of the Reading Power Station using fuel oil and the operation of the backup units in this

period for unlimited hours, at the discretion of the System Administrator. In view of that which has been set

forth above, the approval stated that the Ministry for Environmental Protection would examine the need to

amend the personal orders of the Company and would act accordingly.

105 Government Resolution No. 4623: “Measures to cope with the anticipated shortage of electricity”, dated May 13, 2012.

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In 2011, the supply of fuel oil was based on delivery from the refinery in Ashdod, and since December 2011 the

Company began to import fuel oil from foreign international companies and to purchase fuel oil from oil

refineries in accordance with demands. Beginning in 2012, Glencore Energy UK Ltd. (hereinafter: “Glencore”)

has been supplying most of the fuel oil consumption of the Company. In the first months of 2012, more than

70% of the fuel oil consumption of the Company was purchased from Glencore; the remaining fuel oil was

purchased from ORL and from Paz Refinery in Ashdod. The contract with Glencore for the supply of fuel oil in

2012 is in accordance with an agreement from February 2012. The agreement regulates the payment terms,

including agreed mechanisms for establishing the quality and quantity of the products delivered and their

consistency with the requirements of the agreement.

The suppliers are responsible for transporting the fuel oil as far as the gates of the power station in Ashdod or

the storage sites at the Orot Rabin sites or in Ashkelon. The fuel oil is discharged by mooring the ships at the

offshore fuel moorings at the Orot Rabin and Rothenberg sites.

The prices that the Company pays for fuel oil are based on a 1% sulfur fuel oil price quotation at Lavera under

CIF106

terms (trading prices in the Mediterranean Basin), plus a marketing margin, handling expenses (discharge

at a port, pumping and dispensing) and excise tax. As of the date of the Prospectus the Company has no

dependence on any of its suppliers because it has no impediment to executing transactions with additional or

other suppliers to the extent required.

In accordance with National Outline Plan 10 A/4 and the Personal Order that was issued for the Haifa power

station in 2010, the Company is committed to using low sulfur fuel oil in the Haifa Power Station with a

maximum sulfur content of 0.3%.

In accordance with the Transverse Order that was issued for the Eshkol Power Station in 1995, the Company

uses low sulfur fuel oil in the Eshkol Power Station with a maximum sulfur content of 0.5%. See Sections 7.13,

8.9 and 9.11 for additional details on the application of the environmental protection laws to the use of fuel oil

and additional oils.

7.10.8 Diesel oil

In each of the periods of twelve (12) months that ended on December 31, 2010 and 2011, the Company

consumed approximately 219 and approximately 631 thousand tons of diesel oil, respectively. In each of the

three-month (3) periods ended on March 31, 2012, and 2011, the Company consumed approximately 520 and

approximately 21 thousand tons of diesel oil, respectively. In 2010 and 2011 the Company primarily purchased

its diesel oil from imports. During 2010 and 2011 the main supplier from which the Company purchased diesel

oil, to a tune of approximately 80% of its diesel purchases in these years, is the international supplier Vitol S.A.

(hereinafter: “Vitol”) and most of the import is from it. The contracts with Vitol have been short term point

transactions (SPOT) for a period of up to several months in accordance with the consumption forecasts. These

transaction proceedings were classified by the Company as exempt from the tender obligation in accordance

with the Tender Obligation Law - 1992 and the regulations promulgated thereunder, being classified as

transactions whose tendering or transactions of their type might impair the ability of the Company to fulfill a

duty or task imposed on it by law or its ability to provide a vital service or commodity to the public, and

therefore the Company conducted a competitive proceeding for selecting a diesel supplier. In 2012, Vitol won a

tender for the supply of diesel oil to the Company, and it is expected to supply approximately 60% of the diesel

oil in this year (in the first quarter of 2012 Vitol supplied approximately 70% of the diesel supply in this quarter).

The agreements with Vitol include a provision whereby the Company shall be entitled to reduce the supply of

fuel that has been agreed upon with Vitol in certain cases in which there is a decrease in the demand for fuel

during the period of the agreement. Vitol won a tender for the supply of diesel oil in 2007 and 2008 to and in

effect has supplied the Company diesel oil since 2007.

The said information on the scope of diesel oil purchases during 2012 in accordance with the agreement with

Vitol is forward looking information as per its definition in the Securities Law and is based on the existing

106 Cost, insurance and freight.

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information that the Company has as of the date of the Prospectus and its estimates and forecasts as to this

data, and therefore may change due to factors that do not depend on it, such as: the volume of use of fuels of

different types for the generation of electricity during 2012 and primarily the use of natural gas, regulatory and

other changes.

However, the assessment of the Company is that it has no dependence on a single diesel supplier because it

does not have any impediment to working with additional or other suppliers to the extent required.

The consideration for the quantities of diesel oil that the Company orders for shipment on a particular day are

paid by the Company in accordance with the prices of the month of order.

The prices that the Company is paying for diesel oil are based on a CIF LAVERA price quotation, plus a marketing

profit, conveying expenses (discharge at port, pumping and dispensing), excise tax and purchase tax. The prices

that the Company pays in exchange for the diesel oil are linked to the global market prices, at margins that are

determined in competitive tenders that the Company conducts between its suppliers. This way, the Company

chooses the diesel supplier in accordance with the cheapest price quoted. The adjusted average cost per ton of

diesel oil was approximately NIS 4,725 in 2011, compared with approximately NIS 5,430 in 2010. The adjusted

average cost per ton of diesel oil in the first quarter of 2012 was approximately NIS 4,131, compared with

approximately NIS 5,646 in in the first quarter of last year.

The diesel oil is transported to the power stations of the Company, which are gas turbine powered, mainly by

pumping through a national pipeline, which was built by and belongs to Oil and Energy Infrastructures Ltd. (a

company fully owned by the State), or by road tankers of the various suppliers to sites that are not connected to

the distillate pumping system107

.

On August 7, 2011, the Minister of Finance signed the Customs and Exemption and Purchase Tax for Goods

Order (Provisional Order No. 10), 2011, whereby from February 1, 2011 to December 31, 2011, the purchase tax

for diesel oil imported from abroad would be 31% of the purchase tax imposed on imported diesel oil prior to

the said amendment (that is, the excise tax rate on diesel oil was reduced by 69%), subject to the fulfillment of

the conditions listed in the Purchase Tax Order, in accordance with that which has been set forth in the

Immediate Report of the Company of August 8, 2011 (Reference No. 2011-01-235884). The estimated discount

for the purchase of diesel in 2011 is approximately NIS 1.5 billion. In addition, with the approval of the Knesset

Finance Committee, the excise on diesel oil purchased in Israel was reduced by an identical rate through until

the end of 2011.

In addition, on January 16, 2012, the Knesset Finance Committee decided to extend the reduction of the

purchase tax on diesel oil imported from abroad and set the tax reduction rate at 88% for January through April

2012, and at 69% for May through December 2012, subject to re-examination and changes in the natural gas

supply status. At the same time, the excise tax on local diesel oil was reduced to an identical rate and under

similar conditions. The Knesset Finance Committee extended the period of validity of the 88% tax reduction

until the end of December 2012. As of the date of the Prospectus, the estimated discount for purchasing

approximately 1.7 million tons of diesel that was made and will be made by the Company in 2012 came to a

total of approximately NIS 5 billion. On January 19, 2012, the Company announced that the said reduction was

expected to have a material positive effect over the cash flow of the Company for 2012, in the amount of

approximately NIS 4 billion. See the Immediate Report of the Company dated January 19, 2012 (Reference No.

2012-01-020109). In addition, the excise on local diesel oil was reduced by similar rates for identical periods, as

per the Excise on Fuel Order (Exemption and Restitution) (Provisional Order No. 2) - 2012, and with the approval

of the Knesset Finance Committee.

107 A pipeline for the transfer of distillates operated by Petroleum and Energy Infrastructures Ltd.

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7.10.9 Natural gas

7.10.9.1 General

In 2011 the Company consumed approximately 2,811 thousand tons (approximately 4.15 billion cubic meters

of natural gas) at an average cost of approximately NIS 973 per ton, compared with approximately 3,268

thousand tons (approximately 4.82 billion cubic meters of natural gas) in 2010 at an average adjusted cost of

approximately NIS 921 per ton. In the first quarter of 2012 the Company consumed approximately 358

thousand tons (approximately 0.53 billion cubic meters of natural gas) at an average cost of approximately

NIS 1,069 per ton, compared to approximately 746 thousand tons (approximately 1.1 billion cubic meters of

natural gas) in the parallel quarter the year before, at an average adjusted cost of approximately NIS 917 per

ton. The decrease in the gas consumption stemmed from the depletion of the Yam Tethys deposit and

interruptions in the supply of gas from Egypt, while in previous years there was an increase in the

consumption of natural gas and a decrease in the annual diesel oil consumption of the Company.

As of the date of the Prospectus, the Company has three (3) sources (existing or potential) for the supply of

natural gas – the dwindling Yam Tethys, the supply of gas from Egypt by East Mediterranean Gas SAE

(hereinafter: “EMG”) in which there have been and will continue to be disturbances to the point of absolute

cessation of the gas supply from this source following the notice by EMG of the cancellation notice that it

received from the Egyptian gas suppliers; and the Tamar field, whose gas supply is expected to start only in

July 2013. A potential gas source for future use is the Leviathan reservoir that is located near the Tamar and

Asher reservoirs. According to public information that the Company has, the estimated quantity of gas in the

Leviathan reservoir is double that of the Tamar field108

. As of this Prospectus, there are no contacts between

the Company and the owners of the Leviathan reservoir for the purchase of gas, but on the date on which the

field development proceeding starts for the extraction of gas, the Company intends to negotiate for the

purchase of gas from this field.

In 2011 and in the first quarter of 2012, approximately 84% and approximately 91%, respectively, of the

natural gas that was used for the generation of electricity was supplied to the Company by the Yam Tethys

Group, which holds the Mari B offshore natural gas reserve, which is located approximately 24 km west of

Ashkelon, according to an agreement for the supply of gas with the Yam Tethys Group that was signed in June

2002 and the additional agreement for the supply of gas with the Yam Tethys Group of July 2009 (see Section

7.10.9.2). Since October 2011, there has been a gradual decrease in the quantity of gas actually supplied and

the Company has been receiving notices from Noble Energy Mediterranean Ltd. (hereinafter: “Noble”) about

expected decreases in the quantity of natural gas supplied to it from the Yam Tethys reserve, and accordingly,

in accordance with the last notice dated May 2012, as of the date of the letter. The hourly quantity of gas that

will be supplied to the Company will be approximately one fifth (1/5) of the contractual quantity109

. In

addition there is a possibility of another future reduction of the quantity of natural gas supplied to the

Company from this field. See Section 7.10.9.2 for details on the anticipated impact on the Company.

During 2011, approximately 16% of the natural gas that was used for the generation of electricity was

supplied to the Company by the Egyptian company EMG through an offshore pipe from El Arish to Ashkelon,

which provides for the transfer of gas from the Egyptian gas system, in accordance with an agreement of

August 2005. In the first quarter of 2012, 9% of the natural gas that was used for generating electricity was

supplied to the Company by EMG. See Section 7.10.9.2 for details on the agreement. See Section 7.10.9.2 for

details on disruptions that occurred in the supply of gas from EMG during 2011 and up to the date of the

Prospectus.

108 The data on the estimated gas quantities in the Leviathan reserve is external public data published by Delek Drilling Limited

Partnership, which is one of the reserve rights owners. The correctness of this data has not been examined or assessed by the Company.

109 See the Immediate Report dated October 15, 2011, Reference No.: 2011-01-292275; the Report dated February 19, 2012, Reference No.: 2012-02-046050; the Report dated December 27, 2011, Reference No.: 2011-01 376332; the Report dated February 19, 2012, Reference No.: 2012-01-046050 and the Report dated May 9, 2012, Reference No.: 2012-01-122016. The Immediate Report dated May 15, 2012, Reference No.: 2012-01-125748.

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On March 14, 2012, The Company signed an agreement with the Tamar field rights holders for the purchase

of natural gas from the Tamar field, which is located approximately 100 km west of the coast at Haifa110

. The

negotiations with Noble and with the limited partnerships Isramco Negev 2, Delek Drilling, Avner Oil

Explorations and Dor Gas Explorations ensures (for convenience - “Tamar Partnership”) quantities of gas from

this field, in 2009111

. The gas discovery at the Tamar field (following the exhaustion of the Yam Tethys reserve)

ensures the purchase of quantities of natural gas from a local source of supply that is not as sensitive to

political influences as gas that is supplied by pipeline from foreign sources. However, the depth of the natural

gas that existing at the Tamar field and its distance from the shore require the Tamar Partnership to make

significant investments in the development of the field, which to the best of the Company’s knowledge has

mostly been done, including, inter alia, the building of gas pipelines to a new rig that will be built near the

existing rig that supplies the gas from the Yam Tethys reserve. The supply of gas from this field is expected to

begin as set forth according to the intent of the sellers to start in July 2013.

With respect to that which has been set forth above in respect of the anticipation of pumping of natural gas

from the Tamar field constitutes forward looking information, as per its definition in the Securities Law and is

based on information that is possessed by the Company as of the time of the Prospectus and forecasts whose

materialization depends on many factors, over some of which the Company has no control, such as receipt of

permits, approvals and changes in and dependence regulation and on third parties, as a result of which the

Company has no certainty that its assessments will materialize.

7.10.9.2 Contracts for the purchase of natural gas

(A) The Yam Tethys Group

In July 2002, an agreement for the supply of gas was signed between the Company and the Yam Tethys

Group112

whereby Yam Tethys will supply to the Company natural gas for approximately 11 years from

the time that the gas starts to flow, that is, from February 2004 to December 2014, or such time as the

consumption of a total quantity of 18 billion cubic meters (BCM) of natural gas (which quantity

constitutes approximately half of the quantity required for the Company in the next decade), whichever

is earlier. The total financial scale of the agreement with Yam Tethys was approximately 1.8 billion U.S.

dollars, as of the time of signing the agreement in 2002 (the gas price is fixed in U.S. dollars). The

agreement includes an undertaking of the Company to pay for a minimal quantity of natural gas, whether

the Company has consumed it or not (“take or pay”). The quantity of gas that has been paid for, but not

consumed in certain periods will be available to the Company in the subsequent periods, subject to a

mechanism prescribed in the agreement. The agreement also establishes a mechanism for balance

accumulation for surplus quantities that have been consumed by the Company in any year. The supply of

gas in accordance with the agreement is on an hourly basis with a minimum and maximum quantity per

hour, in accordance with the mechanisms prescribed in the agreement. In accordance with the terms of

the agreement, the Yam Tethys partnership is entitled to supply the Company natural gas that is not from

the reserve, at its sole discretion. The agreement prescribes limits for the liability of each of the parties

for violating part of its undertakings thereby, at rates that are prescribed in the agreement. The

agreement has been amended five (5) times since it was signed, inter alia so as to update the payment

terms, the terms of delivery for purchasing further quantities of natural gas and the transfer of the

extension site from Ashkelon to Ashdod.

The agreement has prescribed collateral that each of the partners in the Yam Tethys Group can provide

and maintain to the benefit of the Company for securing its undertakings in accordance with the

Agreement to amounts, times and conditions that are prescribed in the Agreement. As of the date of the

110 The Immediate Report dated March 14, 2012 (Reference No.: 2012-01-067866). 111 See Immediate Reports dated December 15, 2011, and February 19, 2012, Reference Nos.: 2011-01-364518 and 2012-01-046053,

respectively. 112 To the best of the Company’s knowledge, the owners of the rights in the Yam Tethys project are: Noble (47.059%), Delek Drilling,

Limited Partnership (25.5%), Avner Oil Explorations, Limited Partnership (23%) and Delek Investments and Properties (4.4%).

F-86

Prospectus, guarantees have been extended to the Company by Noble Energy, Delek Drilling, Avner Oil

Exploration and Delek Investments and Properties Ltd. In the total amount of NIS 30,000,000.

In July 2009 the Company executed a binding memorandum of principles (agreed principles) with the

Yam Tethys Group for the purchase of additional quantities of natural gas, to an annual volume of 1

billion cubic meters for five (5) years, until December 2014 and in total 5 billion cubic meters more. See

the Immediate Report dated July 23, 2009 (Reference No.: 2009-01-177324). Although the memorandum

of principles states that its principles would be adopted further to a detailed agreement, another

agreement was not signed and the parties are effectively acting in accordance with the memorandum of

principles from July 2009113

. This memorandum of principles includes an undertaking of the Company to

pay for a minimal quantity of natural gas, whether the Company has consumed it or not. The estimated

scale of the commitment as of the date of signing the memorandum of principles in 2009 is

approximately one billion United States dollars.

From the date of signing the memorandum of principles in 2009, Yam Tethys has been supplying

additional quantities of natural gas to the Company that are divided in hourly terms between two

agreements, as defined in the memorandum of principles. The quantity of gas, which was credited to the

Company on December 31, 2011 within the framework of two gas agreements with the Yam Tethys

Group, for a total volume of 3.6 billion cubic meters, of which 2.15 billion cubic meters remained from

the first agreement of 2002.

As stated earlier, recently, and as of October 2011, the rate of daily and hourly extraction from the Mari B

reserve of Yam Tethys has been gradually decreased, due to the depletion of the field and the collapse of some

of the extraction fields. As a result of this, the Company has to consume increasing quantities of liquid fuels.

In addition, in October 2011, directives were issued by the Director of the Electricity Authority in the

Ministry of Energy and Water114

, including monthly and annual restrictions on the extent of the use of gas

from this field. According to these directives, the Company is limited to an annual consumption of 2.5

billion cubic meters, in order to ensure continuity in the supply of the gas between the depletion of the

Mari B field and the anticipated start of the extraction of gas from the Tamar field in 2013. The

Company’s assessment is that the depletion of the Yam Tethys gas reserve will not allow the Company to

consume the quantities of gas that the Director of the Electricity Authority at the Ministry of Energy and

Water defined.

On June 13, 2012, part of the Yam Tethys partnership announced that the development of the “Pinnacles

1” borehole in the satellite reserves near the Mari B reservoir had been completed (hereinafter: the

“Satellite Reserves”) and that the pumping of natural gas from these reserves had been started.115

The

Company has not received notice with respect to the quantities and flow of natural gas that will be

supplied to it from the Satellite Reserves. On June 17, 2012, part of the Yam Tethys partnership, in

accordance with that which has been set forth above, announced that it had been decided to temporarily

stop the flow of natural gas from the Satellite Reserves due to indications that the composition of the gas does

not correspond to the specification which is required for the flow, but that in the near future, various

alternatives would be examined in such a way that would enable the resumption of the gas flow.116

In addition, pursuant to the announcement by the Yam Tethys reservoir partnership dated June 23, 2013

(see Reference No. 2012-01-163857), the development of the Noa North reservoir had been completed

and the natural gas flow from that reservoir had begun.117

113

The Company has not actually updated it because in effect no additional agreement has been signed between the parties as required by Regulation 37A2 of the Securities Regulations (Periodical and Immediate Reports) - 1970.

114 See the website of the Ministry of Energy and Water: http://energy.gov.il/AboutTheOffice/SpeakerMessages/Pages/GxmsMniSpokesmanNGElectricity.aspx

115 Immediate Report by Delek Drillings Limited Partnership dated June 13, 2012 (Reference No. 2012-01-154668).



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On June 26, 2012, after conclusion of the execution of the required tests, commercial pumping of natural

gas from the Noa North gas reservoir began, within the framework of the gas agreements of the

Company with the Yam Tethys Group. The combined daily quantity of natural gas that is supplied to the

Company at this stage from the Noa North reservoir and from the Mari B reservoir by the Yam Tethys

Group is approximately 40% of the daily contractual quantity. The Company estimates that the event is

expected to have a positive effect over the cash flow of the Company.

(B) EMG

In July 2005, the Company executed an agreement for the supply of natural gas with EMG. In accordance

with the agreement, the total quantity of gas that would be purchased (approximately 25 billion cubic

meters) would be at an average annual rate of approximately 1.7 billion cubic meters for fifteen (15)

years, from the time that the agreement entered force, which was deemed to be July 2008, that is,

through to 2023. The Company has an option for the extension of the agreement by five (5) more years,

that is, until 2028, under the same conditions and for the same annual quantities. The exercise of the

option is conditional upon the provision of advance notice by the Company thirty six (36) months before

the end of the base period, that is, by July 2020. The agreement states that EMG transacts with other

entities with the goal of transferring gas to Israel for the production of electricity, during 2010-2014, EMG

is allowed, by sixty (60) days advance notice, to reduce the annual quantity by up to a certain percentage,

as prescribed in the agreement.

The gas flow started on May 1, 2008, and after a “running in” period of two months the contractual

period started, that is, on July 1, 2008.

The agreement includes an undertaking of the Company to pay for a minimal annual quantity of natural

gas that EMG has transferred to the transfer point, that is, up to the connection point in Ashkelon

between the conduction system pipeline and the EMG pipeline, whether the Company has consumed it

or not (“take or pay”), in accordance with the mechanism prescribed in the agreement. In accordance

with the agreement, the responsibility for the risk and loss of gas shall pass from EMG to the Company at

the point of entry to the territorial water of Israel. The agreement prescribes limits to the liability of each

of the parties for violation of some of their undertakings thereby at rates prescribed in the agreement,

and cases for which each of the parties is entitled to compensation from the other party.

Since the beginning of the supply of gas by EMG, EMG has not fulfilled all of its contractual undertakings

and this, according to its notices, has been for various reasons, such as a general shortage of gas in Egypt

due to delays in the introduction of new production fields, which restricts the supply volumes; gas

demands that exceeded the forecasts and faults in the supply system that stemmed from the overloading

of the gas supply and treatment system in the light of a change in the gas sale agreement between the

Government of Egypt and EMG. As a result of this, based on legal advice that the Company had received,

in the original agreement was updated in September 2009, to include a change in the price of natural gas

and the determination of a mechanism for its periodical update every five (5) years; a reduction in the

quantities that the Company undertakes to purchase within the framework of the agreement; and the

establishment of measures for ensuring the reliability of the gas supply.

The amendment to the agreement was signed in September 2009 and took effect by July 2009.

In addition, five (5) addenda to the agreement of 2005 were signed between the parties after it was

signed (including the addendum of 2009), inter alia for the purpose of changing the gas flow destination

and changes of various dates that were prescribed in the agreement.

The estimated volume of the transaction as of the date of the signing of the agreement in 2005 is

approximately 3 billion U.S. dollars (the payment currency was set to U.S. dollars).

Upon the change of the regime in Egypt in early 2011 after the “Mubarak era”, disruptions in the gas

supply started, which found expression in repeated attacks against the natural gas transmission pipeline

from Egypt to Israel, which significantly impaired the Egyptian gas supply, to the extent that in 2011 the

quantity that was actually supplied amounted to approximately thirty percent (30%) of the contractual

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gas quantity. The Company assesses that the explosions occurred as a result of deliberate action. EMG

has alleged, in its notification to the company upon the halting of the pumping of gas from Egypt, that the

events were a result of force majeure. In April 2012, the supply of natural gas from Egypt was stopped

completely, with a notice from the Egyptian government gas companies supplying natural gas to EMG

(the natural gas supplier of the Company from Egypt) announcing the cancellation of the agreement with

it for the sale of natural gas. The agreement with EMG includes a mechanism of fines for failing to supply

the contractual gas quantities and a guarantee of EMG to a tune of 18 million dollars, which will be valid

until the end of the term of the agreement. In view of the fact that the pecuniary compensation pursuant

to the fines defined in the contract and the implementation of the guarantee is significantly lower than

the expenses sustained by the Company as a result of failure of the supply of the Egyptian gas, the

Company is involved in arbitration proceedings with EMG and with the gas supply companies in Egypt for

receiving compensation for the damages that it has sustained and that it will sustain until the

commencement of the supply of gas from the Tamar field due to the non-supply of Egyptian gas, which

the Company claims to be worth more than two (2) billion dollars. See Note 24 A.3 in the Annual Financial

Statements and Note 8B-2 in the Quarterly Financial Statements for details on the arbitration proceeding.

On April 22, 2012, the Company received a notice from EMG whereby the Egyptian government gas

companies (Egyptian Natural Gas Holding Company (EGAS) and Egyptian General Petroleum Corporation

(EGPC), who are the suppliers of natural gas to EMG, informed EMG that they were cancelling its

agreement with them for the sale of natural gas. On May 10, 2012, the Company received another notice

from EMG stating that EMG was continuing to examine the situation and was seeking alternatives to

natural gas. In the opinion of the Company, this event is not expected to have a materially adverse effect

on the financial state of the Company and/or its cash flow beyond that reported heretofore by the

Company, as for more than a year, the supply of natural gas from Egypt to Israel was very fractional and

irregular in any case, inter alia, following a series of terrorist explosions. See the Immediate Report of the

Company dated April 23 (Reference No.: 2012-01-106680), the Immediate Report dated May 9

(Reference No.: 2012-01-22016) and the Immediate Report dated May 15 (Reference No. 2012-01-

125748).

See Note 8.B.2 of the Quarterly Financial Statements on an international arbitration proceeding that the

Company is conducting with EMG and with the Egyptian government gas companies EGPC and EGAS in a

claim for compensation for the heavy damage that it has sustained and will sustain as a result of the

ongoing violations of the natural gas supply agreements that it has with them.

The Company, with its international legal advisors, is studying the consequences of the unilateral

cancellation of the agreement between EMG and EGPC and EGAS on the international arbitration

proceeding that it is conducting with these companies.

As at the date of the Prospectus, the Company has not received notice that the agreement between it

and EMG for the purchase of natural gas has been cancelled.

(C) The Tamar field

In March 2011, the Company signed an agreement with the holders of the Tamar license rights (in this

section: “the Sellers”), whereby the Company has undertaken to purchase natural gas, in volumes of at

least approximately 42.5 billion cubic meters (BCM) of natural gas, and volumes at most of approximately

78 BCM (hereinafter: “the Agreement”).

The Company was given an option, exercisable until April 2, 2013, to increase the contractual quantity

supplied in the agreement period to a total maximum volume of approximately 99 BCM without the

purchase price being updated and without committing to purchasing the entire quantity, the gas

consumption being in accordance with the mechanism prescribed in the agreement (in this section: “the

Option”). The implementation of the Option is subject to receipt of certain regulatory approvals by the

Sellers. In addition, the Sellers have a right to cancel the Option prior to its exercise in the case of price

controls as defined in the Agreement resulting in a decrease of the purchase price.

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Within the framework of the Agreement, the Sellers state their intent to commence the supply of gas to

the Company on July 1, 2013, and undertake to complete the construction of the infrastructure to allow

for gas supply by no later than October 1, 2013. If no natural gas is supplied from the Tamar reservoir by

January 1, 2014 (in this section: “the Effective Date”), the Sellers will pay the Company, from the

Effective Date, agreed compensation of 525 thousand dollars (as sole relief) for each day of delay in the

supply of the gas, subject to their liability limits as per the Agreement, up to a limit of 95 million dollars,

and for the deferral in the gas supply not arising from force majeure (as this term is defined in the

Agreement). If within six (6) months of the Effective Date the gas is not supplied, and in the absence of an

agreement between the parties with respect to an arrangement that will allow the gas to be supplied, the

Company has a right to cancel the Agreement by advance notice of sixty (60) days.

The gas price in the Agreement has been set according to a formula that contains a base price and linkage

that is based mainly on the American Consumer Price Index118

. The base price for 2011 was set to $5.042

per heat unit (MMbtu)119

, which will be linked in each of the years 2012 to 2019 to the U.S. Consumer

Price Index plus 1% (and less 1% for the subsequent years).

The Agreement includes a take or pay mechanism whereby the Company is committed to paying for a

minimum quantity of natural gas, even if is not used, in the volume of 3.5 billion cubic meters per year in

the first five (5) years and thereafter 2.5 billion cubic meters per year, and in the period of the Option, to

the extent implemented, after a second supply pipe is built, the annual quantity shall exceed 5 billion

cubic meters per year (subject to adjustments in accordance with the volume of the sale of gas of the

Tamar Partnership and the magnitude of electricity generation by the Company).

In addition, the Agreement establishes two (2) dates at which each party may demand, in the case of

believing that the purchase price does not properly reflect the price of the purchase of gas in the Israeli

market, adjustment of the purchase price (price re-opener) as follows: eight (8) years after the date of

the commencement of the running of gas from the Tamar Reserve, the parties will discuss (at the request

of either party) adjustment of the purchase price at a rate of up to 25% (increase or decrease); eleven

(11) years after the date of commencing the pumping of gas from the Tamar Reserve, the parties will

discuss (at the request of either) the adjustment of the purchase price by up to 10% (increase or

decrease). If there is no agreement on the rate of the purchase price adjustment as set forth, the issue

will be settled in an arbitration proceeding that will be conducted in accordance with the rules of the

Israel Arbitration Institute if the disputed amount is lower than the amount set forth in the Agreement, or

alternatively, in accordance with the rules of the London Court of International Arbitration if the disputed

amount exceeds the amount set forth in the Agreement. Such an arbitration proceeding shall be

considered as an international arbitration proceeding for the purpose of Israeli law, English law, U.S. laws

and the New York Convention for the Recognition and Enforcement of Foreign Arbitral Awards.

The Agreement is valid until fifteen (15) years from the date of commencement of supply of gas or until

the full contractual supply quantity, whichever is earlier. If until the end of the thirteenth (13th

) year from

the day of signing the Agreement, the Company informs the Sellers that it expects that it will not be able

to consume the full contractual quantity during the fifteen (15) year period, then the Agreement shall be

extended until the earlier of two years more after the fifteen (15) year period and the consumption of the

entire contractual quantity.

The parties will be allowed to conclude the Agreement in certain circumstances (liquidation, insolvency,

assignment of rights to creditors, appointment of a receiver, etc.), by advance written notice of one

hundred twenty (120) days.

The Agreement requires the approval of the Electricity Authority, the Antitrust Commissioner, the

Companies Authority, and if necessary, the Government.

118

U.S. Consumer Price Index for All Urban Consumers (CPI-U) 119

1 BCM = 36,000,000 MMbtu

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As at the date of the prospectus, the said approvals have not yet been received. To the extent that the

approvals are not received by September 30, 2012, the Company has the right to cancel the Agreement.

In addition, in accordance with the provisions of the Agreement, if these approvals are not received

within forty five (45) days of the date of signing the Agreement (that is, by April 29, 2012), the parties will

discuss, within seven (7) days of this time, the chances of receiving the approvals, and soon after that

discussion, the Sellers will be allowed to announce the cancellation of the Agreement. As at the date of

the prospectus, the parties have not discussed the issue of receipt of the approvals.

On April 19, 2012, the Company filed an application for exemption from a binding arrangement for the

Agreement with the Antitrust Authority (in this section: “the Application”). On June 15, 2012, the

Antitrust Authority forwarded its decision on the Application to the Company, whereby it is satisfied that

most of the agreement does not deal with the reduction or prevention of competition and that it has no

binding arrangements that are not necessary for its realization and that there is no agreement that

causes true infringement upon competition in the market. For these reasons, the Antitrust Authority

exempted the agreement pursuant to Section 14 of the Antitrust Law, subject to a list of conditions that

are stated in the decision of the Antitrust Authority, dealing mainly with the splitting of the option

(whose deadline for realization has been deferred from April 2, 2013, to April 15, 2013), according to the

following outline:

(1) The duration of the option period shall be limited from its actual realization date pursuant to the

Agreement, insofar as the Company opts to realize it by no later than December 31, 2019 (“the

Option Period Conclusion Date”).

(2) Through to April 15, 2015, the Company will inform the Tamar Partnership whether it intends to

extend the option period beyond the time set forth in Subsection (1) until the end of the Option

Period, as set forth in the Agreement (“the Option Period Extension”). Insofar as the Company

chooses to extend the Option Period as set forth in this Subsection, the daily, annual and total gas

quantity will remain unchanged.

(3) If the Company has opted not to realize the Option Period Extension, the maximum hourly quantity

will decrease to the maximum hourly quantity set forth in the base transaction, and the daily

quantity will decrease to a quantity that does not exceed the daily quantity set forth in the base

transaction, through to the end of the Agreement Period, and the annual and total quantities in the

Agreement shall be updated accordingly.

(4) In addition, the Antitrust Authority has established within its decision that the remaining terms of the

Agreement will not be modified in any way that worsens the state of the Company, including no

change in the price or payment terms, delivery times and dates, supply quantities, etc., to the

detriment of the Company.

In addition, on June 14, 2012, after holding a public hearing proceeding, discussions in the plenum of the

Electricity Authority, including an oral hearing for the commercial entities (including the Company) and

consumer entities, the Electricity Authority resolved on the matter of the gas agreements between the

Tamar Partnership and the Company (and the Tamar Partnership and the private producers)120

(in this

section: the “Electricity Authority Resolution”). The Electricity Authority Resolution stated that the

Electricity Authority will recognize the costs of the Company for the purchase of the natural gas, subject

to the amendment of the Agreement, in accordance with the terms enumerated below, cumulatively:

(a) The conditions of the Option Transaction in the Company’s agreement will be amended so that the

option included in the Agreement would be split into two. A notice of exercise of the option shall not

be later than April 15, 2013. A first notice of exercise of the option shall be in accordance with the

120

Decision No. 1 of Meeting No. 377, dated June 14, 2012, on the matter of: “Principles for the recognition of costs for agreements

for the purchase of natural gas 2012”.

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existing dates in the current Agreement and no later than April 15, 2013. The date of termination of

this option shall be at the end of 2019.

(b) A possibility shall be given for extending the option for a period after the end of 2019, giving notice

to that effect by the Company until April 15, 2015. The second option termination date shall be the

conclusion date of the Agreement.

(c) The linkage mechanism in the Agreement will be amended to the effect that the surplus cost that

stems from the addition mechanism (in both the Base Agreement and in the Option Period) of an

additional percent per year beyond the Consumer Price Index in the United States, for the first eight

(8) years of the Agreement, and its reduction by one percent each year during the eight (8) years

thereafter (hereinafter: the “Plus Minus One Mechanism”) will be returned to consumers in the

form set forth in Subsection (D) below.

(d) The Plus Minus One Mechanism will be cancelled in the Option Transaction, and in addition to this,

the linkage of the base price in the option to the U.S. Consumer Price Index as indicated in the

Agreement shall be reduced to a maximum linkage rate of 30%, from January 1, 2013 until the end of

the option period, including with respect to its extension.

(e) The Company will be able to increase the gas supply change rate on an annual basis beyond that set

forth in the Agreement, as long as systemically the hourly change rate may be increased in

arrangement with the System Administrator.

(f) The remaining sections of the Agreement shall not change to the detriment of the Company, subject

to the execution of the changes derived from the resolution by the Electricity Authority.

As of the date of the Prospectus, the position of the Tamar Partnership with respect to the changes in the

Agreement that were required in the context of the decisions by the Antitrust Authority and the

Electricity Authority has not yet been obtained, and no discussion has been made in the Company on this

matter.

(D) Importation of liquefied natural gas (LNG)

In order to bridge the period of shortage in natural gas through to the beginning of extraction of gas from

the Tamar fields (to the extent that it is approved and takes effect), and as an solution for the peak

demands and reliability of the gas supply after the extraction begins as well, the Minister gave approval in

February 2011 for the Company to advance an infrastructure project for the purchase of liquefied natural

gas (hereinafter: “LNG”). In accordance with the said resolution of the Minister, Israel Gas Lines Ltd.

(hereinafter: “IGL”), which is a company that is fully owned by the State of Israel, and is to the best of the

Company’s knowledge, the holder of a gas conduction license, it will deploy a buoy approximately 10 km

west of the shore of Hadera, which will be connected to the national gas transmission system, which will

connect to an LNG ship that has the ability to gasify the liquefied natural gas onboard ship and to pump it

into the national transmission system. IGL will also assume the responsibility for the operation of the

buoy. Within the framework of this solution, the Company will lease an LNG vessel with gasification

ability and will purchase the liquefied natural gas from overseas sources that have not yet been

determined. The expected timetable for the commencement of the delivery of LNG is the last quarter of

2012. The price of liquefied natural gas is expected to be based on global demand and supply. The LNG is

traded globally at prices that range, as of the time of the Prospectus, between 11 to 14 U.S. dollars per

mmbtu121

. The estimated cost of leasing and operating the gasifying vessel is approximately 70 million

dollars per year, for a period of five (5) years with two exit points – after two (2) years and after three and

a half (3.5) years, by giving advance notice.

As of the date of the Prospectus, the Company has published a tender for the import and supply of LNG

and has started negotiating with a company for the leasing of a gasifying vessel.

121

British Thermal Units – btu; the price relates to one million btu (mmbtu).

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The information that has been set forth above with respect to the expected schedule for the

commencement of the supply of LNG and the estimated cost constituted forward looking information, as

per its definition in the Securities Law, and is based on information and estimates that the Company

possesses as of the date of the Prospectus, and estimates and forecasts made by third parties. These

expectations and estimates may fail to materialize or may materialize only partially or they may

materialize in a manner that differs materially from what is expected, as a result of factors that do not

depend on it alone, inter alia, the receipt of the required permits and licenses, the completion of

negotiation processes and a commitment with suppliers.

(E) Project for the construction of a natural gas transmission system (herein after: the “Gas Transmission

Project”)

In November 2001, the Company was requested by the Government of Israel to finance, manage and

order the works required for the construction of part of the natural gas transmission system. For this

purpose, in November 2004, an agreement was signed between the State of Israel, the Company and

Israel Gas Lines. Four (4) addenda have been made to this agreement, which constitute an integral part of

it (together: “the Trilateral Agreement”). Disagreements have arisen between the Company, IGL and the

State of Israel, and the parties have filed mutual actions in material amounts, which are being adjudicated

within the framework of arbitration proceedings.

See Note 13B.1 to the Annual Financial Statements for further information.

(F) Natural gas transmission agreement

In June 2006, the Company signed an agreement with IGL, for the transmission of natural gas to the sites

of the Company – Eshkol and Reading sites.

In January 2009, an agreement was signed, replacing the 2006 agreement, which is valid for fifteen (15)

years, that is, until 2024, and it which will apply to all of the sites of the Company that will be connected

to the gas transmission system. Within the framework of the new agreement, the Company has been

granted flexibility on the issue of ordering capacity through a right to divert capacity to a volume of up to

15% of the ordered capacity, and through a right to order short term capacity (for at least a full month).

7.11 Working capital; inventory

As set forth, the Company operates as a single combined, coordinated system, and therefore the working capital is

examined in the terms of the Company as a whole (see Section 18 for details). However, details will be presented

below in respect of the with respect to policy and duties of the Company with respect to the holding of inventories

of fuel that is assigned to the generating segment:

7.11.1 Coal – It is the policy of the Company to keep at each of the power stations inventory that is appropriate for

seven (7) weeks of average consumption, without falling below an inventory that is sufficient for five (5) weeks.

In the event of a break-down in the coal unloading system, coal will be transported from site to site in

accordance with an emergency procedure that the Company has in place. See Section 7.10.6 for details.

7.11.2 Fuel oil – It is the policy of the Company to maintain an inventory of approximately 160-200 thousand tons at

the Orot Rabin and Ashkelon sites, which serve as storage sites, although the regular use of fuel oil at these sites

is decreasing. In the case of an emergency, fuel oil will be transported from these sites to steam driven power

stations. See Section 7.10.7 for details.

7.11.3 Diesel oil – It is the policy of the Company to maintain an inventory of approximately 190 thousand tons, this

inventory including the demand of the Fuel Administration at the Ministry of Energy and Water whereby the

Company is to maintain an emergency inventory of 165 thousand tons. The emergency inventory is classified in

the Financial Statements of the Company as current inventory. The rest of the inventory, approximately 25

thousand tons, is the operational inventory held by the Company. As of the date of the Prospectus, the

committee is examining with the Ministry of Energy and Water and other emergency national economy

agencies the increase of the emergency inventory, but to the best of the Company’s knowledge its work has not

F-93

yet been completed. The diesel inventory is stored in tanks that are located at the sites of the Company and at

the national storage terminals. For details, see Section 7.10.8.

7.11.4 The inventory of liquid fuel has been set quantitatively and the duration of this inventory cannot be determined,

as it depends on the actual generation state that varies by use of other fuels, compared with the use of coal that

is determined by consumption time, as the coal consumption is predictable and fixed, give or take, over time.

7.11.5 The quantity of inventory that is held by the Company is subject to provisional orders of the CEO of the

Company, in accordance with the needs of the Company during emergencies, to the effect that while there is a

shortage in the supply of natural gas, the Company is acting to increase the inventory of diesel oil that is

available to it.

7.12 Restrictions on and supervision of the operations of the Company in the generating segment

The Company has licenses for generating electricity, pursuant to the Electricity Sector Law. See Section 22.1.2 for

details on the validity of the generation licenses of the Company and the manner of their extension. For the

purpose of the generation of electricity, the Company builds and operates units for the generation of electricity

and ancillary facilities that are required for the generation of electricity (power stations, gas turbines and other

means of electricity generation), whose construction and operation are subject to complex, extensive regulations,

which include the receipt of licenses, permits and approvals (including pursuant to the Planning and Construction

Law, the Business Licensing Law and pursuant to environmental protection laws) with which the Company must

comply. The Company must fulfill the conditions of the licenses that it has received, otherwise they will be

cancelled or suspended and/or the Company will be exposed to civil and criminal sanctions for their violation. See

Section 22.1.5.

7.13 Environmental risks and the ways in which they are managed – the generating segment

7.13.1 Environmental hazards and environmental regulation – general

The activity of the Company in the generating segment is exposed to various environmental hazards, which

include the emission of pollutants into the air that include fuel combustion products (inter alia, sulfur dioxide,

nitrogen oxides, particles, carbon dioxide and carbon monoxide – greenhouse gases), the storage and use of

hazardous materials and fuels, the pollution of soil and water sources, use of seawater for cooling, industrial

effluents, asbestos, noise, non-ionizing radiation and more.

Therefore, the generation activity is subject to extensive regulation in the environmental protection field. Over

the course of recent years, the applicable environmental requirements (or those pending legislation) for the

operations of the Company and the supervision and enforcement of those requirements have become stricter.

The Company estimates that this trend is likely to continue and even intensify in the coming years, in

accordance with the awareness and international requirements, inter alia, in accordance with the common

practice in western countries.

The laws that apply to the generating operations of the Company include, inter alia, the Hazard Prevention Law

1961 (hereinafter: the “Hazard Prevention Law”), including personal orders that have been issued thereunder;

the Planning and Construction Law - 1965; the Business Licensing Law - 1968; the Water Law - 1959 and the

regulations that have been promulgated thereunder; the Prevention of Water Pollution from Land Sources Law -

1968 (hereinafter: the “Prevention of Water Pollution from Land Sources Law”); the Hazardous Materials Law -

1993 (hereinafter: the “Hazardous Materials Law”); the Coastal Environment Protection Law - 2004 (hereinafter:

the “Coastal Environment Protection Law”); the Clean Air Law - 2008 (hereinafter: the “Clean Air Law”); the

Prevention of Hazards from Asbestos and Harmful Dust Law - 2011, (hereinafter: the “Prevention of Hazards

from Asbestos and Harmful Dust Law”); the Freedom of Information Law - 1998, including the Freedom of

Information Regulations (Provision of Information on Environmental Protection for Public Inspection) - 2009; the

Pharmacists Regulations (Radioactive Elements and Their Products) - 1980 (hereinafter: the “Pharmacists

Regulations”); the Non-Ionizing Radiation Law - 2006 (hereinafter: the “Non-Ionizing Radiation Law”; the Energy

Sources Law - 1989; and various bylaws (jointly hereinafter: the “Environmental Laws”).

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The Company is studying the ramifications of the Environmental Laws, is acting to prevent or minimize the

environmental risks that may occur during the course of its operations, is preparing for the financial, legal and

operational consequences of the laws and is allocating money in its budgets for the purpose of fulfilling the

provisions of the Environmental Laws applying to it and those that are expected to apply to it.

However, there is no confidence that the costs and commitments within the existing and anticipated

Environmental Laws will not exceed the amounts that have been allocated by the Company for these purposes,

particularly in view of the trend of stricter environmental regulation in recent years and the volume of

investments that is required in order to comply with it. The Company estimates, as of the time of this

Prospectus, and based on the provisions of the Electricity Sector Law, that the material costs that will be

imposed on it as a result of new regulatory requirements in the field of environmental protection will be

covered within the framework of the electricity charge rate. However, the resolution with respect to the

recognition of costs is under the authority of the Electricity Authority.

The assessments of the Company therefore constitute forward looking information, as per its definition in the

Securities Law, which is not under the control of the Company and whose realization is not certain.

The Company assesses, as at the date of this Prospectus, that it is materially in compliance with the material

provisions of the Environmental Laws. The Company possesses the environmental licenses required for its

activity and where missing it is acting to obtain them.

7.13.2 Air

7.13.2.1 The Clean Air Law

The Clean Air Law took effect on January 1, 2011, with the goal of regulating the quality of the air in Israel and

preventing its pollution, and it institutes a stricter regime of regulation of emissions of pollutants into the air

and the values of the presence of airborne pollutants. The law establishes a licensing regime for significant

airborne pollutant emissions sources and prohibits the construction and operation of such an emissions

source without the issuance of a permit in accordance with the law.

In accordance with the transitional provisions in the Clean Air Law, an emissions source that has been duly

operated by the Company prior to the commencement of the law will be allowed to continue to operate even

without an emissions permit through to September 30, 2016, or until a resolution is reached with respect to

an emissions permit, as long as the Company submits an application for an emissions permit in respect of it by

March 1, 2015. For new facilities or significant changes in existing facilities that will be activated until that

time, the Company will have to receive an emissions permit as a condition for their operation.

The Clean Air Regulations (Fees), 2010 requires the payment of a fee for the submission of an application for

an emissions permit or an application for a significant change in operation at an emissions source. The

Company’s assessment is that the total fees that it will be required to pay do not constitute a material

expense.

On June 22, 2010, the Clean Air Regulations (Emissions permits), 2010 were published, prescribing the

requirements for the submission of an application for and the receipt of an emissions permit, inter alia the

presentation of the best available technology for airborne emission abatement from the emissions source.

On May 31, 2011, the Clean Air Regulations (Air Quality Values) (Temporary Order), 2011 were published,

prescribing updated and sometimes stricter values (in relation to values that were established prior to the

publication) for the presence of airborne pollutants. The regulations may affect the planning of future

projects of the Company and the operation of existing facilities.

The Clean Air Law empowers the Ministry for Environmental Protection to establish a fee in respect of the

emission of pollutants into the air that will be imposed on emissions permit holders. As at the date of the

Prospectus, no such fee has been set.

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The Company is studying the economic, legal and operational consequences that stem from the Clean Air Law

and its regulations and has commenced preparations for preparing the applications for the emissions permits

at the sites requiring them.

As far as the Company knows, the Ministry for Environmental Protection intends to exercise its authority

under the Clean Air Law to declare a number of areas in Israel as air pollution stricken areas (mainly the Haifa

Bay, Gush Dan and Jerusalem areas). In view of the first stage of this examination, the Company cannot assess

its consequences at the time of this Prospectus.

7.13.2.2 Conditions with respect to air pollution in personal orders pursuant to the Hazard Prevention Law

Conditions with respect to airborne emissions from the facilities of the Company are being imposed on the

Company inter alia within the framework of personal orders that have been issued under the Hazard

Prevention Law (which were given prior to the effect of the Clean Air Law) and within conditions in a business

license.

7.13.2.3 The Transverse Order

On December 26, 2010, the Minister for Environmental Protection signed a transverse personal order that

applies to all of the existing power stations of the Company. The order prescribes, inter alia, a duty to reduce

emissions at the coal power stations of the Company in a gradual manner until the end of 2016, updated

airborne emission values, a duty of continuous monitoring and installation of monitoring instruments, duties

of tracking, recording and reporting, restrictions with respect to the use of fuels and more.

The order also determines that the coal power stations of the Company are to burn coal with an average

annual sulfur content of 0.43%. The Company has applied to the Ministry for Environmental Protection for a

change in this order, on the grounds that in view of the coal inventories in the global market, it will not be

able to comply with it. In October 2011, the Ministry for Environmental Protection informed the Company

that an extension to the effect of the instruction had been given until the end of 2012 and that the issue will

be reexamined during the latter half of 2012.

See Section 7.13.2.4 for details on the matter of the provisions of the Transverse Order for the use of backup

fuel.

7.13.2.4 Directives with respect to the use of natural gas

As of February 2004, the Company is gradually converting some of its facilities to operation by natural gas,

which significantly reduces the emission of pollutants and greenhouse gases into the air. As at the time of this

Prospectus, the Alon Tavor, Haifa, Hagit, Reading, Eshkol, Tzafit, Gezer and Ramat Hovav sites are connected

to a natural gas supply system and are powered by it in accordance with the availability of the gas and the

directives for order of operation In accordance with that which has been set forth below (and units 1-4 at the

Orot Rabin power station are expected to be converted to natural gas power gradually until late 2016).

The Transverse Order prescribes various provisions for circumstances in which the Company will be allowed

to burn backup fuel (fuel oil and diesel oil) in the natural gas powered generation array, which include a fault

in the natural gas extraction, conduction or supply system.

The need for using backup fuel in a number of power stations of the Company increased significantly from

2011 due, inter alia, to the shortage in the supply of natural gas from Egypt. Accordingly, from time to time,

individual temporary approvals are issued by the Ministry for Environmental Protection for using backup fuel.

Due to the continued shortage of natural gas and the application of the Company on the issue, in April 2012

the Director General of the Ministry for environmental protection established the current procedure for use

of backup fuel at the time of a fault or shortage in the supply of natural gas to the electricity system. The

manner of operation of the generation units by the system management unit of the Company is conducted,

inter alia, in accordance with this procedure.

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7.13.2.5 Within the framework of the Government’s resolution dated May 13, 2012122

, the Government decided, in

view of the expected shortage of electricity during the summer of 2012, inter alia, to direct the Minister for

Environmental Protection to act to the extent required by July 1, 2012, to allow for examination of the

installation and operation of portable gas turbines with an output exceeding 20 megawatts, to be used in

backup format, and to remove the period of preparation for the shortage and subject to stipulations

prescribed in the resolution, the restrictions in the number of hours prescribed by his Ministry with respect to

the operation of electricity generation units by backup fuel during a shortage of natural gas. See Section 6.8

for further information on the Government resolution dated May 13, 2012.

Following the Government resolution as set forth above, on June 3, 2012, approval was received from the

Ministry for Environmental Protection to operate the power stations of the Company using backup fuel at a

time of shortage in natural gas during the summer of 2012 (June through October), in accordance with the

order of operation that was prescribed in the procedure set forth and including operation of the Reading

Power Station using fuel oil and the operation of the backup units in this period for unlimited hours at the

discretion of the System Administrator.

7.13.2.6 Additional orders

At the Haifa, Reading and Eshkol sites, individual personal orders that include various instructions with

respect to the reduction and prevention of airborne pollutant emissions, monitoring and sampling, manners

of operation and more apply.

7.13.2.7 Emission abatement plan

In July 2011, the Ministry for Environmental Protection approved, under certain conditions, the airborne

emission abatement plan that the Company submitted whereby devices for cleaning emission gases would be

installed at the Company’s coal power stations gradually until the end of 2016.

7.13.2.8 Hearing – The Orot Rabin Station

In January 2011, the CEO of the Company was summoned for a hearing in the Haifa District of the Ministry for

Environmental Protection against the background of a claim that the Company had failed to comply with the

personal order for the Orot Rabin Power Station with respect to the signing of contracts with emission gas

cleaning facility suppliers. The Company showed the Ministry the reasons for which it was unable to comply

with the provisions of the order, which lie in petitions that were filed against the tender proceeding that the

Company conducted for the purchase of relevant equipment and its efforts to keep to the schedule. in

accordance with that which has been set forth above. After the said hearing, the Company filed the emission

abatement plan, which includes a number of updated dates for the installation of devices for cleaning exhaust

gases at the Orot Rabin power station. As set forth, this updated plan has been approved by the Ministry for

Environmental Protection conditionally. In addition, in December 2011, additional conditions were vested in

the business license of the station by the Ministry for Environmental Protection that cancel the personal order

of units 5 and 6 at the Orot Rabin power station and update the dates for taking various actions for reducing

airborne emissions in accordance with the emissions abatement plan.

7.13.2.9 Airborne emissions of coal dust fly ash

In March 2012, the Ministry for Environmental Protection sent the Company additional conditions to the

business license of the Orot Rabin Power Station with respect to the prevention of diffuse emissions of coal

dust and fly ash from the power station, which prescribes various instructions with respect to operational and

maintenance actions that the Company must take in all of the activity segments of the coal and fly ash

systems to reduce and prevent dust emissions.

Following the request of the Company, some of the conditions of the business license for the Orot Rabin

Power Station have been amended. These conditions have not yet been officially forwarded from the local

122

See http://www.pmo.gov.il/PMO/Secretarial/Govmes/2012/05/govmes130512.htm; Government Resolution No. 4623 dated May

13, 2012.

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authority to the Company. The Company intends to apply to the Ministry for Environmental Protection with a

request for clarification concerning these new conditions and it is acting to apply those conditions that have

taken effect.

7.13.2.10 Energy saving

The Company is subject in its generation activity, inter alia, to the Energy Sources Law - 1989 and various

regulations promulgated thereunder that deal with energy saving and Government resolutions that are

published from time to time with respect to the policy for energy saving and greenhouse gas emissions

abatement. The Company is acting to comply with this regulation and is studying its consequences of it and of

new regulation initiatives in the field. The Company estimates that this regulation does not affect the

generation activity of the Company materially.

7.13.3 Land and water

The facilities of the Company store and contain hazardous materials, infrastructures and facilities that contain

fuels and hazardous materials. The Company is working on the prevention and treatment of soil and water

pollution from these materials, infrastructures and facilities.

During the dismantlement of fuel infrastructures, a need may arise to perform polluted soil rehabilitation works.

These works may involve material costs for the Company. This assessment constitutes forward looking

information, as per its definition in the Securities Law, as the treatment of contaminated soils varies, depending

on the contaminated soil volume and the contamination type, the cost per treatment per cubic meter of

contaminated soil being at estimated at hundreds to a few thousand shekels and the magnitude possibly

reaching tens of thousands of cubic meters per site.

In recent years, the Company has been holding discussions with the Ministry for Environmental Protection with

respect to the draft of the conditions in business licenses with respect to fuel tanks that the Company possesses,

which include a requirement for the sealing of containment enclosures. If the draft conditions on the sealing of

fuel tank containment enclosure mature into binding conditions, the assessment of the Company that they will

impose on it costs amounting to millions of dollars. This assessment is forward looking information as per its

definition in the Securities Law, as the execution of the sealing in a containment enclosure of an existing tank,

including the temporary dismantlement of infrastructures, lining and restoring operation, is estimated at

approximately a million NIS.

7.13.4 Legislative bill for Prevention of Soil Pollution and the Rehabilitation of Polluted Soil Law - 2011

In August 2011, the first reading of a legislative bill for the Prevention of Soil Pollution and the Rehabilitation of

Polluted Soil Law - 2011, was approved, which prescribes a general prohibition against causing soil pollution and

which imposes duties on owners and possessors of land and possessors of hazardous materials to prevent soil

pollution and to act to rehabilitate polluted soils. The bill is being discussed, to the best of the Company’s

knowledge, by the Knesset Interior and Environmental Protection Committee for the purpose of its preparation

for the second and third readings. The draft legislation may impose duties on the Company for the execution of

soil surveys at sites at which hazardous materials are used and in accordance with the survey findings,

additional duties to treat identified pollution and to rehabilitate soil will be imposed. In preparation for the

second and third reading of the bill in the Knesset in May 2012, an amended draft of the bill was distributed in

May 2012. The Company is studying the wording of the new draft and implications of this bill for it.

7.13.5 Effluents

During the course of the generation of electricity, industrial effluents are formed in the generating segment

facilities. The industrial effluents that are formed from the power stations are drained into site storage facilities

and are removed to authorized sites, while industrial effluents at coastal power stations are treated in

specialized purification facilities. As far as possible, the purified effluents are exploited for reuse for the

purposes of the station while other treated wastewater is dumped into the sea in accordance with the offshore

discharge permits that are given to each site pursuant to the Prevention of Sea Pollution from Land Sources

Law.

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7.13.6 Hazardous materials

The Company holds, uses and stores hazardous materials at the power station sites. The Company holds poison

permits as required by law for the purpose of dealing with hazardous materials and takes the actions for the

purpose of compliance with the conditions of the permits.

7.13.7 The Occupational Safety Regulations

On October 29, 2011, the Occupational Safety Regulations (Environmental Monitoring and Biological Monitoring

of Workers Handling Noxious Agents), 2011, replacing the Organization for the Supervision of Labor

(Environmental Monitoring and Biological Monitoring of Workers Handling Noxious Agents), 1990, took effect.

The new regulations include, inter alia, the duty to conduct a preliminary survey of the facilities of the Company

in which workers are exposed to work with noxious agents, for the purpose of establishing an occupational

environmental monitoring plan. In addition, the Regulations state updated permitted exposure levels for a list of

substances and a duty of the employer at the workplace using a noxious agent (as defined in the Regulations) to

act to reduce the risk of exposure to this agent to the extent possible, including by installation of ventilation and

suction measures and fume chambers. The professional personnel at the Company are examining the aspects

that are relevant to the Company and are acting to adopt them.

7.13.8 Preparations for hazardous material events – plant files

The Business Licensing Regulations (Hazardous Plants), 1993, establish that a hazardous plant, as this has been

defined in the regulations, is required to prepare a plant file that describes the preparations for the prevention

and handling of a hazardous material event as a result of an operational break-down, accident, terrorist event or

force majeure. All power station sites have had plant files prepared for them, which are updated from time to

time as necessary, particularly in the light of the changes in the generation units that have transitioned to

natural gas power. Within the framework of the natural gas power licensing, these plant files are scrutinized and

approved by the Natural Gas Authority in the Ministry of Energy and Water. All power stations conduct

exercises of the emergency teams and the response to handling a hazardous material incident in conjunction

with the relevant authorities.

7.13.9 Asbestos

In August 2011, the Asbestos Hazard Prevention Law, whose purpose is to minimize and deal with hazards

caused by asbestos and noxious dust, took effect with respect to the facilities of the Company. Inter alia, the law

establishes that all brittle asbestos that has been installed for the purpose of thermal insulation throughout the

plants of the facilities is to be removed and buried within ten (10) years from its entry into force, a survey is to

be conducted for locating and mapping any existing use of brittle asbestos in certain facilities and prevent

situations that may release asbestos fibers into the air.

In some of the facilities of the Company, asbestos cement and brittle asbestos have been used in the past. The

Company has established inter-divisional teams to prepare for compliance with the provisions of the law for

these two (2) asbestos types, including for the handling of projects for the removal of brittle asbestos from the

power stations. As at the date of the Prospectus, the Company is studying the implications that may stem from

this law over its operations, and is acting to get the permits required for asbestos works at its sites.

7.13.10 Planning and construction

Within the framework of the generation activity, the Company is subject to the provisions of planning and

construction laws. The power stations of the Company are subject to various environmental provisions that are

set forth in outline plans and in construction permits. Within the framework of the planning processes for the

design of new power stations or the expansion of current stations, the Company is sometimes required to

conduct environmental effect surveys or environmental expert opinions, in accordance with rules and directives

that are set forth by the planning and environmental protection authorities.

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7.13.10.1 Legislative bill for the Planning and Construction Law (Environment and Health Impact Reviews), 2011

On March 30, 2011, the legislative bill for the Planning and Construction Law (Environment and Health Effect

Reviews), 2011 was laid before the Knesset, whose main point is to anchor a duty to prepare a health impact

review wherever an environment impact review is required to be submitted. To the best of the Company’s

knowledge, as at the time of this Prospectus, the legislative bill is in a very early stage and as yet has not even

passed its preliminary reading. In view of this early stage, the Company cannot assess whether the legislative

bill, assuming it is approved, will impose material expenses on it.

7.13.10.2 Reading Power Station

Since 1996, a National (partial) Outline Plan, NOP 3/10/A for regulating, inter alia, the operations at the

Reading site of the Company in Tel Aviv has been advanced. According to the text of the plan, the power

station at the site will be closed down in 2020, and the Company will be required to relocate certain facilities

and make environmental investments at the site, unless another partial national outline plan is approved.

Public committees that have been approved by the Minister and the Minister of the Interior recommend

approving another partial national outline plan, to the effect that the site will continue to have a power

station operating from it. The proposed plan was forwarded for the comments of the district planning and

construction committees and for public objections and are pending approval by the National Planning and

Construction Council, and if approved will be forwarded for the approval of the Government. If the plan is

approved in the proposed version, its provisions will impose on the Company significant expenses, in an

amount that is estimated at tens of millions of dollars. Within a Government resolution dated May 13,

2012123

, the Government directed the Minister for environmental protection to act to remove the restrictions

that were prescribed by his Ministry with respect to the operation of the various generation units, including

Reading, using backup fuel, during a shortage of natural gas in the period of preparation for a shortage as

defined in the Government resolution (dated June 1, 2012 to December 31, 2012), as long as the electricity

generation units operate in accordance with the order of operation set by the Ministry for Environmental

Protection (after consulting the Ministry of Energy and Water) with the goal of minimizing the exposure of the

population to air pollution caused by increased use of backup fuel, and removing the restrictions on the

permitted number of hours of operation for the backup units and diesel generators during a shortage. On

June 3, 2012, approval was obtained from the Ministry for Environmental Protection to operate the

Company’s power stations using backup fuel at a time of shortage in natural gas during the summer of 2012

(June through October), including operating the Reading Power Station with fuel oil. See Section 6.8 for

further information on the resolution of the Government dated May 13, 2012.

7.13.10.3 Preservation of the coastal environment

The Coastal Environment Preservation Law prohibits, inter alia, harm to the coastal environment as per its

definition in the law (a strip of 300 meters from the shoreline), unless a duly issued permit to do so is issued.

Within the framework of this law, the Coastal Environment Preservation Committee was established, and is

required to approve various plans within the coastal environment. Within the framework of the law, the

Company is sometimes charged with requirements with respect to and restrictions relating to Development

Plans of coastal power stations.

A significant portion of the manufacturing facilities of the Company are along the coast of the Mediterranean

Sea, and therefore the Company is preparing both for the prevention of the pollution of the sea with salt and

for protecting its facilities from sea pollution from an external source.

In March 2012, the Ministry for Environmental Protection disseminated for the comments of the Government

ministries the memorandum of the Preparedness and Response to Sea and Coastal Environment Oil Pollution

Incidents Law - 2012. The purpose of this legal memorandum is to implement the ORPC instructions, inter

alia, by requiring the various entities operating offshore or near the shore to prepare plans for coping and

123

Government Resolution No. 4623: “Measures to cope with the anticipated shortage of electricity”, dated May 13, 2012.

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dealing with incidents of sea pollution by oil and their consequences. The Company is studying the text of the

memorandum of the law and its possible consequences over its activity.

7.13.10.4 Fly ash

Within the framework of the generation of electricity at coal power stations – Orot Rabin and Rothenberg, fly

ash is created. Since 1998, the quantity of fly ash formed has been sold by the Company for use in the

construction and infrastructure industries and agriculture.

In June 2008, the Radiation Supervisor at the Ministry for Environmental Protection announced that he

considered fly ash to be radioactive waste. In July 2008, the Company submitted an objection to this

resolution, inter alia claiming that this classification had no scientific basis, and based on directions and

regulation of the issue in western countries and the International Atomic Energy Agency (IAEA). Further to the

objection of the Company, the Assistant to the Director General of the Ministry of Environmental Protection

announced that the Ministry itself was interested in optimum, maximum use of fly ash, under supervision

with respect to the content of radioactive materials in the construction products containing fly ash.

In January 2010, Standard SI 0098 “Content of Natural Radioactive Elements in Construction Products”, which

establishes that construction products in Israel, including those containing fly ash may not be manufactured

or distributed unless they have been inspected and found to comply with the standard, took effect. As far as

the Company knows, construction products containing coal ash from the power stations of the Company are

inspected in accordance with the requirements of the standard.

The supply of coal ash for the range of uses is continuing unhindered and as far as the Company knows, it has

not been affected by the announcement of the Radiation Supervisor at the Ministry for Environmental

Protection and by the publication of the standard, and is not likely to be harmed in the future.

This assessment constitutes forward looking information, as per its definition in the Securities Law, as based

on the situation as at the time of the Prospectus, considering that there will be no changes or tightening of

requirements, it may be assumed that the situation will remain the same and the fly ash supply for the range

of applications shall remain unhindered.

7.13.10.5 Business Licensing

The activity of the Company is subject to the Business Licensing Law and the regulations thereunder. Most of

the power stations of the Company operate pursuant to business licenses that have been given permanently

and ancillary conditions that are updated or renewed from time to time. These were intended to regulate,

inter alia, the operation of the station with the goal of reducing or preventing environmental risks and

hazards. The Company is acting to regulate the business licenses for the remaining generation sites and for

other licensable items in accordance with the provisions of the law and the requirements of the authorities,

the regulation process for some of them being at advanced approval stages. The operation of the sites of the

Company without a business license constitutes a violation of the Business Licensing Law and may lead to the

termination of the operations of the business. See Section 22.9 for further information on the Business

Licensing Law and the state of licensing of the various licensable items at the Company.

7.13.10.6 Overarching conditions for a business license for combined cycle gas turbine stations

In March 2009 the Company received from the Ministry for Environmental Protection a draft of overarching

conditions for issuing of a business license for combined cycle gas turbine power stations. The terms of the

draft include operational instructions and instructions with respect to the execution of tests and monitoring

operations. The wording of the draft is being discussed with the Ministry for Environmental Protection. The

assessment of the Company is that if the existing text of the draft is adopted, there may be economic and

other implications for the operations at some of the sites and facilities of the Company. As the draft

conditions are at an early stage to the best of the Company’s knowledge, the Company cannot assess whether

they impose material consequences for it.

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7.13.10.7 Integrative licensing

In September 2011, the Ministry for Environmental Protection published a draft document with respect to the

adoption of a policy for integrative licensing in Israel for major plants that have complex ramifications on the

environment, as well as guidelines for the provision of information for the purpose of this licensing

proceeding.

Integrative licensing, in accordance with that which has been set forth in the European IPPC directive

(Integrated Pollution Prevention and Control Directive) is intended to examine in an integrative manner the

environmental ramifications of the plant on the environment in all aspects (effluents, air, soil, etc.) and

accordingly to set individual conditions for each plant, considering its unique conditions and the integration of

its various environmental impacts.

A draft of the document that has been published includes a general outline of the information that will be

requested within the framework of the integrative licensing process, including with respect to the submission

of emission abatement plans and information with respect to plant Development Plans. The mechanism will

require reorganization and the addition of information and surveys that are delivered to the Ministry for

Environmental Protection for the purpose of licensing of the sites of the Company. At this stage, it is still not

possible to assess when the draft document will be adopted and become binding or the consequences that

will stem from the adoption of the policy set forth by the Ministry for Environmental Protection.

7.13.10.8 PCB

The Company has removed all transformers and capacitors containing PCB (polychlorinated biphenyls, a liquid

that has high insulation and flame retardant properties compared to mineral oil; a carcinogenic substance)

from its power stations and other outside facilities to the waste site at Ramat Hovav.

7.13.10.9 Miscellaneous

(A) Socio-environmental reporting duty – the legislative bill for the Government Companies Law - the

legislative bill for the Government Companies Law (Amendment – Social-Environmental Reporting Duty),

2011 was placed on the agenda of the Knesset in May 2011 and is intended to lead to the amendment to

the Government Companies Law, in a manner that will require Government companies to report the

socio-environmental consequences of their activity in accordance with the GRI (Global Reporting

Initiative) model. The Company is studying the text and possible consequences of the bill.

(B) In April 2012, the Environmental Protection Law (Emissions and Transfers to the Environment –

Obligation of Reporting and Register) 2012 was published, imposing a reporting duty with respect to

emissions and transfers of pollutants and waste to the environment. This is, among other things, for

creating an emission register, which will be made available for public inspection. The emission register

will be made out and managed by the Ministry for Environmental Protection. As at the date of the

Prospectus, the Company is studying the law and its practical and financial consequences for its

operations.

7.13.11 Material events or matters with respect to environmental protection

As at the date of the Prospectus, to the best of the Company’s knowledge, it is not exposed to material events

or matters with respect to environmental protection in the generating segment unless these have been stated

above.

7.13.12 Material legal or administrative proceedings with respect to environmental protection

Various legal proceedings, criminal and civil alike, have been filed against the Company and directors thereof

with respect to the generating segment, on grounds of violation of environmental laws.

The criminal prosecutions relate primarily to seawater and air pollution, and those whose adjudication is over

did not involve material fines for the Company or its directors. See Note 24 B.2 to the Annual Financial

Statements.

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(A) Project D

In June 2008, two petitions were filed to the High Court of Justice against the planning proceedings of the

coal power station in Ashkelon (hereinafter: “Project D”), that were held at the National Infrastructures

Committee by the Adam Teva v’Din Association [Israel Union for Environmental Defense] and by the Green

Party. In November 2009 the petitions were struck within the framework of a hearing of them that was held

and following the recommendation of the Court to the petitioners to withdraw their petitions, but it was

stated that the petitioners reserved the right to apply to the Court at the end of the planning move.

In September 2009, the Adam Teva v’Din Association and the Green Party filed a petition with the High

Court of Justice against the decision to dismiss an appeal of the Green Party against the resolution of the

Coastal Environmental Protection Committee to approve the advancement of the project. To the best of the

Company’s knowledge, as at the date of the Prospectus, this petition is pending. The Company is not a party

to the petition.

In December 2010, the Company was charged with a new Development Plan by the Minister, constituting

an amendment to the original plan for which the petitions that have been set forth above were filed.

Pursuant to the new plan, the power station will be powered by natural gas as its primary fuel, in a manner

that will minimize the emission of pollutants and greenhouse gases and by coal as a backup fuel only (“dual

fuel station”). It was also agreed between the Ministry of the Interior, the Ministry for Environmental

Protection and the Ministry of Energy and Water that the future planning proceeding would be held at the

National Planning and Construction Council and not at the National Infrastructures Council. See Section 7.7

for details on the Development Plan. See Section 7.7.4 for details on Project D.

7.13.13 Company policy in environmental risk management

The Company generates and supplies electricity in Israel while taking measures to protect the environment and

reduce environmental hazards, along the electricity chain (generation, transmission, transformation and

distribution). The Electricity Sector was developed while constantly balancing various needs, including inter alia

the quality of electricity, reliability of supply, costs to the national economy and environmental protection

considerations. The Company considers itself to be responsible as being responsible and committed in taking

steps to protect the environment and reduce environmental hazards throughout the electricity chain.

The Company is operating in accordance with the an environmental strategic policy and vision to protect the

environment out of responsibility for society and the environment, with a long term, prospective sustaining

view, for minimization of the environmental consequences that stem from its activity and for leadership in the

field of hazard prevention and environmental effect abatement.

The principles of the economic policy of the Company include the integration of environmental considerations

throughout its fields of activity, including in decision making processes; design and operation of facilities while

paying attention to ongoing reduction of environmental effects while considering the principles of sustainable

development, while adopting the best proven and economical technologies; adoption of proven, advanced

environmental criteria, even in the absence of relevant laws and regulations; intelligent use of raw materials

and natural resources; the reduction and recycling of waste and byproducts; integration of landscape, regional

and environmental considerations in the design of new facilities and maintenance of existing ones; the holding

of an open, transparent dialog with the public, with regard to plans that have environmental consequences; the

reduction of greenhouse gas emissions, the expansion of the use of environmentally friendly fuels and energy

sources and the encouragement of electricity saving; joint activity with environmentalist, state, public and

international entities, including participation in environmental studies, in the development and initiation of

advanced technologies and adoption of environmental values in the organizational culture, increasing the

environmental awareness and commitment of the employees of the Company and integration of environmental

issues into its activity in the community.

As part of the risk management policy of the Company, the Company is operating to reduce the environmental

consequences of its activity in accordance with the provisions of the law and proven, common environmental

criteria in the field. Among its other actions in this field, are: construction of facilities for pollutant emission

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abatement and transition to the use of natural gas, to the extent that it is available, regular monitoring and

sampling of its environmental performance, reduction of the use of potable water, adoption of a policy based

on the principle of preventive caution with respect to magnetic fields at the Company’s facilities, adoption of

energy saving processes, waste management, reuse of byproducts, instructing of employees in the fields of

environmental protection and sustainability and more.

The Company regularly tracks proceedings of environmental legislation with the goal of studying its

consequences.

7.13.14 Environmental costs and investments of the Company in environmental protection

A breakdown of the investments of the Company in environmental protection in the generating segment, over

the three (3) years that preceded the Prospectus and in the first quarter of 2012 and 2011, is as follows:

Three months ended on March 31

(adjusted to NIS of March 2012)

Twelve months ended on December 31

(adjusted to NIS of March 2012)

Twelve months ended on December 31

(adjusted to NIS of December 2011)

NIS million, current prices

2011 2012 2009 2010 2011 2009 2010 2011

Total investment in environmental protection facilities

Approx. 84

Approx. 120

Approx. 122

Approx. 201

Approx. 495

Approx. 122

Approx. 200

Approx. 493

Current costs (without depreciation)

Approx. 18

Approx. 23

Approx. 72

Approx. 73

Approx. 74

Approx. 72

Approx. 73

Approx. 74

(A) Investments during 2011

In 2011, the Company invested approximately NIS 495 million adjusted to the NIS of December 2011, in

environmental protection aspects in the generating segment (in addition to approximately NIS 7 million in

special products) (approximately NIS 495 million adjusted to the NIS of March 2012), inter alia, in the

installation of air emission abatement measures at the Orot Rabin Station (including, inter alia, “primary

devices” and removers).

In addition to the investments that have been set forth above, the Company spent in 2011 within the

framework of costs of operation of the power stations and ancillary expenses to fuels, approximately NIS 83

million (adjusted to New Israeli Shekels for December 2011 and March 2012) for compliance with

requirements stemming from environmental protection. The Company estimates that the environmental

costs that the Company bore in 2011 were invested mostly in future prevention and reduction of

environmental damage and the rest was invested in environmental repair and restoration.

Most if not all of the increase in investments in 2011 relative to 2010, by the amount of some NIS 300

million, results from the setup of pollutant reduction facilities at the Orot Rabin and Rothenberg sites,

which comes to a total of approximately NIS 329 million.

In 2011, the absolute majority of investments (approximately 98%) was with respect to projects, the setup

of which has not yet been completed.

(B) Allocation for 2012

The Company is allocating in its budgets money for compliance with environmental conditions and laws. For

2012, the Company allocated within its current operation and development budgets a total of

approximately NIS 1,137 million (in current shekels) for compliance with environmental protection

requirements (of which approximately NIS 80 million, in current shekels, was within the operation and fuel

budgets). The increase in the budget over the years originates from the emission abatement project in

Hadera, which started in 2012. Approximately 97% of the investment budget which concerns environmental

quality is intended for emissions abatement, in accordance with that which has been set forth below.

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(C) Emission abatement budget

The data for emission abatement for 2012 is approximately NIS 1,042 million (in current shekels).

Within the framework of the development budget, the Company has allocated an amount of approximately

NIS 5,309 million (initial estimate without interest) (in current shekels) for abatement of airborne emissions

for the years 2013-1026, inter alia for the purpose of installation of airborne pollutant emission abatement

devices from the Orot Rabin and Rothenberg sites (“primary devices”, removers and construction of

catalytic devices).

In February 2011, the Company executed an agreement with Babcok Noel GmbH for the purchase of

emission abatement systems in some of the generation units at the Rabin and Rothenberg Power Stations.

The total amount that the Company committed to pay within the framework of this agreement is

substantial. Differences of opinion between the parties with regard to the manner of implementation of the

agreement that stood at approximately 40 million euro have ended recently.

The financial figures are based on past experience of the Company and the forecast of the Company that is

based on the degree of environmental impact caused by the current generation activity of the Company

and instructions with respect to environmental protection in their current form.

The estimates of the management of the Company with respect to the expected scope of investments in the

field of environmental protection is forward looking information, as per its definition in the Securities Law,

which is based on the Company’s budget and work plans. The estimates of the Company with respect to the

expected volume of investments in the environmental protection field may fail to materialize or materialize

partially or differently than estimated, inter alia due to factors that are not under the control of the

Company, including a change in the regulatory requirements applying to the Company and other events,

including those that stem from the lateralization of risk factors of the Company.

7.14 Material agreements

The agreements that have been set forth below are material agreements that are outside of the ordinary course

of business of the Company, which have not been set forth in other sections of this chapter.

7.14.1 Transactions that involve the supply or conduction of natural gas

With respect to the supply of natural gas to the Company and the conduction thereof, a number of transactions

have been made with the State and with government companies, including:

(A) Contract for construction of a natural gas conduction system – in November 2004, the Company signed a

contract for the funding, management and ordering of the works that are required for the construction of

part of the system for natural gas conduction, with the State and with Israel Gas Lines Ltd. See Sections

7.10.9.2 (E) and 24.1.2 for details. As of December 31, 2011, and December 31, 2010, the long term debt

balance, exclusive of current maturities, of this project, adjusted to the NIS of December 2011, is NIS 952

thousand and 951 thousand, respectively (NIS 956 thousand and NIS 955 thousand, respectively, adjusted

to the NIS of March 2012). For March 31, 2012, and March 31, 2011, the long term debt balance in this

project stands at NIS 927 thousand and 900 thousand, respectively.

(B) Contracts for natural gas conduction – see Section 7.10.9.2 (F).

7.15 Legal proceedings

7.15.1 In May 2008, the Director General of the Companies Authority was appointed as an arbitrator in the dispute

between the Company on the one side and IGL and the State on the other, following a number of mutual claims

between the Company and the State and IGL in the amount of approximately 30 million dollars. As at the date

of the Prospectus, the dispute between the parties is still pending; however, contacts are ongoing between the

Company and IGL in an attempt to settle the dispute. See Note 13G to the Annual Financial Statements for

details.

F-105

With respect to other pending legal proceedings against the State, including proceedings for the generation

segment, see Note 24 B to the Annual Financial Statements and Section 24.

8. The transmission and transformation segment

8.1 General information on the transmission and transformation segment

The electricity transmission and transformation activity is conducted under a license that the Company has

received “for transmission, distribution, supply, sale and trade of electricity”. This license, and all activities

involved therein, was extended, as set forth, along with other licenses that the Company possesses, until January

1, 2013.

The Company has no separate license for activity in the transmission and transformation segment and the activity

that is being conducted in accordance with the text of the consolidated license above (which in accordance with

that which has been set forth above related to a number of activities).

Within the framework of this field of activity, the vast majority of electricity that is generated, as set forth by the

Company, and to a far lesser extent by private electricity producers, is transferred by the Company via its

transmission grid. The transmission grid is deployed throughout the State of Israel and the territories that have

been subject to its rule since June 1967 (East Jerusalem, the West Bank and Gaza) (in this section, for the sake of

convenience only, “the country”). The transmission grid consists of extra high voltage lines (400 kV) and a high

voltage grid (161 kV), through which electrical energy is transmitted from the generation units to the switching

stations (stations of 400 kV voltage) and to the major substations (stations of 161 kV voltage) and from the

switching stations and the major substations to substations that are built nationwide. At the substations of the

Company, transformation activity is performed, changing the electricity voltage levels from extra high or high

voltage and from high to medium or low voltage. The electricity transmission at extra high voltage facilitates the

transfer of energy between the power stations generating the energy and the transmission segment at low energy

losses. After the transformation of the electricity to medium voltage, the electricity is transferred to end users

through the distribution system. See Section 9 for details on the distribution segment.

The Company has two (2) types of substations: (1) permanent; and (2) temporary, which are built on land that is

not usually zoned for the construction of a permanent substation, until the construction of a permanent

substation in the area, for a period of five (5) to ten (10) years. In addition, there are private substations that are

owned by a consumer or producer of high voltage.

See Section 22.1 for information with respect to the management of the system as described in the Electricity

Sector Law.

8.1.1 Structure of the field of activity of changes occurring in it

In accordance with that which has been set forth above, the activity of the Company in this field of activity

includes activity of transmission of electric energy that is generated at the various generation units of the

Company and by private electricity producers to the switching stations and from there to the substations

deployed throughout Israel. As of the date of the Prospectus, the Company is responsible for transmission of

electric energy, in addition to consumers in the State of Israel, to East Jerusalem, to the West Bank and to Gaza,

as well. Some of the customers of the Company are high voltage customers, which include primarily major

consumers, such as industrial plants, the Mekorot Water Company and others (see Section 9).

8.1.2 Restrictions, legislation, regulation and special constraints applying to the general field of activity

The Company estimates that the activity of the Company in the transmission and transformation segment, like

its other fields of activity, is subject to legislative restrictions, such as those which have been set forth in the

provisions of the Electricity Sector Law, in the Government Companies Law and in the Book of Criteria Published

by the Electricity Authority and to constraints that are related to licensing issues and requirements for permits

from various authorities and government ministries such as the Electricity Authority, the Companies Authority,

the Ministry of Energy and Water and the Ministry for Environmental Protection, to a possible structural change

F-106

and to emergency and Development Plans in the Electricity Sector. See Section 22 for details on restrictions,

legislation, regulation and special constraints applying to all of the activity of the Company.

8.1.3 The electricity charge rate in the transmission and distribution segments

8.1.3.1 The current electricity charge rate

The electricity charge rate for the transmission and distribution segments was set in accordance with the

resolution of the Electricity Authority dated July 1, 2002 on the issue of “the electricity charge rates and the

Criteria for 2002-2000 and their manner of update”124

(hereinafter: the “2002 Charge Rate Basis Book”),

which took effect on July 5, 2002. The 2002 Charge Rate Basis Book stated that if until December 31, 2005 no

new charge rates would be set with respect to January 1, 2006 onward, then the resolutions of the Electricity

Authority would be valid until the date of setting new charge rate bases. As of the date of the Prospectus, the

Electricity Authority has not yet set new charge rate bases for the transmission and distribution segments, but

for the generation segment only, meaning that the charge rate basis for 2002 also applies to the transmission

and distribution segments.

(A) Manner of determining and updating the charge rate

See Sections 7.1.3.2 and 8.1.3 for details on the manner of determining and updating the electricity

charge rate.

(B) Main components

(1) Recognized active assets and depreciation

(A) The asset basis

The asset basis in the transmission and distribution segments was calculated based on the

average net active fixed data in 2000.

(B) Depreciation

The recognized depreciation costs were based on the depreciation costs in the books of the

Company in the year 2000.

(2) Financing costs (return on assets)

Like the new charge rate basis for the generation segment, the calculation of the recognized return

on its assets is derived from three (3) variables: leverage level, return on equity capital and return on

foreign capital. The recognized normative leverage ratio in the charge rate and the rate of return on

foreign capital are in accordance with the new generation charge rate basis book – see Section 8.1.3.

The rate of return on equity capital is in accordance with the resolution of the Electricity Authority

dated July 1, 2002, and stands at 5.5% with respect to the transmission segment and 6.2% with

respect to the medium voltage and low voltage distribution segment. In accordance with the

resolution of the Electricity Authority, the rates of return set forth above for equity capital reflect

different risk levels that are expected in the various segments of activity, which arise, inter alia, from

the market risks of each segment.

The preexisting hedging mechanism in accordance with the 2002 charge rate book has been

cancelled, and a new hedging mechanism has been applied to all of the activity segments of the

Company. See Section 7.1.3.2 for details on the rate of return on foreign capital and the hedging

mechanism.

124

Resolution No. 1 of Meeting No. 110, dated July 1, 2002, on “electricity charge rates and criteria for 2002-2005 and their manner of

update”.

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(3) Costs of operation

The recognized costs of operation for the transmission and distribution segments were based on the

operation costs listed in the books of the Company based on 2000, while making certain

adjustments.

(4) Pension costs

Within the operation costs in the charge rate, as prescribed in the charge rate bases in 2002, the

wage and pension costs of the employees of the Company are recognized. The Electricity Authority

has also recognized changes in the assessment of the actuarial debt for pension for second

generation employees. The distribution by segments was made by the wage distribution.

(5) Depreciation coefficients

Depreciation coefficients per sold kWh have been set within the charge rate formulas, which

represent the expectation of cost saving in the Company and that are supposed to reflect economy

of scale at cumulative annual rates. As of the date of the Prospectus, the annual rates of the

depreciation coefficients are: 1.3% for transmission and transformation segment inputs125

; 2.5% for

the inputs of the medium voltage distribution segment126

; 3.7% for inputs in the low voltage

distribution segment127

; and 2% for the inputs of consumer costs that are included in the

transmission and distribution segments (at all voltage levels).

8.1.3.2 The future electricity charge rates in the transmission and distribution segments

Within the resolution of the Electricity Authority of December 2005128

with respect to principles for setting

new charge rate bases and combined cycle costs, the Electricity Authority stated that with respect to the

setting of a new charge rate basis for the distribution segment, the outline of the recognized costs that it will

establish will limit the permitted investment level per year for the Company in order to maintain the level of

services for the consumer, including reliability of supply and connections to the grid. In the same resolution,

the Electricity Authority stated that with respect to the transmission segment, it considered the correct,

updated definition of the activity of the transmission segment prior to determination of its cost to be of

supreme importance, in view of it being a unique segment that would provide essential services both to the

Company and to private entities operating in the Electricity Sector. In view of this, the resolution further

stated that the Electricity Authority considered it necessary for the Company to operate immediately for

managerial organization that would provide for the activity of this segment as a distinct, consolidated

segment within an essential service supplier licenses, that the costs involved in such preparations be included

within the recognized costs for the segment, subject to execution of that organization. It was further stated in

the resolution that the transmission segment would include, inter alia, the following activities: prediction of

demand and consumption in the national economy, overarching planning, simulations of systemic stability on

the generation and consumption side alike, integration and activity of monitoring and control over all

electricity delivery in the system, including the manner of conduct of commerce. As of the date of the

Prospectus, the prediction for demand at the Company level and the manner of managing commerce, which

the Company does not yet have, are not included in the transmission segment.

125

Not including high voltage consumer costs: fixed payment in the electricity bill and payment for expanded services that are

collected from consumers. 126

Not including high voltage consumer costs: fixed payment in the electricity bill and payment for expanded services that are collected from consumers.

127 Not including high voltage consumer costs: fixed payment in the electricity bill and payment for expanded services that are

collected from consumers. 128

Resolution No. 4 of Meeting No. 128, dated December 18, 2000 on the matter of “Principles for setting new charge rate bases and

costs of combined cycles”.

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In the hearing document that was published on July 30, 2008129

, the Electricity Authority stated that the

charge rate basis book for the generation segment was one tier in setting recognized costs for all segments in

the electricity chain (generation, transmission, distribution and supply), which deliberation was supposed

according to the document to be executed during 2009, and as of the date of the Prospectus has not been

executed.

Within the framework of the planned raising of the charge rate130

by 8.9%, which took effect on April 1, 2012,

following a resolution of the Electricity Authority dated March 22, 2012, on the “spread of increase of

electricity charge rates for the years 2012-2014 in a period of problems in the supply of natural gas to the

energy sector in Israel”, an addition to the recognized cost was included in the transmission and distribution

segment for 2012, contributing approximately 1.2% to the electricity charge rate. The addition is in the

amount of approximately NIS 240 million in charge rate basis quantities (sold quantities of 2006) based on the

following distribution:

NIS 60 million in the transmission segment, NIS 80 million in the distribution segment and NIS 100 million in

the low voltage distribution segment, relative to the recognized cost in the last charge rate update.

The addition shall be valid until a new charge rate basis is determined for the transmission and distribution

segments.

In addition, it has been determined that the effective date of the new charge rate basis for the transmission

and distribution segments is April 1, 2012.

In addition, a mechanism for account reckoning has been established for the recognized costs for the

transmission and distribution segments. Within it, the Electricity Authority states that the recognized costs for

the transmission and distribution segments, including the addition in accordance with this resolution, shall

remain without a depreciation coefficient until a new basis is set for these segments. Differences that will

form between the recognized cost at the time of setting the new basis and the recognized costs shall be

considered as compensation for the delay in the update.

The Company applied to the Electricity Authority on March 14, 2012, with a request to discuss a number of

subjects relating to setting a new charge rate basis for the transmission segment. A document for a hearing

has not yet been published and this application has not yet been responded to as of the date of the

Prospectus.

8.1.4 Changes in the scope of activity in and profitability of the field

The Company estimates that there are various factors that may affect the scope of activity in the field and in its

profitability, such as the entry of private electricity producers, changes in the magnitude of electricity

consumption and changes in the electricity charge rates, as well as statutory changes against the authorities and

the Ministry of the Interior.

The main trends and changes that may affect the volume of transmission and transformation activity are the

following:

(A) Due to the increase in the generating capacity in the national economy, whether by private energy

producers or by the Company, and the increase in the reserve131

of the electricity generating ability, the

Company anticipates that it will be required to build additional switching stations and high and extra-high

voltage lines, as well as upgrading existing power transmission lines to stronger ones.

(B) In addition the Company expects that due to the increase in demand for electricity, it will be required to

build additional substations.

129

Resolution No. 1, of meeting 228, dated July 30, 2008, on the matter of “hearing with respect to the book of recognized costs for

the generation segment before hearing, changes in the charge rate structure book – demand time clusters and distribution of consumption and update of the decision of the Authority “compensation formula for delay in update”.

130 Resolution No. 1 of the meeting of the Electricity Authority dated March 22, 2012.

131 This refers to the difference between generation ability and the demand for electricity at that time from consumers.

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(C) The Company is acting consistently in order to reduce the costs of the construction of substations, by

building outdoor substations (that is, a station in which the high voltage switching equipment and

transformers are located on the premises of the station) and reducing the costs of all of the station

components. However, due to the strict environmental requirements, the Company is expected to build

internal substations (that is, a station in which all electrical equipment is enclosed in a building) of larger

scale. In addition, there are demands on the part of outside parties to bury overhead transmission lines

underground and divert existing lines within the framework of “intelligent avoidance” policy, which is

application of reasonable measures for reducing magnetic field levels where possible.

(D) The construction of a larger number of private substations by private electricity producers and high voltage

and extra high voltage customers will lead to a greater investment of working hours of Corporation staff in

introduction of utilization that the Company is required to make for the private producer or consumer, for

tests and maintenance, because the tests that are related to the connection of the substation to the

transmission system are conducted only by the staff of the Company.

(E) Updates to the Tenders Law will impede the equipment procurement processes.

(F) Changes in the Criteria for the level, standard and quality of service that an essential service supplier license

holder provides, which are set forth by the Electricity Authority, will require the Company to make greater

payments as indemnification to electricity producers and consumers that are connected to high and extra

high voltage grids. The implementation of a criterion for high voltage, which is expected to be published by

the Electricity Authority in 2012, may impose on the Company fines due to failure to meet the prescribed

schedule for connecting a new consumer or failure to supply electricity for certain reasons.

(G) A demand of the Ministry of the Interior to add high voltage lines to an outline plan will extend the time of

construction of high voltage lines.

(H) Environmentalist requirements with respect to electromagnetic radiation and the difficulty to obtain

expected line corridors will increase the volume of high and extra high voltage cables.

That which has been set forth above with respect to the key trends and changes that may affect the volume of

activity in the field and its profitability constitutes forward looking information, as per its definition in the

Securities Law, which is based on estimates and forecasts of the Company for the date of the Prospectus and for

which there is no certainty that it will materialize, in part or in full, in the manner set forth or in another manner

and may materialize in a materially different way, inter alia, because of circumstances that do not depend on the

Company only, such as: changes in the regulation applying to the field of activity, changes in the demand for

electricity, the entry into activity of private electricity producers and the dependence on external factors.

8.1.5 Technological changes that may materially affect the field of activity

The technological changes that may materially affect the field of activity and which the Company has started a

process of implementation of follow:

(A) Deployment of high output (75 MVa132

instead of 45 MVa) transformers with current limiters at the

substations within metropolises for increasing the transformation ability at new substation sites and

replacement of transformers at existing substations.

(B) Deployment of new technologies in the transmission field, such as ACSS wires with thermal ability, which

are used for increasing the transmission capacity of existing transmission lines to avoid the construction of

new lines.

(C) Laying of underground cables of 2,000 mm2 cross section.

132

MVa – megavolt ampere.

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8.1.6 Critical factors for success of the field of activity and changes applying therein

The Company estimates that the business success of the transmission and conduction segment depends

primarily on the update of the electricity charge rate for the transmission and transformation segment and on

the level of demand for electricity, the costs of maintenance and operation of the transmission and

transformation facilities, recognition of the total costs that are required for electricity transmission and

transformation within the electricity charge rate and the ability of the transmission and transformation segment

to increase efficiency in structure and technology. See Sections 7.1.3.2 and 7.7.3.1 for further information.

8.1.7 The key entry and exit barriers of the field of activity and changes occurring therein

(A) Entry barriers

The Company estimates that the key entry barriers in the field of activity are: the high costs of connection

of high voltage lines and the technical ability of accommodating a new high voltage customer in the system.

(B) Exit barriers

The regulation that regulates the activity of the Company and its status as an “essential service supplier

license” holder in accordance with the Electricity Sector Law and the provisions of its licenses, requiring it to

transmit electricity to the public at large, reliably and efficiently, in accordance with the terms of its license,

are the key barriers preventing exit from the field of activity.

8.1.8 The structure of competition in the field of activity and changes occurring therein

As of the date of the Prospectus, the Company is acting as a monopoly in the field of electricity transmission and

transformation and has no competitors. In addition, the Company is required to allow private electricity

producers to use its transmission system. See Section 7.4.4 for details.

8.1.9 Alternatives to products of the field of activity and changes occurring therein

Technologically speaking, there are places in the world in which the construction of gas turbines in industrial

zones and in cities in which there is no existing transmission system and that require alternative means of

power supply, without a need to connect to the transmission system, such as via a standalone generator, solar

panels and so on.


In accordance with that which has been set forth above, the Company operates as a single combined and

coordinated system for the supply of electricity to consumers, from the generation of electricity at generation

sites, continuing to its transmission and transformation to the distribution system and high voltage customers

(private electricity consumers and producers) to its distribution and supply to the end points of each of the

consumers. See Section 10.

Services in the transmission field are given to high voltage customers (private producers and approximately 40 major

consumers such as Dead Sea Works) and the districts of the Company (the distribution system that sells medium

voltage and low voltage electricity to consumers in the State of Israel). The end consumer pays for the transmission

component by the general charge rate that is prescribed by the Electricity Authority (see Section 8.1.3).

8.3 Segmentation of revenues and profitability of products and services

8.3.1 Revenues

The net revenues from the sale of electricity that are assigned to the transmission and transformation segment in

2011 came to a total of approximately NIS 1,792 million, adjusted to the NIS of December 2011, compared with

approximately NIS 1,768 million adjusted to the NIS of December 2011 for 2010, representing an increase in revenues

of approximately NIS 24 million. See Note 36 to the Annual Financial Statements and Note 12 to the Quarterly

Financial Statements. The change in the revenues arises from a decrease of approximately NIS 11 million for a real

decrease in the electricity charge rate, against an increase in consumption of approximately NIS 35 million.

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The net revenues from the sales of electricity that are assigned to the transmission and transformation segment

in 2011 came to a total of approximately NIS 1,799 million, adjusted to the NIS of March 2012, in contrast with

approximately NIS 1,775 million (adjusted to the NIS of March 2012) in 2012, representing an increase in

revenues of approximately NIS 24 million. The change in revenues is a result of a decrease of approximately

NIS 11 million for real decrease in the electricity charge rate, against an increase in consumption of

approximately NIS 35 million. See Note 36 to the Annual Financial Statements and Note 12 to the Quarterly

Financial Statements.

The net revenues from electricity sales that are assigned to the transmission and transformation segment in the

three-month period that ended on March 31, 2012, came to a total of approximately NIS 437 million, compared

to approximately NIS 401 million adjusted to the parallel period the year before, representing an increase in

revenues of approximately NIS 36 million. See Note 36 to the Annual Financial Statements and Note 12 in the

Quarterly Financial Statements. The change in revenues is a result of a decrease of approximately NIS 2 million

for a real decrease in the electricity charge rate, against an increase in consumption of approximately NIS 38

million.

8.3.2 Profit from ordinary operations – the transmission and transformation segment

The profit from ordinary operations in the transmission and transformation segment in 2011 came to a total of

approximately NIS 508 million, adjusted to the NIS of December 2011, compared with a profit of approximately

NIS 549 million, adjusted to the NIS of December 2011 in 2010, representing a decrease of approximately NIS 41

million.

The profit from ordinary operations in the transmission and transformation segment in 2011 came to a total of

approximately NIS 512 million, adjusted to the NIS of March 2012, compared to a profit of approximately

NIS 551 million (adjusted to the NIS of March 2012) in 2010, representing a decrease of approximately NIS 39

million.

The loss from ordinary operations in the transmission and transformation segment in the three-month period

that ended on March 31, 2012, came to a total of approximately NIS 27 million, compared to a profit of

approximately NIS 73 million, adjusted to the parallel period the year before, that is, a decrease of

approximately NIS 100 million.

See Section 8.1.3 for details on the application of the Company in December 2011 to the Electricity Authority, in

which it demanded that the Electricity Authority update the charge rate bases for the transmission and

distribution segments immediately.

8.4 Generation capacity – the transmission and transformation segment

8.4.1 The transmission segment (power lines):

A breakdown the length of the transmission circuits133

of the Company follows:

Date 400 kV lines

km of circuit

161 kV overhead lines

km of circuit

115 kV lines

km of circuit

161 kV underground lines134

km of circuit

March 31, 2012 739.8 4,284 104 102.8

March 31, 2011 739.8 4,253 104 94

December 31, 2011 739.8 4,260 104 97.6

December 31, 2010 739.8 4,240 104 94

133

In general, there is more than one transmission line between any two pylons, known as a “circuit “and measured in km 134

Underground.

F-112

On December 31, 2010, the installed output of 161/400135

MVa136

connection transformers137

stood at 10,000

MVa and on December 31, 2011, the installed output of 161/400 MVa connection transformers stood at 10,150

MVa.

On March 31, 2012, the installed output of 161/400 MVa connection transformers stood at 10,150 MVa and on

March 31, 2011, the installed output of 161/400 MVa connection transformers stood at 10,000 MVa.

8.4.2 The transformation system:

On March 31, 2012, the transformation system consisted of 197 substations (of which 40 substations were

owned by high voltage consumers), compared to 198 substations that the transformation system had on

December 31, 2011, and 197 substations it had on December 31, 2010, and as at March 31, 2011.

On December 31, 2012, the installed transformation ability was approximately 17,379 MVa (including

approximately 2,524 MVa across substations for high voltage consumers), compared with an installed

transformation ability of approximately 17,119 MVa (including approximately 2,524 MVa across substations for

high voltage consumers) on March 31, 2011. On December 31, 2011, the installed transformation ability was

approximately 17,399 MVa (including approximately 2,524 MVa across substations for high voltage consumers),

compared to an installed transformation ability of approximately 17,119 MVa (including approximately 2,524

MVa across substations for high voltage consumers) as at December 31, 2010.

The table below displays a number of switching stations (including also substations) and number of substations

of the Company and of consumers, as of December 31 and March 31, 2011 and 2010:

Substation type Year

Switching station Substation Private Total

March 31, 2012 10 147 40 197

March 31, 2011 10 147 40 197

December 31, 2011 10 148 40 198

December 31, 2010 10 147 40 197

The material changes in the transformation system that occurred in 2011 are: introduction into service of an

internal substation in Kfar Saba, additions of transformation the Sharon, Cabri, Herzliya, Anielewicz and Kiryat

Gat substations, and a mobile substation was deployed at the Atarot switching / substation.

The material changes in the transformation system that occurred in the first quarter of 2012 are: deployment of

the Sdom North mobile unit and the dismantlement of the Kfar Saba Weizmann mobile units.


See Section 7.6.1 for details on assets that it uses in its fields of activity, including in the field of transmission and

transformation.

Details of the fixed assets and facilities described below relate to the property and assets possessed and/or used

by the Company in the field of transmission and transformation activity, disregarding the differences of opinion

between the Company and the state with respect to the rights of the Company to the property and assets in

question, which it possessed, as of the time of expiry of the Concession (see Note 1 G to the Quarterly Financial

Statements and Section 15.3 with respect to the “property settlement” and its consequences for the Company).

135

A connection transformer changes voltage levels within the transmission system (from 400 kV to 161 kV). 136

The transmission system has three voltage levels: (1) extra high voltage – 400 kV; (2) high voltage system of 161 kV and (3) a high voltage system of 115 kV (an old system whose use is decreasing).

137 A voltage measurement unit.

F-113

A breakdown of the switching stations and the major substations that are used by the transmission and

transformation segment at the various sites follows:

Name of site Location Type Site area in m

2 Nature of the rights

Caesarea ** Caesarea Switching station - Sublease, Caesarea Development Company, until 2048

Tzafit * Next to Kfar Menachem

Switching station - Lease till 2034

Petach Tikva * Next to Morasha Junction

Switching station 65,073 Ownership

Zevulun * Kfar Hassidim Switching station 272,045 Development agreement with ILA till 2000 with a right to receive a lease

Gan Sorek * Rishon le Zion Switching station 210,136 Development agreement with ILA till 1998 with a right to receive a lease

Even Sapir * Southwest of Moshav Even Sapir

Switching station 104,000 Lease till 2040

Gezer ** Next to Ramla Switching station - Possession

Ramat Hovav ** Switching station - Lease contracts till 2028/2029

Hagit *** Switching station - 327,00 m

2 leased till 2051. The rest is

owned.

Yavneh Ashdod Junction Major substation 100,117 1760 m

2 leased until 2023. The rest is

owned.

Kishon ** Nesher Major substation 100,000 Lease till 2058

Alon Tavor ** Major substation - Lease till 2039

Yarkon * Tel Aviv, Ramat Hahayal

Major substation 655,116

100,000 m2 owned. The rest is

possessed

Total area 964,390

* The site includes a substation. ** The area of the switching stations and major substations above includes a substation and is included in the area of the site of the relevant power stations, as indicated in Section 7.6. *** The areas of these switching stations are included in the areas of the site of the Hagit Power Station, as indicated in Section 7.6.

There are two (2) additional substations that are on the premises of power stations. See Section 7.6 for further

information.

As at the date of the Prospectus, the Company is working on the advanced stages of a lease deal with respect to a

land tract of approximately 40,000 square meters for the Ayalon (Ganot) switching station and the construction of

the switching station has commenced. The deal was approved by the management of the ILA and in the institutes

of the Company and lease fees have been paid for it. As at the date of the prospectus, a lease contract for the area

has yet to be signed.

The transmission and transformation segment includes 113 permanent substations, 18 temporary substations and

15 active mobile substations that are dispersed nationwide. See note 11B to the Annual Financial Statements for

details on the type of rights of the Company to these properties.

F-114

8.6 Development of the Electricity Sector – the transmission and transformation segment

8.6.1 Manner of determination of the Development Plans of the transmission and transformation segment

See Section 22.1.3.2 for details on the duty of the Company to submit a Development Plan and comply with its

conditions and the schedules prescribed therein.

The Development Plan for the transmission and transformation system is submitted for approval once a year.

The duration of the Development Plan as set forth is for a period of five (5) years. Due to the long time required

for advancing projects in the transmission and transformation field, considering the proceeding required for

environmental and statutory purposes and receiving construction permits, the Company is preparing a

Development Plan for ten (10) years, with a semi-annual update (in view of changes in the demand forecast, a

need for accommodating projects of private entrepreneurs, problems in advancing infrastructure projects and

more), from which the five year Development Plan that is submitted as set forth for the approval of the Ministry

is derived.

The transmission and transformation system Development Plan of the Company for 2011-2015, which was

submitted for the approval of the Minister in April 2010, which received his approval in December 2010138

, is

estimated at approximately NIS 5.4 billion in December 2009 prices, for the period set forth, and approximately

NIS 1.1 billion per year on average. In effect, in recent years, in view of its financial situation, the Company has

been acting to reduce the expenses for the development of the transmission system. The plan includes the

construction of new projects and projects that include expansions and improvements of the existing system, for

the purpose of adapting the transmission and transformation system to the needs of the Electricity Sector, while

considering the availability of the sites and the ability of the Company to realize projects.

8.6.2 The main projects in the field of transmission and transformation that ended in 2011 were:

(A) The construction of permanent substations – Kfar Saba.

(B) The addition of transformation at existing substations – Sharon, Cabri, Herzliya, Rotem, Kiryat Gat.

(C) The construction of 10 km of overhead circuits.

(D) Hundreds of relatively small projects and advancement of multi-year project whose utilization started in

2011.

8.6.3 Main assumptions and restrictions underlying the Development Plan

The Development Plan is based on: (A) the geographic layout of the load, which his consistent with the national

demand forecast; (B) the generation system Development Plan; (C) the planning criteria; (D) the implementation

of advanced, proven technologies in the transmission and transformation system; and (E) analysis of the odds of

materialization of the projects.

The purpose of the Development Plan is to adapt the transmission and transformation system to the needs of

the national economy, while reducing costs and minimizing land resources, in accordance with the prescribed in

arrangement with the Ministry of Energy and Water. The plan is being developed while considering planning,

land, environmental and economic uncertainties and constraints and their consequences over the ability to

implement the plan.

8.6.4 The Development Plan fulfills the following needs:

(A) Securing optimum operation conditions of the generation system, while considering the expected

geographic distribution of the loads, using assorted reasonable scripts with respect to the loading of the

generation units;

(B) Securing the survivability of the system, which is an isolated system, therefore being exposed to unusual

occurrences at a high likelihood;

138

See the Immediate Report of December 29, 2010 (Reference No.: 2010-01-722700).

F-115

(C) Securing the reliability of adequate supply to consumers in cases of faults in the generation units, in

transmission circuits, at substations, at connection transformers and at substation transformers;

(D) Maintaining the quality of the supplied electrical energy;

(E) Consideration for the feasibility of the projects elaborated in the Development Plan following analysis of

chances of materialization.

The transmission and transformation system Development Plan is a result of techno-economic optimization of

various options that answer these needs, for the purpose of adapting the main parameters of the equipment to

the Israeli system in the technical aspect and in scheduling of the order of equipment from the economic aspect.

A test is being made for the projects that have been listed in the Development Plan with respect to the chances

of materialization that depend on the availability of the sites and the ability of the Company to implement them.

In accordance with these evaluations of odds of materialization, updated operation dates have been

established.

The Company is acting to implement a Government resolution dated January 2009139

that addresses the

transition to the generation of electricity from renewable energy to a volume of 10% before 2020 and in this

context it operates to connect each renewable energy entrepreneur that has applied to it for connection, for

making a feasibility study or a connection review, in accordance with the resolution of the Electricity Authority

of July 2008.140

See Sections 7.4.4 and 22.1.3.2.

Within this framework, in accordance with the resolutions of the Electricity Authority, the Company has

published a large number of feasibility studies of the various initiatives for generation of electricity using

renewable energy. The Company is advancing plans for the construction of a second 400 kV line to the south of

the country whose purpose is to allow for the accommodation of renewable energy generation facilities to large

scales in southern Israel.

On the issue of the Government tender for solar power stations at Ashalim, the Company is dealing with the

planning material in the context of an environmental document and the outline plan for a 161 kV regulator and

a 161 kV high voltage line to the Ashalim site; in the context of the Ketora private power station, the Company is

making good the material for an environmental review for a 161 kV high voltage power line as required. See

Section 7.4.2 for details on the tender at Ashalim.

However, the Company does not have the possibility to connect to the electricity grid all initiatives for the

construction of renewable power stations to a significant magnitude without completing the project for

connecting Eilat and the southern Arava to the transmission grid via Mitzpe Ramon using a new 161 kV high

voltage line towards Eilat, and particularly without completion of the segment of the Makhtesh Ramon region.

As of the date of the Prospectus, in accordance with the demand of the Ministry of Infrastructures, the change

of an underground section in the area of the crater (Makhtesh), which requires the recognition of the costs by

the Electricity Authority, is being assessed. The Company is operating to advance the project in the planning

track and receive approvals and various options are being assessed, in accordance with that which has been set

forth above, including an underground one.

8.6.5 Development of the transmission system

In accordance with the Development Plan above, in 2012-2015, the Company is planning to add to the high

voltage (400 kV) transmission system approximately 124 km of circuitry, conditional to the conclusion of

statutory proceedings for the approval of the lines. As of the date of the Prospectus, the Company is within the

schedule that was described in the Development Plan. See Sections 8.6.1 and 22.8 for details on the statutory

proceedings.

139

Resolution No. 4450. 140

Resolution No. 1 of Meeting No. 222 dated July 9, 2008 on the matter of “proceeding for construction of private electricity

generation facility”.

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In 2012-2015, the Company is planning to add approximately 688 km of circuitry to the high voltage (161 kV)

transmission system. In addition, approximately 869 km of circuitry will be upgraded, rebuilt or relocated, and

approximately 47 km of underground cable circuits are scheduled to be added.

8.6.6 Development of 400/161 kV transformation system

The Development Plan of the Company for 2012-2015 includes: the addition of connection transformers to an

output of approximately 575 MVa at the Zevulun Switching Station (2012); construction of the Ayalon Switching

Station with 3 connection transformers and a total output of approximately 1,950 MW (2014) and the transfer

of a connection transformer from Tzafit to Petach Tikva, along with its upgrade to 650 MW (2013) – contingent

upon the conclusion of statutory proceedings. In late 2015, the Company is due to have ten (10) 400/161 kV

switching stations with a total output of approximately 12,945 MVa.

The information that has been set forth above with respect to the Development Plan of the Company constitutes

forward looking information, as per its definition in the Securities Law. This information includes forecasts,

subjective assessments and other plans of the Company as of the date of the Prospectus with respect to the

working assumptions that it has used in the formation of the Development Plan and the forecast and the

materialization dates of those assumptions. Such information is based on future data, whose materialization is

uncertain and is not under the exclusive control of the Company. The main factors that may affect the forward

looking information not materializing or changes occurring in the estimated schedule for its execution, as

described above are, inter alia: a change in the expected growth rate of the demand for electricity,

implementation of the Structural Change (see Section 1.3); the Development Plan that the Minister will

prescribed, to the extent that subject plan is prescribed for the transmission and transformation segment;

difficulties in obtaining a license and/or regulatory changes in the field of environmental protection and

licensing; the absence of appropriate charge rate coverage and the ability of the Company to raise the financing

required for executing the Development Plan.

8.6.7 Development of 161 kV transformation ability

The development of the substations of the transmission and transformation segment is being carried out in

accordance with the multi-year planning of the Company, while considering the geographical layout of the

demand. This forecast is expressed in the construction of new permanent substations, temporary and mobile

substations and the addition of transformation in existing substations. There are fixed, temporary and mobile

substations. Fixed substations are divided into two (2) types: open and closed substations. A temporary

substation is usually built for a few years, where transformation is needed but it is difficult to get permits to

build a permanent station within the time required. A portable substation is moved from site to site as

necessary, as an interim solution, before the construction of a permanent substation. When building permanent

substations, the Company prefers to build open substations over closed ones, because the cost of construction

of a closed station is twice that of an open one. Closed substations are built due to the demand of the

authorities or in the absence of sufficient area for building an open station.

In certain cases, the Company has difficulty in implementing all of the projects that are required for the purpose of

adaptation of the transformation ability installed at the substations to the regional electricity demand in

accordance with the planning criteria. Therefore, until the construction of a permanent substation in the region,

alternative solutions are being run, such as the construction of a temporary substation or the deployment of a

mobile substation. A temporary substation is a temporary facility that is constructed in arrangement with the local

authority. This substation is constructed at a standard that is lower than that of a permanent substation and is

scheduled for dismantlement within approximately five (5) years of its date of construction, and is designed for the

installation of only 1 to 2 transformers, compared with 2 to 6 transformers at a permanent station.

Portable substation – the Company has a number of portable substations that were purchased during the

1990s. A portable substation is a device that consists of two large trailers and has 161 kV high voltage

equipment, a single 20 MW transformer, a medium voltage distribution regulator that has 3-4 outlets and an

appropriate protection, command and control system. These facilities are installed in accordance with the needs

of the system and are transported to a new location upon the completion of the permanent project of

expansion of the transformation system.

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Within the Development Plan of the Company, approximately 9 permanent substations with a total

transformation ability of approximately 1,215 MW are planned to be added in 2012-2015. In late 2015, there

are expected to be approximately 146 substations with a total transformation ability of approximately 16,185

MVa (permanent, temporary and mobile). In addition, at the Ayalon substation a high voltage capacitor battery

with an output of 220 mVar will be installed.

That which has been set forth above with respect to the Development Plan of the Company constitutes forward

looking information, as per its definition in the Securities Law. This information includes forecasts, subjective

estimates and other plans of the Company as of the date of the Prospectus with respect to the working

assumptions that it has used in the construction of the forecasts and the times of materialization of those

assumptions. Such information is based on future data, whose materialization is uncertain and is not under the

exclusive control of the Company. The main factors that may affect non-materialization of the forward looking

information or changes occurring in the estimated schedule for its execution in accordance with the description

above include: a change in the expected growth rate in the demand for electricity, implementation of a change

in the future organizational structure of the Electricity Sector and of the Company (see Section 1.3); the

Development Plan that the Minister prescribes, to the extent that he prescribes such a plan for the transmission

and transformation segment; difficulties in securing licenses and/or changes in regulation in the environmental

protection and licensing field; the absence of appropriate charge rate coverage and the ability of the Company to

raise the financing required for executing the Development Plan.

8.6.8 Forecast of the investments that will be required for executing the Development Plan of the transmission and

transformation segment

Based on projects that are in the Development Plan for the transmission and transformation segment, the Company

has made an estimate of the investments that are required for the period of the Development Plan, which has not yet

been brought forth for the approval of the Board of Directors. For 2012, an investment of approximately NIS 650-700

million is being planned and similar amounts are being planned for investment in each of the years until 2015.

In 2010, approximately NIS 507 million adjusted to the NIS of December 2011 (approximately 509 adjusted to

the NIS of March 2012) was invested, and in 2011, approximately NIS 574 million adjusted to the NIS of

December (approximately 576 adjusted to the NIS of March 2012) and in the first quarter of 2012 an amount of

approximately NIS 164 million (including cost of allowance index linkage) was invested for the execution of the

Development Plan of the transmission and transformation segment (all data in current prices).

The investment plan that will be required for the execution of the Development Plan of the Company for the

transmission and transformation segment is forward looking information, as per its definition in the Securities Law.

This information includes forecasts, subjective estimates and other plans of the Company as of the date of the

Prospectus with respect to the working assumptions that it has used in the construction of the forecasts and the

times of materialization of those assumptions. Such information is based on future data, whose materialization

is uncertain and is not under the exclusive control of the Company. The main factors that may affect non-

materialization of the forward looking information or changes occurring in the estimated schedule for its

execution in accordance with the description above include: a change in the expected growth rate in the demand

for electricity, implementation of a change in the future organizational structure of the Electricity Sector and of

the Company (see Section 1.3); the Development Plan that the Minister prescribes, to the extent that he

prescribes such a plan for the transmission and transformation segment; difficulties in securing licenses and/or

changes in regulation in the environmental protection and licensing field; the absence of appropriate charge rate

coverage and the ability of the Company to raise the financing required for executing the Development Plan.



8.8 Human capital

The organizational structure in the transmission and transformation segment:

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Key to

symbols

VP

Dept Mgr

Brch Mgr

Unit

Dpt Brch Mgr

Roster of employees

(positions): 470

Vice President,

Generation and

Transmission

System Administration

Unit

Deputy for Private

Producers

Operation Regime Policy

Communic-ations

Emergency Control Ramat

Hasharon

Computers Operations

Field of Activity – Transmission Segment (Including System Administration)

Transmission and

Transformation Branch

F-119

As of March 31, 2012, the transmission and transformation segment has 409 permanent employees and 61

temporary employees in the transmission and transformation branch and the system administration unit,

compared with 402 permanent employees and 62 temporary employees in the transmission and transformation

branch and the system administration unit as of March 31, 2011. (The number of employees relates to

organizational assignment and does not include employees assigned to other branches and working for the

benefit of the segment, such as transmission grid line operation staff, who are organizationally assigned to the

distribution districts and vice versa – see Section 9.9).

See Section 14 for details with respect to benefits and the nature of the employment agreements and additional

details.

8.9 Environmental risks and ways of managing them – the transmission and transformation segment

8.9.1 Environmental risks and environmental regulation – general

The activity of the Company in the transmission and transformation segment is exposed to various

environmental risks, which include storage and use of hazardous materials and fuels, pollution of soil and water

sources, non-ionizing radiation and more. Therefore, the transmission and transformation activity is subject to

extensive regulation in the environmental protection field. Over recent years, the applicable environmental

requirements (or those pending legislation) for the activity of the Company and control and enforcement of

these requirements have become stricter. The Company estimates that this trend is likely to continue and even

intensify in the upcoming years, in accordance with international awareness and requirements and inter alia as

is common in western countries. See Sections 7.13 and 9.11 for details on environmental risks in these fields.

8.9.2 Land

See Section 15 for a general description on this subject.

In 2010, the Company received an email application from the Polluted Lands Supervisor at the Ministry for

Environmental Protection with respect to the construction and lining of containment enclosures of transformers

for prevention of pollution of soil and water sources. The Company is examining priorities for lining transformer

containment enclosures and is studying the consequences of the matter. An initial assessment that the

Company conducted shows that the application, is not expected to impose material expenses on it.

8.9.3 Hazardous materials

The transmission and transformation division has a poison permit that is renewed every three (3) years. See

Section 7.13.6 for details on risks from hazardous materials.

8.9.4 Business licensing

See Section 7.13.8 for details on this subject, including on the matter of recognition of plant files for the

substation units in the transmission and transformation division.

8.9.5 Regulation on environmental protection issues

The transmission and transformation division is in advanced stages of the ISO 14001 standard qualification

process. See Section 21.2 for further information.

8.9.6 Planning and construction

The construction of the transmission and transformation facilities is being done in accordance with construction

permits that are issued pursuant to the provisions of the Planning and Construction Law - 1965 (hereinafter: the

“Planning and Construction Law”), except the construction of high voltage electricity grid facilities, as per their

definition in the Planning and Construction Regulations (Arrangement of Transmission, Distribution and Supply

of Electricity), 1998, which is being done in accordance with authorizations that have been given to pursuant to

the regulations mentioned above and in accordance with the Planning and Construction Law. In 2004, the

Ministry of Interior instructed the planners of the districts of the Ministry not to consent to give authorizations

for the construction of high voltage lines without the advancement and approval of a detailed plan. Due to this,

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the Company filed a petition to the High Court of Justice to declare the directive void, and to declare void an

amendment to the district outline plan of the southern district that it adopted (DOP 4/ 14/ 64/ A). In October

2009, a hearing of the petition was heard. The Court suggested that the parties attempt to reach a compromise

with respect to the planning outline that is suitable for the construction of 161 kV lines. The parties held

contacts, at the end of which a compromise proposal was formed by the Ministries of the Interior, Justice,

Energy and Water and the Company, which provides, inter alia, for the construction, in an interim period, of a

number of lines (as defined in the compromise agreement) in an authorization proceeding. Following the

achievement of the compromise, a consensual motion was filed to strike the petition and a resolution on the

striking of the petition as motioned was handed down on May 16, 2012

In January 2011, the Company learned that the Ministry of the Interior was advancing National Outline Plan No.

40 (NOP 40), which addresses the utilization of the underground space, including a categorical instruction

whereby electricity infrastructures are to be underground, unless a planning institute has prescribed otherwise

with respect to a specific infrastructure. The Company submitted to the Ministry its initial position on the issue

in January 2011, after which the Ministry of Energy and Water requested to defer the discussion in the

Committee for Essential Planning Issues, following which the Company requested that no hearing to be held on

the matter in the planning institutions until the Company would submit a professional document that would

analyze the implications of such a resolution. Also comments have been forwarded to the Ministry of Energy

and Water and the Ministry of Finance.

In November 2011, the Company received a notice from the director of the Planning Administration at the

Ministry of the Interior whereby in view of a new policy that is being advanced in the Planning Administration

for making out a comprehensive, combined future national outline plan NOP/40 will not be advanced in its

current format. The director of the Planning Administration also clarified that there was no intent for the future

combined plan to impact approved plans and cause difficulties for the planning and execution of national

infrastructures.

See Section 22.8 for details.


As of the date of this Prospectus, to the best of the Company’s knowledge, it is not exposed to material events

or matters with respect to environmental protection in the transmission and transformation segment unless

specified above.


See Note 24 B.8 to the Annual Financial Statements on the issue of legal proceedings with respect to the

transmission and transformation segment and statements of indemnification that have been given by the

Company in accordance with Section 197 of the Planning and Construction Law.

See Section 9.11.2 with respect to proceedings related to non-ionizing radiation. See Note 24 B of the annual

Financial Statements with respect to judicial proceedings relating to this field of activity.

8.9.9 The policy of the Company in environmental risk management

See Section 7.13 for details on this subject.



8.10 Restrictions and regulation over the activity of the transmission and transformation segment

The Company has a license for transmission of electricity, pursuant to the Electricity Sector Law, in effect until

January 1, 2013.

See Section 22 for details on the regulation applying to the Company, including the transmission segment.

See Section 21.3 with respect to licensing proceedings in accordance with the Planning and Construction Law.

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In October 2005, the Electricity Authority set forth updates to criteria for infrastructure utilities whereby

producers could sell electricity to the Company and “supply” electricity to end consumers via the transmission grid

of the Company and criteria for the purchase of electricity from private producers and license holders

(hereinafter: “Chapter E and Chapter F in the Book of Criteria”). See Sections 7.4.1 and 8.1.2 for details on the

Book of Criteria.

In July 2009141

, the Electricity Authority published an update to Chapters E and F of the Book of Criteria that deal

with private producers, infrastructure utilities, definition of the structure of the future Electricity Sector and the

roles of the players that will be operating in it.

In February 2011142

, the Electricity Authority published a hearing document on the issue of the relegations of the

Company with private producers with respect to high and extra high voltage connections. The Company has

forwarded its response to the document for the hearing. The Electricity Authority has not yet published a

resolution on the issue.

See Section 7.4 for details on charge rate arrangements that the Electricity Authority has published for private

producers that operate using conventional technologies, cogeneration, pumped storage and renewable energy at

various voltages, with the goal of regulating the activity of these producers in the Electricity Sector.


See Note 24 B.8 to the Annual Financial Statements with respect to legal proceedings with regard to the

transmission and transformation segment and statements of indemnification that have been given by the

Company in accordance with Section 197 of the Planning and Construction Law.


The primary suppliers of the Company in the transmission and transformation field are: Elco Van Rol, which

supplies transformers to the transmission units; Siemens, with which the Company has executed a long term

maintenance contract for transmission units, for the diesel pipeline for gas turbines and for renovation and

treatment for extension of the lifetime of various generation units; ABB, which provides switching and protection

equipment; and ALSTOM AREVA AEG, which supplies current circuit breakers for units, spare parts for turbine

valves, tools for turbine renovation and spare parts for turbines.

9. The distribution segment

9.1 General information on the distribution segment

9.1.1 General

The distribution segment of the Company conveys electric energy from the substations, at which the voltage

level drops to the level of the distribution voltage, for consumption purposes. The distribution system consists

of distribution lines of 33 kilovolt, 22 kilovolt and 6.3 to 12.6 kilovolt tension levels (all of these are medium

voltage lines), low voltage lines and a distribution transformer that interconnects them.

The Company delivers to most consumers electricity at low voltage, and to major consumers (that is, consumers

that consume a large amount of electricity, such as major factories) electricity at medium voltage.

The distribution segment has five (5) districts, which cover the entire country, through which most of the work

and service relations between the Company and its companies are held, whose number as of the date of this

Prospectus is approximately 2.5 million.

141

Government Resolution No. 4450 on the matter of: setting of a guiding objective and formation of tools for advancing renewable

energies, particularly in the Negev and Arava region, dated January 29, 2009. 142

Published on February 6, 2011, see the Electricity Authority website.

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(A) The northern district covers all of the northern areas of Israel, from the Alexander River to the south, not

including Haifa and its surrounding area. The activity of the district along the border of Lebanon, Syria and

Jordan and in the southeastern areas along the “seam line” is performed under security restrictions. Most

of the distribution grids in this area are overhead. In 2011, the district served approximately 413 thousand

customers, compared with approximately 405 thousand customers in 2010. As of March 31, 2012, the

district served approximately 414 thousand customers, compared to approximately 407 thousand

customers as of March 31, 2011. The district features a large dispersal of population, multiple settlements

and long distribution lines.

(B) Dan District is enclosed by Highway 5, Glilot Interchange in the north, Bar Ilan and Or Yehuda to the east

and the town of Holon to the south. Due to its urban character, this is the densest district out of the

districts of the Company. For the reason, the lion share of the distribution grids in the Dan District is

underground. In 2011 the Dan District served approximately 546 thousand customers, compared with

approximately 542 thousand customers in 2010. As of March 31, 2012, the district served approximately

547 thousand customers, compared to approximately 543 thousand customers as of March 31, 2011.

(C) The Jerusalem District includes metropolitan Jerusalem, Beit Shemesh, Har Tuv, Mount Hebron and its

southern slope, Samaria including the town of Ariel, the Jordan Valley between Ein Gedi and Mehola. Due

to its location, this district assumes most of the burden of the work of the Company that is conducted in the

Judea and Samaria territories (the West Bank). This activity is possible due to the exclusion of the issue of

electricity supply from the conflict, as well as due to the cooperation with the East Jerusalem Electricity

Corporation, which to the best of the Company’s knowledge has a board that currently consists of

representative of the municipal councils of Jerusalem, Bethlehem, Beit Jalla, Beit Sakhour, Ramallah, Al Bira

and Jericho. In 2011, the Jerusalem District served approximately 281 thousand customers, compared with


282 thousand customers, compared to approximately 278 thousand customers as of March 31, 2011. To

the best of the Company’s knowledge, in addition to the listed number of customers, the district secures

the supply of electricity to approximately 250 thousand Palestinian customers.

(D) The southern district is the largest of the districts of the Company and runs from Emek Hefer in the north

to Eilat in the south, except the Dan District, which includes metropolitan Tel Aviv. In accordance with its

size, this district serves approximately 40% of the Company. In 2011, the Southern District served

approximately 1,011 thousand customers, compared with approximately 994 thousand customers in 2010.

As of March 31, 2012, the district served 1,016 thousand customers, compared to approximately 998

thousand customers as of March 31, 2011. The activity of the district along the border with Gaza is

conducted under security restrictions and sometimes under fire.

(E) The Haifa District includes Haifa and its surrounding area, from the southern industrial zone of Akko in its

north, Shefaram and Mishmar HaEmek in the east, Bat Shlomo in the south and the Carmel coast towns to

the west. This district features a dense urban area, and therefore about two thirds of the grid lines are

underground. In 2011 the Haifa District served approximately 270 thousand customers, compared with


271 thousand customers, compared to approximately 268 thousand customers as of March 31, 2011.

9.1.2 Structure of the field of activity and changes occurring therein

In accordance with that which has been set forth above, the activity of the Company in this field is activity of

electricity distribution from substations to consumers through medium voltage lines and low voltage lines, and

the supply and sale of electricity to consumers. As of the date of the Prospectus, the Company distributes,

supplies and sells most of the electricity in the State of Israel.

9.1.3 Restrictions, legislation, regulation and special constraints applying to the field of activity

The activity of the Company in the distribution segment, like its other fields of activity, is subject to legislative

restrictions, such as those prescribed in the provisions of the Electricity Sector Law and the Government

Companies Law, and constraints related to the issue of licensing and requirements for permits from various

F-123

government authorities and offices such as the Electricity Authority, the Companies Authority, the Ministry of

Energy and Water and the Ministry for Environmental Protection and structural changes and emergency and

Development Plans in the Electricity Sector. The activity of electricity distribution is carried out under a license

that the Company has received for “transmission, distribution, supply, sale and trade of electricity”. This license

and all of the activities therein have been extended to January 1, 2013. In accordance with that which has been

set forth above, the Company has not had a separate license issued for the distribution activity and therefore

the activity is carried out in accordance with the text of the consolidated license that relates to a number of

activities. See Sections 1.3 and 22 for details on these aspects of the activity of the Company and the various

restrictions.

9.1.4 The electricity charge rate in the distribution segment

See Section 7.1.3.2 for details on the electricity charge rate in the distribution segment.

9.1.5 Changes in the volume of activity and profitability of the field

The Company estimates that there are various factors that may affect the volume of activity and profitability of

the field, such as changes in the volume of electricity consumptions and changes in electricity charge rates.

9.1.6 Developments in markets of the field of activity or changes in the characteristics of its customers

During 2011, and as of the date of the Prospectus, the Ministry of Energy and Water has been encouraging

savings in the consumption of electricity by consumers, inter alia, through changes in the regulation of air

conditioners, refrigerators, light bulbs, motors and transformers, by subsidizing the replacement of old

equipment, which features high consumption, with new energy saving equipment, and by public information

actions for increasing the awareness for energy savings among consumers. The Company is a partner in this

effort, for which purpose it has contributed the activity of the marketing branches and districts. See Section 6.5

for details on the policy of the Government of Israel with respect to savings in electricity consumption.

9.1.7 Technological changes that may materially affect the field of activity

In the short term, the Company does not anticipate material technological changes that may affect the activity

field. However, in the long term, the Company operates, with the encouragement of the Government in the

“smart grid” fields, which are supposed to improve the efficiency of the systems of the Company and consumers

alike (see Section 9.7.4.4 for details on the “smart grid”).

9.1.8 The critical factors for success in the field of activity and changes occurring therein

The Company estimates that the business success of the distribution segment depends, inter alia, on the level of

demand for electricity, the costs of maintenance and operation of the distribution facilities, recognition of the

total revenues required for the distribution of electricity within the electricity charge rate and the ability of the

distribution segment to improve its structural and technological efficiency. In 2011 until the date of the

Prospectus no change has occurred in these factors.

9.1.9 Changes in the layout of suppliers and raw materials to the field of activity

The Company is increasing the amount of purchase of raw materials in East Asia for purposes of reducing costs.

However, some of the increase in the cost of raw materials in the distribution segment is because the main raw

materials of the segment are copper, aluminum and steel, whose prices have experienced a constant rise.

9.1.10 Key entry and exist barriers of the field of activity and changes occurring therein

Entry barriers:

The Company estimates that the main entry barriers to the field of activity are receipt of a distribution and

supply license.

Exit barriers:

The regulation that regulates the activity of the Company and its status as an “essential service supplier”, in

accordance with the Electricity Sector Law and the provisions of its licenses, which requires it to supply

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electricity to the public at large, reliably and efficiently, in accordance with the terms of its license, are the key

exit barriers from the field of activity.

9.1.11 Alternatives to the products of the field of activity and changes occurring therein

See Section 7.1.10.


In accordance with that which has been set forth above, the Company operates as a single, combined and

coordinated system, for the supply of electricity to consumers, from the generation of electricity at the generation

sites, continuing through its transmission and transformation, to its distribution and supply to the end points of all

consumers. In addition, the Company makes connections to homes of consumers and expansions to existing

connections.

9.3 Segmentation of revenues and profitability

9.3.1 Revenues

The net revenues from sales of electricity that are assigned to the distribution segment for 2011 (in accordance

with the assumptions set forth in Note 36 to the Annual Financial Statements) came to a total of approximately

NIS 2,577 million, adjusted to New Israeli Shekels of December 2011, compared with approximately NIS 2,755

million, adjusted to New Israeli Shekels of December 2011, for 2010. This represents a decrease in revenue of

approximately NIS 178 million. The change in the revenues arises from a decrease of approximately NIS 233

million, for a real decrease in the electricity charge rate, and against an increase in consumption of

approximately NIS 55 million.

The net revenues from sales of electricity that are assigned to the distribution segment for 2011 (in accordance

with the discounts specified in Note 36 in the Annual Financial Statements), came to a total of approximately

NIS 2,587 million, adjusted to New Israeli Shekels of March 2012, compared to approximately NIS 2,766 million,

adjusted to New Israeli Shekels of March 2012, for 2010. This represents a decrease in revenues of

approximately NIS 179 million. The change in revenues arise from a decrease of approximately NIS 233 million,

for a real decrease in the electricity charge rate, and against an increase in consumption of approximately NIS 54

million.

The net revenues from sales of electricity that are assigned to the distribution segment for the three-month

period that end on March 31, 2012 (in accordance with the discounts specified in Note 12 in the Quarterly

Financial Statements), came to a total of approximately NIS 655 million, compared to approximately NIS 633

million adjusted in the parallel period of the previous year, an increase in revenues of approximately NIS 22

million. The change in revenues arises from a decrease of approximately NIS 42 million, for a real decrease in

the electricity charge rate, and against an increase in consumption of approximately NIS 64 million.

9.3.2 Profit from ordinary operations – the distribution segment

The loss from ordinary operations in the distribution segment in 2011 came to a total of approximately NIS 9

million (adjusted to New Israeli Shekels of December 2011), compared with a profit of approximately NIS 392

million (adjusted to New Israeli Shekels of December 2011) in 2010. This represents a decrease of approximately

NIS 401 million, which arises from a real increase in the electricity charge rate and a decrease in consumption.

The loss from ordinary operations in the distribution segment in 2011 came to a total of approximately NIS 9

million (adjusted to the NIS of March 2012), compared to a profit of approximately NIS 393 million (adjusted to

the NIS of March 2012) for 2010, representing a decrease of approximately NIS 402 million, which is a result of a

real decrease in the electricity charge rate and an increase in consumption.

The loss from ordinary operations in the distribution segment in the three-month period that ended on March

31, 2012, came to a total of approximately NIS 692 million, compared to approximately NIS 84 million adjusted

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in the parallel period the previous year, representing an increase of approximately NIS 608 million, which arises

from a real decrease in the electricity charge rate and an increase in consumption.

9.4 Competition

9.4.1 As of the date of the Prospectus, the Company has no competitors in the distribution segment, but there are a

number of places to which the Company supplies electricity in bulk (concentrated), which is transferred to one

point, and the distribution itself is performed independently to end customers through internal distribution

systems of these places (see Section 10). See Section 6.5 with respect to the provisions of the Electricity Sector

Law that state restrictions to possession of licenses in general and for the distribution section in particular. In

addition, on the plane of activity of supply and sale of electricity of the Company, there are private electricity

producers that hold a supply license in addition to their generation license that has been given to them and that

therefore also serve as suppliers to end consumers that transact with them directly and receive electricity from

them rather than the Company. As has been set forth above, the electricity that is generated by these private

electricity producers is transmitted via the transmission and distribution grid of the Company (a service that is

given to the producer against payment as set forth, including all of the ancillary services that the Company

supplies with respect to the supply of electricity, except billing services).

9.4.2 In addition, if and to the extent that the Structural Change in accordance with the provisions of the Electricity

Sector Law is conducted, including incorporation of holders of distribution licenses within separate companies,

the Company cannot assess what the consequences of such incorporation would be in the future over the

competition in this field of activity, over its activity, profitability and financial status. See Sections 1.3, 6.5 and

7.4 for details with respect to the sale of electricity by private electricity producers and the Structural Change

required by the Electricity Sector Law, respectively.

9.5 Distribution capacity

On December 31, 2011, the distribution system consisted of approximately 25,625 km of medium-voltage grid

lines (compared with approximately 25,254 km on December 31, 2010); approximately 45,868 distribution

transformers with a total output of approximately 22,210 megavolt-amperes (compared with approximately

45,516 distribution transformers with a total output of approximately 21,593 megavolt-amperes as at December

31, 2010) and approximately 19,804 km of low-voltage grid lines (compared with approximately 19,615 km of low-

voltage grid lines as of December 31, 2010).

On March 31, 2012, the distribution system had approximately 25,789 km of medium-voltage grid lines (compared

to approximately 25,372 km on March 31, 2011); approximately 46,230 distribution transformers with 12,893-

megavolt-ampere total output (compared to approximately 45,852 distribution transformers of approximately

12,760 megavolt-ampere total output for March 31, 2011); and approximately 19,934 km of low-voltage grid lines

(compared to approximately 19,701 km of low-voltage grid lines on March 31, 2011).

The table below presents the number of transformers by type, as at December 31 in each of the years 2009

through 2011.

Number of transformers

Transformer types

Year

12.6-6.3 kV 22 kV 33 kV Total

March 31, 2012 2,716 39,339 4,175 46,230

March 31, 2011 2,688 39,044 4,120 45,852

2011 2,704 39,014 4,150 45,868

2010 2,684 38,727 4,105 45,516

2009 2,656 38,279 4,046 44,981

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See Section 7.6.1 for details on assets that serve it in its fields of activity, including in the field of transmission and

transformation.

The breakdown of fixed assets, land and facilities described below relates to the property and assets kept by the

Company and/or the parties serving the Company in the field of activity of distribution, supply and sale of

electricity, disregarding the differences of opinion between the Company and the State with respect to the rights

of the Company to such property and assets, which it possessed at the time of expiry of the concession. See

Section 15.3 with respect to the “property settlement” and its consequences for the Company.

The Company has approximately 30 district and regional offices, of which 25 are at separate sites and 5 combined

at sites that include substations, in the total area of approximately 150,000 m2.

In addition, there are approximately 12,900 transformation, switching and bulk rooms dispersed nationwide.

See Section 8.5 for details on the type of rights of the Company to these properties. See also Note 11B to the

Annual Financial Statements. In addition, the assets of the Company include assets, mainly grids and lines, which

are in Judea and Samaria (the West Bank) (including in the territories of the Palestinian Authority) (hereinafter:

the “Territories”). The Company estimates that the use of these assets for the supply of electricity will continue,

and the assets will continue to be owned by the Company. If the ownership of the remainder or some assets in the

Territories will be moved from the Company, the Company cannot assess whether the Company will receive full or

partial indemnification, if any, for these assets.

9.7 Development of the Electricity Sector – distribution

9.7.1 Manner of establishing the Development Plans of the distribution and supply segment

See Sections 22.1.2 and 22.1.3.2 for details on the duty of the Company to submit a Development Plan and

comply with its prescribed conditions and schedules.

The Development Plan in the distribution segment for 2011-2016, which has not yet been filed for the approval

of the Minister pursuant to his authority under Section 19(A) of the Electricity Sector Law, has three (3) key

components of the distribution grid: a medium voltage grid, transformers for distribution and a low voltage grid.

Each of these components is given attention in the Development Plan with respect to their construction or

replacement. In addition, the distribution grid has a component of electricity meters, automation and

improvement of the connection to homes. The Development Plan is intended to adapt the distribution system

to the needs of the Electricity Sector in view of the introduction of new substations and the development of

existing substations, adding of consumers, increase in the predicted load of existing consumers and antiquation

of the existing grid, in accordance with techno-economic planning criteria. The Development Plan for the

distribution system is being carried out by the districts of the Company that are responsible for planning,

executing, operating and maintaining the distribution grid.

9.7.2 Key assumptions and restrictions underlying the Development Plan

The distribution grid Development Plan of the Company is based on the following data and assumptions:

9.7.2.1 A forecast of the number of new domestic and small business connections and connection expansions, that

has been received from the statistics and market research department of the Company.

9.7.2.2 A forecast of the number of new large business connections based on average performance of previous years,

produced from the ordering system of the Company.

9.7.2.3 Medium voltage consumer data received from the ordering department of the Company.

9.7.2.4 Technical directives for planning of the distribution grid given by the national grid.

9.7.2.5 Directives of the Ministry of Energy and Water, the Electricity Authority, local authorities, and statutory

authorities for the planning and execution of national infrastructures, such as the directive of the Ministry of

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Energy and Water of the year 2001 for building an underground grid in urban and industrial areas featuring

high population density.

9.7.2.6 Forecast of natural increase of the peak demand for electricity.

9.7.3 Anticipated development of additional distribution capacity

The anticipated development of additional distribution capacity is based on long term planning of the customers

division for 2011, which is submitted to the Board of Directors within the financial planning of the Company,

each year.

9.7.3.1 Medium voltage

Within the Development Plan, in 2012-2016 approximately 6,033 km of overhead and underground medium

voltage lines are expected to be added. In addition, approximately 1,425 km of grid will be replaced. During

2012, approximately 1,204 km of overhead and underground medium voltage lines are expected to be added.

These figures are based on the estimates of the Company, which are the construction of approximately 1,200

km on average per year, and replacement of 285 km on average per year, out of the construction of

approximately 900 underground per year.

At the end of the period that has been set forth above, the total length of the medium voltage lines is

expected to be approximately 31,658 km.

9.7.3.2 Low voltage

Within the Development Plan, in 2012-2016, approximately 7,271 km of overhead and underground voltage

lines are expected to be added. In addition, approximately 308 km of grids will be replaced. During 2012,

approximately 1,449 km of overhead and underground low voltage lines are expected to be added. These

figures are based on the estimates of the Company of construction of approximately 1,400 km on average per

year (including renewal of grid) and replacement of approximately 60 km.

At the end of the period that has been set forth above, the aggregate length of low voltage lines is expected

to be approximately 27,081 km.

9.7.3.3 Distribution transformers

Within the Development Plan, during 2012-2016, approximately 7,465 new transformers are expected to be

added. During these years, approximately 6,143 transformers are scheduled for replacement. During 2012,

approximately 1,473 new transformers are expected to be added and approximately 1,199 transformers are

scheduled for replacement.

At the end of the period that has been set forth above, the Company is expected to have approximately

53,333 distribution transformers at its disposal.

That which has been set forth above constitutes forward looking information, as per its definition in the

Securities Law. This information includes forecasts, subjective estimates and other plans of the Company as of

the date of the Prospectus with respect to the working assumptions that it has used in building the forecast

and the date of materialization of those forecasts. Such information is based on future data, whose

materialization is uncertain and is not under the exclusive control of the Company. The main factors that may

affect the non-materialization of the forward looking information or changes occurring in the estimated

schedule of its execution, in accordance with that which has been described above include: non-

implementation of special projects, change in the expected growth rate in the number of connections,

implementation the structure change in the Electricity Sector and of the Company (see Section 1.3), difficulties

in securing licenses and/or changes in legislation in the environmental protection and licensing field; the

absence of appropriate charge rate coverage (see Note 1 F to the Annual Financial Statements); the inability of

the Company to raise the financing required for executing the Development Plan, a change in the expected

rate of growth of demand for electricity and an increase in the number of consumers.

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9.7.4 Forecasts for investments that will be required for the execution of the Development Plan of the distribution

segment

An average annual investment forecast for the distribution and supply segment for each of the years 2012 to

2016, which has not yet been brought forth for the approval of the Board of Directors, is estimated at

approximately NIS 2.4 billion per year. This forecast also includes an investment in the renewal of the grid and in

special projects that are listed below:

9.7.4.1 Consequences of the Non-Ionizing Radiation Law: since 2007, the Company has been operating in accordance

with the Non-Ionizing Radiation Law and the class permits that have been received from the Ministry for

Environmental Protection. During 2012, some of the class permits for the construction and operation of

electricity facilities that were issued by the Ministry for Environmental Protection pursuant to the Non-

Ionizing Radiation Law are due to expire. The Company is in the process of getting replacements permits for

those that are to expire. On May 22, 2012, the Company received new permits with respect to those facilities

for which the permits expired on that date, and additional permits which will replace permits that will expire

during the year. On the basis of the new permits, the Company can continue to set up and operate its

facilities. The Company has arrived at understandings with the Ministry of Environmental Protection in the

context of restrictive conditions which were integrated into some of the type permits, such as a restriction

with regard to setting up new above-ground high voltage lines in populated areas. If the type permits are not

amended in accordance with the understandings, the Company will be required to submit individual setup

and operation permits in specific cases. The Company estimates that it has no material exposure in this

context. With respect to existing grid facilities, the Company invests in improvements for the purpose of

reduction of the exposure of the public to magnetic fields, to a tune of approximately 2 million dollars per

year, in accordance with the Criteria that have been formed and according to the plan that has been

forwarded for the information of the Ministry for Environmental Protection as required by the Non-Ionizing

Radiation Law.

(A) The privatization of kibbutzim and their switching from bulk supply to individual supply.

(B) The burial of existing grids in populated areas: earlier investments in the wake of excavation

opportunities in city centers.

(C) The shifting of pylons on roads.

(D) Addition of private electricity producers, which is expected to increase the electricity generation capacity,

for which the Company may have to strengthen the existing grid and/or build an additional distribution

grid

This estimate is forward looking information, as per its definition in the Securities Law, and upon the building

of an updated investment forecast, the Company may be required to make investments of volumes that differ

from those set forth above. This information includes forecasts, subjective estimates and other plans of the

Company as of the date of the Prospectus with respect to the working assumptions that it has used in building

the forecast and the date of materialization of those forecasts. Such information is based on future data, the

materialization of which is uncertain and is not under the exclusive control of the Company.

The main factors that may affect the non-materialization of the forward looking information or changes

occurring in the estimated schedule of its execution, in accordance with that which has been described above

include: non-implementation of special projects, change in the expected growth rate in the number of

connections, implementation of the Structural Change in the Electricity Sector and of the Company (see Section

1.3), difficulties in securing licenses and/or changes in legislation in the environmental protection and licensing

field; the absence of appropriate charge rate coverage (see Note 1 F to the Annual Financial Statements); the

inability of the Company to raise the financing required for executing the Development Plan.

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9.7.4.2 The electric automobile project

The Electricity Sector Regulations143

, as amended in March 2012, regulate the manners in which a customer

may transact with a supplier for recharging of an electric vehicle. Pursuant to these regulations, the

transaction agreement between an electric vehicle recharging license holder and a customer may not contain

a provision restricting the customer’s ability to end the transaction between the parties at any time, or

restricting the customer in recharging his vehicle through other supply license holders. In other words, a

recharging station may be purchased and the Company worked with under an agreement, or a customer may

be a supplier of another recharging supplier.

In addition, the regulations impose on the license holder a duty to provide service to casual customers

without giving priority in the supply of electric energy to its regular customers, except preference in the cost

of recharging, which will be carried out through the management system of each recharging provider, which

will identify the customer in accordance with its assignment to the supplier that executed a contract with it,

and will charge it or the supplier to which it is assigned for payment. In accordance with the provisions in the

regulations, a license holder will provide for the supply of electricity for recharging electrical vehicles at

various charge rates, to the extent determined, but will be required to publish the recharging cost for casual

customers in a prominent place.

The Company as an essential service supplier is committed to building recharging posts in public grounds

(roads and pavements), using which any customer, casual or regular, can recharge his automobile. Electric

automobile and rechargeable automobile rechargers will have to be related to the recharging control

management system of the Company, which will provide for recharging of the automobile In accordance with

the load on the electricity grid. In accordance with the said regulations, in any case of a license holder seeing

that there is concern regarding the reliability and continuity of the distribution of electricity as a result of

charging an electric vehicle, the license holders hall use various measures, including appropriate

instrumentation for distribution grid demand load control and management.

As far as the Company is concerned, a condition for the fulfillment of the project is securing coverage of costs

of an essential service supplier for the construction and maintenance of the recharging array in general,

including in public grounds. In early discussions with the Electricity Authority on the subject of charge rates

and reimbursement of costs, which were held in accordance with the directives of the Ministry of Energy and

Water, this was a mechanism in which the costs and grid connection of the recharging post, its regular

operation and maintenance, and the management, control, measurement and charging array would be

covered separately from the cost of the electricity consumed for recharging. In other words, a charge rate is

to be determined which will include a fixed payment for each recharge (for covering the costs of the

recharging array, which will be built by the Company and the unique fixed costs), and the price per kWh (for

covering the costs of the electricity actually consumed). In addition, the costs of recharging of vehicles, as a

payment component in the electricity charge rates, will be borne only by the electric vehicle owner sector

rather than the entire public.

In accordance with the policy principles of the Ministry of Energy and Water (the Ministry of National

Infrastructures, as it was then) of July 2011, the Company is responsible for providing a recharging connection

to customers of the electric automobile project who will choose to connect without a recharging provider. For

the purpose of management of the recharging stations in public grounds, and management of recharging

stations for direct customers without a supplier and control of all of the recharging arrays of vehicles during

congestion, the Company has the burden of establishing and regularly maintaining an IT array.

9.7.4.3 Pylon protection project

The pylon protection project that the Company executed in cooperation, inter alia, with the Ministry of

Energy and Water ended in early 2011.

143

The Electricity Sector Regulations (Conditions and Procedures for Issue of a License and Duties of a License Holder) - 1997.

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Within the framework of the project, approximately 140,000 pylons were protected against electric shock,

mostly in populated areas. The Company invested in the protection project approximately NIS 235 million (in

current shekels) over five (5) years, of which approximately NIS 2 million (in current shekels) were in 2011.

There is a joint initiative of the Ministry of Energy and Water and the Company for the approval of regulations

for protection and signage medium voltage and low voltage truss pylons144

that will vest within the

Regulations the protection project in the form that has been carried out by the Company. These regulations

have not yet been approved and their approval will require the Company to complete the pylon protection

and signage project in open grounds located up to 1,000 meters from built up areas, within a schedule that

will be defined, according to the estimate of the Company, during a consensual transition period. An initial

estimate of the Company is that the project completion will cost (as this has been defined in the regulations)

approximately NIS 100 million (in current shekels).

That which has been set forth above with respect to the estimate of the cost of execution of the project

constitutes forward looking information, as per its definition in the Securities Law. This information is based on

information that the Company has as of the time of the Prospectus and includes its estimates and forecasts for

this time. This information may not materialize, in part or in full, or may materialize in a manner differing from

the forecast of the Company, inter alia as a result of an update in the number of pylons to be actually

protected, the results of the tenders for the materials for the project and changes in the estimated schedule.

9.7.4.4 Smart grid project

In November 2011, the Minister informed the Company that it was required to submit to him, by no later than

December 31, 2011, a Development Plan for the implementation of smart electricity metering using the

distribution system of the Company. After the Company receives approval for deferral, in January 2012 it filed

the plan, which includes the replacement of approximately 2.5 million meters in a proceeding that will last,

according to the estimate of the Minister, for about five (5) years from the date of approval of the plan. The

plan includes the installation of “smart meters” that are capable of being read remotely at a high rate, ability

to disconnect and reconnect the feed line and transmit a warning of loss of supply voltage. In addition, an

information center will be established, providing an indication of the supply state and other indications to

consumers via the Internet. The Company estimates that for building the smart metering it will be required to

invest approximately NIS 2.7 billion, of which approximately NIS 39 million is included in the investment plan

of the Company for 2012 on the issue of Stage A of the smart grid – the Smart City Project. As of the date of

the Prospectus, the plan has not yet been approved by the Minister.



9.9 Human capital

The organizational structure of the distribution segment:

144

Truss – an engineering element that is usually used for strong, lightweight constructions such as communication towers, pylons,

bridges, cranes and various engineering tools.

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Field of Activity – Distribution Segment

Northern

District

Marketing

Department

Key to

symbols

Vice President

for Customers

Roster of employees

(positions): 4,256

Haifa

District

Dan

District

Jerusalem

District

Southern

District

VP

Brch Mgr

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As at March 31, 2012, the distribution segment employs 3,463 permanent employees and 793 temporary

employees in the marketing branch and in the districts (compared with 3,430 permanent employees and 896

temporary employees in the marketing branch and in the districts as of March 31, 2011 (the number of employees

relates to organizational assignment and does not include employees assigned to other branches and working for

the segment and vice versa). In accordance with that which has been set forth above, some of the employees who

are organizationally affiliated with the distribution segment work, in addition to working in the construction and

maintenance of the distribution system, in the constructing and operation of the transmission grids (see Section

8.8). See Section 14 for details with respect to benefits and the nature of the employment agreements and

additional details.


As of the date of the Prospectus, there are no suppliers in the distribution field on which the Company has

material dependence.

However, the Company has a materials supplier (Synergy Cables Ltd.), which supplies the Company with medium

voltage and low voltage cables at a cost of approximately NIS 120 million per year (this supplier supplies the

Company approximately 80% of the medium and low voltage cables that are purchased by it and about a third of

the cost of the suppliers of the distribution segment).

9.11 Environmental risks and their manner of management

9.11.1 Environmental risks and environmental regulation – general


9.11.2 Non-ionizing radiation

The Non-Ionizing Radiation Law - 2006, including the Non-Ionizing Radiation Regulations - 2009, apply to the

facilities of the Company that are used for the generation, transmission, distribution and supply of electricity,

and are classified as a “radiation source” as per its definition in the law.

The law establishes that no radiation source may be built or operated except with permits by law and in

accordance with the terms thereof, which are given by the responsible supervisor at the Ministry for

Environmental Protection. In addition, a fee must be paid for these permits.

The law took effect on January 1, 2007, with respect to electricity facilities, which up to that time had no

construction permit or authorization permit issued for them pursuant to Section 45 of the Electricity Sector Law,

and on July 15, 2008, the law took effect with respect to the facilities for which a construction permit or

authorization as above had been received through to January 1, 2007.

Upon the start of the effect of the Radiation Law, the Company submitted applications for radiation and

operation permits for all of its facilities. The Company is continuously negotiating with the Ministry for

Environmental Protection in cases where it is necessary to have a new permit issued for construction and

operation of a facility that does not match the class permits that have been given to the Company. The

operation of a radiation source without a duly issued permit or deviation from its conditions may constitute a

violation of the Radiation Law and lead to the issue of an order for the removal of the source. During 2012,

some of the class permits for the construction and operation of electricity facilities that have been given by the

Ministry for Environmental Protection pursuant to the Non-ionizing Radiation Law will expire. The Company is in

the process of receiving new permits to replace those which are about to expire. On May 22, 2012, the

Company received new permits with respect to those facilities for which the permits expired on that date, and

additional permits which will replace permits that will expire during the year. The Company has arrived at

understandings with the Ministry of Environmental Protection in the context of restrictive conditions which

were integrated into some of the type permits, such as a restriction with regard to setting up new above-ground

high voltage lines in populated areas. If the type permits are not amended in accordance with the

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understandings, the Company will be required to submit individual setup and operation permits in specific

cases. The Company estimates that it has no material exposure in this context.

On June 18, 2012, the Company was apprised of the Non-ionizing Radiation Law Memorandum (Monetary

Sanctions) - 2012, which concerns the setting of administrative and criminal means of enforcement, including

monetary sanctions in amounts up to NIS 200,000, for a corporation that has breached certain provisions of the

Radiation Law. The Company is studying the provisions of the Memorandum and its implications for the

Company.

Over the course of the past 30 years, many studies have been conducted in the world for the purpose of the

examination of the relationship between prolonged exposure to magnetic fields from domestic electric

appliances and excessive frequency of other diseases, and some of the health surveys that have been conducted

have revealed findings that indicate such a relationship between magnetic fields and leukemia in children. The

findings of these surveys have been attacked by various researchers, who argue that they are based solely on

estimates and that the statistical correlation that was found was very weak and does not substantiate causality

while other health surveys and laboratory tests have found no findings indicative of any relationship145

. In

November 2010, updated directives were issued by the International Commission for Non-Ionizing Radiation

Protection (ICNIRP), in accordance with which the maximum value of exposure to a magnetic field from the

electricity grid for the general population is 2,000 milligauss, relating to the known health effects that stem from

the induction of a magnetic field in the body146

. In that document, the Commission stated that sufficient

information had not been accumulated in order to determine a value lower than that value with respect to

epidemiological findings whereby there may be other health effects from extended exposure to magnetic fields

at levels lower than the threshold that has been set forth above. As a response to the possibility of the existence

of long term health effects, the World Health Organization (WHO) and other agencies in the world support the

implementation of a principle of preventive care whereby even in the absence of certainty with respect to the

existence of a risk and its limited scope – if any – there is room for taking certain, minor steps in all matters

related to exposure to magnetic fields. The principle of preventive care has been vested in Israel with respect to

non-ionizing radiation in the Non-Ionizing Radiation Law and also applies to the Company in the construction

and operation of radiation sources. The law does not prescribe the maximum permitted levels of exposure of

persons to radiation from a radiation source, which were supposed to be prescribed in accordance with the law

in regulations that were supposed to be promulgated by January 1, 2007. The law states that if no such

regulations have been promulgated on matters pertaining to the Electricity Sector until that day, the resolutions

of the Supervisor on the issue, inter alia, of conditions in construction and operation permits on matters relating

to the Electricity Sector, are to be in accordance with the recommendations in the report of the Experts

Committee with respect to magnetic fields from the electric grid published on the website of the Ministry for

Environmental Protection (hereinafter: the “Expert Committee”); however, such a resolution on matters that

have an impact on costs for the Electricity Sector, for which a written notice has been given to the Supervisor,

from the Minister for Environmental Protection or the Minister of Energy and Water requires the prior approval

of the Minister for Environmental Protection, the Minister of Energy and Water and the Ministry of Finance. On

December 28, 2011, the Minister of Energy and Water informed the Minister for environmental protection that

regulations establishing threshold values for exposure to non-ionizing radiation that originates from an electrical

facility may directly and materially affect the costs for the Electricity Sector, electricity charge rates and the

reliability and availability of the supply of electricity, and therefore, he required them to be promulgated with

his consent and that of the Minister of Finance, pursuant to his authority under Section 25(C) of the Non-

Ionizing Radiation from an Electrical Facility Law. In addition, the Minister announced under his authority in

accordance with Section 26(B)(1) of the law that the threshold values for non-ionizing radiation from an

electricity facility that are not in accordance with the statements in the expert committee report, have an effect

145

Extremely low frequency Fields: Environmental Health Criteria Monograph 238. World Health Organization 2007, Guidelines for

Limiting Exposure to Time-Varying Electric and Magnetic Fields (1 Hz - 100 kHz). Health Physics 99(6):818-836; 2010), the report of the Experts Committee with respect to Magnetic Fields from the Electricity Grid, the Ministry for Environmental Protection, March 2005.

146 Guidelines for Limiting Exposure to Time-Varying Electric and Magnetic Fields (1 Hz - 100 kHz). Health Physics 99(6):818-836; 2010.

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over the costs of the Electricity Sector, and therefore the resolutions of the Commissioner under Sections 3, 10

and 11 of the law relating to such threshold values require the prior written approval of the Minister for

environmental protection by the Minister of Energy and Water and by the Minister of Finance.

The said Expert Committee has established an exposure threshold value of 1,000 milligauss for short term

effects, alongside the use of the principle of preventive care in the design of new facilities and operation of

existing facilities.

In March 2011, a draft interim report of a public expert committee that was appointed in 2007 following the

recommendations of the Expert Committee in 2005 was forwarded for the comments of the Company, within

the framework of which, inter alia, target values of a few milligauss were recommended for exposure to

magnetic fields from the electricity grid, along with a recommendation to require all electricity facilities to have

a construction permit. During the course of 2011, the Company forwarded its initial comments on the draft

interim report to the relevant parties, and it is studying its implications.

In the last two years, a joint initiative of the Ministry of Health and the Ministry for Environmental Protection

has been advanced for establishing binding threshold values for magnetic fields from the electricity grid. Within

this framework, in November 2011 a first meeting of a team whose members included representatives of the

Company and representatives of the Government ministries was held, with the goal of examining the meaning

of establishing a threshold value of exposure from a magnetic field from the electricity grid of 4 milligauss on

average per day.

The Ministry for Environmental Protection includes explanatory comments on the issue of non-ionizing radiation

in answer to public applications to it on this subject, and in non-ionizing radiation measurement reports that are

compiled by the Ministry and by private surveyors. These explanatory comments, in various forms, include

information whereby the threshold value for short term exposure to magnetic fields from the electricity grid is

1,000 milligauss, long exposure to levels of more than 2 milligauss is a possible carcinogen and that the

recommended average level of 24 hour continuous exposure is to be 2 milligauss, for 12 hour continuous

exposure – 3 milligauss, and for 8 hour continuous exposure an average level of 4 milligauss. These values were

also cited in various correspondences between the Ministry and the Company and raise contentions and claims

towards the Company from the public and from the authorities. The Company has forwarded its objections to

this position to the Ministry for Environmental Protection and to the Ministry of Energy and Water and has

asserted that these values are being translated by the public and by some of the authorities into a binding

standard, which the Company cannot comply with.

A number of planning authorities have determined in planning permits for electricity facilities, as well as in an

outline plan for the construction of substations, a condition whereby the levels of the magnetic field from the

facility are not to exceed a few milligauss (2 to 10 milligauss). This condition may constitute an obstacle to the

construction and connection of facilities to the electricity grid.

In the assessment of the Company, according to tests that it has conducted, most of the electricity facilities that

it owns comply with the directions of the International Commission for Non-Ionizing Radiation Protection

(ICNRIP). The Company is acting to design new facilities in order to avoid exceeding the threshold value above.

The Company is building new electricity facilities in accordance with the conditions included in the construction

and operation permits in all matters related to implementation of measures for restriction of exposure levels,

access denial, placement of warning signs, reporting duties, etc.

The Company is working diligently in order to reduce the magnetic fields in all of the electricity facilities that it

owns and to comply with the provisions of the Radiation Law, while acting in accordance with the principle of

preventive care. Toward this end, special purpose teams have been established in the Company, including

representatives from the relevant divisions, and professional discussions have been held with the participation

of representatives of the Ministry of Energy and Water and the Ministry for Environmental Protection.


See Section 9.11.2 for proceedings with respect to non-ionizing radiation, and see Note 24 B to the Annual

Financial Statements for legal proceedings related to this field of activity.

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As of the date of the Prospectus, to the best of the Company’s knowledge, it is not exposed to material events

or matters that are related to environmental protection in the transmission segment unless specified above.

9.11.5 The policy of the Company with respect to the management of environmental hazards



The expenses of the Company in the context of non-ionizing radiation were in 2011 at approximately NIS 6.6

million out of an amount of approximately 2 million dollars (approximately NIS 7.6 [million] in accordance with

the rate of exchange as at December 31, 2011) that were allocated for the reduction of public exposure to

magnetic fields as set forth in Section 9.7.4.1. The cost of the fees that the Company has paid for permits

pursuant to the Radiation Law stood at approximately NIS 1.2 million in 2011. See Section 21.8

9.12 Restrictions to and regulation of the operations of the Company in the distribution and supply segment

9.12.1 Criteria for the reliability of supply – rules of supply of electricity to consumers

In accordance with the Electricity Sector Law, one of the functions of the Electricity Authority is: “the

establishment of criteria for the level, standard and quality of the service that is provided by the holder of a

license for the provision of essential services.” In the Book of Criteria that was first determined by the Electricity

Authority in 2002, and which is updated from time to time, both the rules for transactions between consumers

and the Company and the binding charge rates for the various services that the Company provides to its

consumers are determined.

The Book of Criteria is published on the website of the Electricity Authority147

, and it currently replaces most of

the provisions in the arrangement that had existed with respect to the rules of the supply of electricity to

consumers148

, most of which have been cancelled and only two (2) of which remain in effect as of the date of

the Prospectus149

, and the rules of connections that have been cancelled. See Sections 8.1.2 and 22.1.3.1 for

further information on the Book of Criteria.

In addition, the Electricity Authority has determined150

the level of reliability that constitutes the basis for the

electricity charge rate, as follows:

(A) The charge rate bases are intended to achieve an overall level of reliability for a low voltage consumer of

100 minutes of average downtime for the average consumer per year (“the objective”).

(B) Through to February 2003, the Electricity Authority will establish a binding plan for achievement of the

objective (as of the date of the Prospectus, no such plan has yet been determined) and in its absence the

Company is operating in accordance with indices that it has recommended to the Electricity Authority, In

accordance with that which has been set forth below.

(C) Based on the existing operational set up, the Company is required to reduce the variance between the

reliability levels in the different administrative areas and the general average from 100% to 50%.

The Company estimates that it is upholding the Criteria that have been set forth, with the exception of that

which has been set forth above and below with respect to the determination of the reliability of the level of

147

In accordance with the Electricity Sector Regulations (Modes of Publication of Criteria), 2002, the Criteria are supposed to be

published in the Official Gazette, but in effect the Electricity Authority publishes them on its website only, in accordance with that which has been set forth. The Book of Criteria was last updated in August 2011.

148 The Rules of the Electricity Sector (Supply of Electricity to Consumers) (Provisional Order) - 1996.

149 The rules that have remained in effect are: Rule 4: “Connections to supply grid”, which addresses the allocation of transformer

rooms to provide for a connection to the electricity grid, and Rule 12: “Access”, which gives the Company permission to enter the premises of the consumer at any time in order to take steps to prevent harm to persons or property.

150 Resolution No. 6 of meeting 109 dated June 26, 2002 in the matter of “[The] level of reliability in charge rate bases”.

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supply. With regard to the determination of the level of reliability in accordance with that which has been set

forth above, the Electricity Authority has not yet established a binding plan to achieve the objective.

The Company has taken action in the past in order in order to convince the Electricity Authority to accept its

position whereby it would not be possible to implement the resolution of the Electricity Authority in order to

achieve the objective of 100 minutes of downtime, but it would be possible to obtain a total level of reliability

for a low voltage consumer of approximately 141 minutes of average downtime for the average consumer per

year, this being subsequent to the conclusion of the Company’s DMS project. The DMS project is a project of the

Company with regard to the distribution system, which is intended to improve the reliability of the electricity

and which is due to conclude by 2016, outside of the scope of the plan for achieving the objective that which

has been set forth above, which will be approved by it in accordance with that which has been set forth above.

The cost of the project is estimated at approximately NIS 520 million (in current shekels), of which the Company

still has to pay approximately NIS 55 million (in current shekels). In addition, the project requires maintenance

costs of approximately NIS 3-5 million per year for the next ten (10) years.

The Company achieved this objective in 2009 and is assuming that it will be able to achieve this objective in

those years in which the weather will be average. In 2010, following a major storm that took place during the

winter, the Company did not attain this objective of 141 minutes. In 2011, the measured downtime per

consumer was 143.4 [minutes], an overrun of approximately 2.4 minutes relative to the objective of 141

minutes that the Company had established, in accordance with that which has been set forth, as an objective for

2016 (the date of conclusion for the DMS project). With respect to the reduction of the variance between areas,

the Company has succeeded in the reduction of the variance (standard deviation) between the downtime

minutes metric of the administrative areas and the national average to under 50% in 2005, and from 2005

onward, in the years in which no extraordinary weather occurred, to values below 40%. The Company cannot

assess whether its plan will be accepted by the Electricity Authority and what the consequences would be for

failure to uphold the objective that the Electricity Authority has determined in accordance with that which has

been set forth above. There is a possibility that failure to uphold the objective at the times that shall be set forth

in the plan, once these have been determined by the Electricity Authority, may manifest in the non-recognition

of certain expenses for the purpose of setting the charge rate in the distribution segment. The Company

estimates that the project costs for improving the reliability of supply will be recognized in the electricity charge

rate.

The information that has been set forth constitutes forward looking information as per its definition in the

Securities Law. This information is based on information that the Company has as of the date of the Prospectus

and includes its estimates and forecasts as of that date. It is possible that the information may fail to materialize,

in part or in full, or that it may materialize in a manner that differs from the forecast of the Company, inter alia

as a result of climatic changes and regulatory changes.


See Section 24 to the Financial Statements with respect to legal proceedings that pertain to this sphere of activity.

F-137

Part 4: Description of the Business Affairs of the Company – Information Relating to Matters that Pertain to the Operations of the Company as a Whole

Information relating to matters pertaining to the activity of the Company altogether – general

Further to the information that has been described above, which addresses each sphere of operations of the Company

on an individual basis, information that pertains to matters that relate to the operations of the Company as a whole has

been set forth below. The information that appears in this part [of the document], along with the information that

appears above, reflects a description of all of the areas of business of the Company on a consolidated basis.

10. Customers - electricity consumers

10.1.1 On December 31, 2011, the number of customers of the Company stood at approximately 2,520 thousand, in

comparison with approximately 2,486 thousand customers on December 31, 2010, representing an increase of

approximately 33.9 thousand customers. On March 31, 2012, the number of customers of the Company stood

at approximately 2,530 thousand customers, in contrast with with approximately 2,494 thousand customers on

March 31, 2011, constituting an increase of approximately 35.9 thousand customers. The electricity

consumption in 2011 was 53,062 million kWh, which constitutes an increase of 1,025 million kWh in comparison

with 2010. The electricity consumption in the first quarter of 2012 was approximately 13,844 million kWh,

representing an increase of approximately 1,347 million kWh for the parallel quarter the year before.

10.1.2 The Company classifies its customers into households, the industry, public and commercial buildings and bulk,

water pumping and agriculture.

The table that appears below shows the electricity data by customer types for the years ended December 31,

2011 and December 31, 2010 and for a three-month period that ended on March 31, 2012, and March 31, 2011.

See Note 28 to the Annual Financial Statements for details on the revenues of the Company by customer types.

In the twelve-month (12) period that ended on December 31, 2010, and 2011 (in millions of kWh, and in

percentages)

Total electricity consumption

In percent

2010 Total electricity consumption

In percent

2011

Domestic 30 15,590 30 15,909

Industrial 20.5 10,647 20.7 10,987

Public, commercial and bulk 40.6 21,157 40.3 21,421

Water pumping 5.8 3,029 5.7 3,015

Agriculture 3.1 1,614 3.3 1,730

Total 100 52,037 100 53,062

10.1.3 In the three-month period that ended on March 31, 2012, and 2011 (in million kWh and in percent)


In percent

March 31, 2011 Total electricity consumption

In percent

March 31, 2012

Domestic 33.2 4,180 34.9 4,835

Industrial 21.0 2,642 19.5 2,697

Public, commercial and bulk 37.9 4,781 38.2 5,284

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In percent

March 31, 2011 Total electricity consumption

In percent

March 31, 2012

Water pumping 4.7 594 4.3 594

Agriculture 3.2 402 3.1 434

Total 100 12,599 100 13,844

10.1.4 The domestic sector – as of December 31, 2011, the Company is serving approximately 2.2 million households,

which represent almost all of the households in the State of Israel. This is similar to the statistic for December

31, 2010. As of March 31, 2012, the Company serves approximately 2.2 million households, representing almost

all of the households in the State of Israel, similar to March 31, 2011.

In the year that ended on December 31, 2011, the domestic consumption increased by approximately 2.0%,

relative to the corresponding period during the year that preceded it. The revenue in current prices (gross) from

the sale of electricity in the domestic sector increased by approximately 0.7% in 2011 relative to the

corresponding period during the year that preceded it, because of an increase in consumption and charge rates.

In the first quarter of 2012, the domestic consumption increased by approximately 15.7% relative to the parallel

quarter the year before. The revenues in current prices (gross) from the sale of electricity in the domestic sector

increased by approximately 33.3% in the first quarter of 2012 relative to the parallel quarter the year before,

because of an increase in consumption and charge rates.

10.1.5 The public-commercial and bulk sector includes the consumption of electricity by commercial premises,

shopping centers, various businesses and authorities of the public sector, such as: local authorities, Government

ministries and schools.

The electricity consumption in this sector increased in the period that ended on December 31, 2011 by

approximately 1.2% relative to the corresponding period during the year that preceded it. The revenues in

current prices (gross) from the sale of electricity in the public commercial sector increased in 2011 by

approximately 5.9% relative to the corresponding period during the year that preceded it because of an increase

in consumption and charge rates.

The consumption of electricity in this sector increased in the first quarter of 2012 by approximately 10.5%

relative to the parallel quarter the year before. The revenues in current prices (gross) from the sale of electricity

in the commercial public sector increased in the first quarter of 2012 by approximately 28.4% relative to the

parallel quarter the year before, because of an increase in consumption and charge rates.

10.1.6 The industrial sector - electricity consumption of the industrial sector increased by approximately 3.2% in the year

that ended on December 31, 2011 relative to the corresponding period during the year that preceded it. In 2011, the

revenues in current (gross) prices from the sale of electricity increased in this sector by approximately 9.5% relative to

the corresponding period during the year that preceded it, because of an increase in consumption and charge rates.

The consumption of electricity of the industrial sector increased by approximately 2.1% in the first quarter of

2012 relative to the parallel quarter the year before. In the first quarter of 2012, the revenues in current prices

(gross) from the sale of electricity in this sector increased by approximately 26.5% relative to the parallel

quarter the year before, because of an increase in consumption and charge rates.

10.1.7 Water pumping151

is required in order to supply drinking water and irrigation water for other purposes to all

parts of the country. The electricity consumption in this sector decreased by approximately 0.5% for the year

that ended on December 31, 2011, relative to the corresponding period during the preceding year. In 2011, the

revenues in current prices (gross) from the sale of electricity in this sector increased by approximately 5.9%

relative to the corresponding period during the year that preceded it because of an increase in charge rates.

151

Mainly Mekorot, water desalination, local authorities, etc.

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The consumption of electricity in this sector did not change in the first quarter of 2012 relative to the parallel

quarter the year before. In the first quarter of 2012, the revenues increased in current prices (gross) from the

sale of electricity in this sector by approximately 19.2% relative to the parallel quarter the year before because

of an increase in the charge rates.

10.1.8 The agricultural sector – in the year that ended on December 31, 2011, the consumption of the agricultural

sector increased by approximately 7.2% relative to the corresponding period during the year that preceded it.

The revenue in 2011 increased in current prices (gross) by approximately 13.5% relative to the corresponding

period during the year that preceded it because of an increase in consumption and charge rates.

In the first quarter of 2012, the consumption of the agricultural sector increased by approximately 7.9% relative

to the parallel quarter the year before. The revenues in the first quarter of 2012 increased in current prices

(gross) by approximately 25.7% relative to the parallel quarter the year before because of an increase in

consumption and in charge rates.

10.2 Types of electricity charge rates

In accordance with the provisions of the Electricity Sector Law, the Electricity Authority sets forth separate

electricity charge rates for the Company for its different segments of activity. However, most of the electricity

consumers (consumers of “domestic”, “general” electricity charge rate and some “public street lighting”, in

accordance with that which has been set forth below) pay, for electricity, one weighted uniform charge rate for

the entire year, which includes all of the segments of operations of the Company.

In accordance with the provisions in the Book of Criteria, as of the date of the Prospectus, the electricity charge

rates for the consumer are divided into four (4) types, as follows:

(A) Uniform charge rates – a charge rate that is calculated on the basis of an annual average in accordance with

the “load and time charge rate” (in accordance with that which has been stipulated below) and the

characteristics of the consumption hours of the group to which the consumer belongs. The groups for this

purpose are as follows: (A) “domestic” – homes that are used for the purpose of residence only, buildings for

agricultural purposes and places of worship; (B) “public street lighting” – street and public garden lighting;

and (C) “general” – an electricity charge rate that is intended for buildings that are used for workshops,

industry or commerce, including educational and cultural institutes, absorption centers, buildings that are

used by non-profit associations and institutions, clinics, hospitals, Government ministries and buildings that

are temporary connected (in other words, relates to the other consumers at a uniform charge rate that is not

the “domestic” or “public street lighting” charge rate);

(B) “Bulk” (a charge rate that applies to the sale of electricity to the Palestinian Authority);

(C) “Load and time charge rate” – a charge rate that is calculated in accordance with the load of the system and

the consumption time;

(D) A “concentrated sales charge rate” – an electricity charge rate for low and medium voltage consumers that

distribute and provide electricity to others.

The load and time charge rates were first instituted in Israel in 1982, and on the date of the Prospectus they apply

on a mandatory basis to all high voltage, medium voltage and low voltage consumers whose connection size is

3X200 amperes or more, or whose annual consumption exceeds 40,000 kWh. The load and time charge rate is

based on the marginal costs in the system and is intended to create a direct connection between the costs of

electricity generation and supply at the various times and the price that the consumer pays. In the electricity bill of

load and time charge rate consumers, consumption is listed by different hour clusters (in accordance with the

seasons of the year, the day of the week and the time of the day) and they have a programmable electronic meter

installed for the purposes of this charge rate. The kWh prices for the load and time charge rate also vary in

accordance with the supply voltage. In addition, each uniform charge rate consumer to which the mandatory load

and time charge rate does not apply can ask to enroll in an optional load and time charge rate.

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As of December 31, 2011, the total number of consumers who use the load and time charge rate is approximately

58,235, in comparison with 56,130 consumers as of December 31, 2010. In other words, approximately 2.3% of

the total number of consumers consumes approximately 60% of the total annual electricity consumption. As of

March 31, 2012, the total number of load and time charge rate consumers is approximately 61,105, compared to

57,964 consumers as of March 31, 2011.

As of December 31, 2011, the total number of consumers using the “domestic” charge rate is approximately 2.21

million, in comparison with approximately 2.19 million for December 31, 2010. In other words, approximately 89%

of the total number of consumers consumes approximately 30% of the total annual electricity consumption. As of

March 31, 2012, the total number of “domestic” charge rate consumers is approximately 2.22 million, compared

to approximately 2.19 million for March 31, 2011.

11. Marketing and distribution

In 2011 and up to the time of the Prospectus, the Company conducted relatively limited advertising

communication activity, which dealt with various issues that are on its agenda: electricity safety, marketing of

visitor centers of the Company, environmental protection and new service of enrollment into an electricity

account by email. The advertising costs of the Company for 2011 came to a total of approximately NIS 4 million,

without advertising costs required by law such as enactments with respect to tenders, situations vacant, planning

and construction and so on, in contrast to approximately NIS 10.1 in 2010. In the first quarter of 2012, the

Company did not conduct any media-advertising activity, except announcements required pursuant to the law

such as notices on tenders, open positions and planning and construction.

12. Seasonality

The demand for electricity in the State of Israel is seasonal. The seasons in this context are defined as the summer

(July to August, inclusive), winter (December to February, inclusive) and the transitional seasons – spring (March

to June, inclusive) and autumn (September to November, inclusive). The demands are higher during the summer

(due to the use of air conditioners) and in the winter (due to the use of heating appliances) than in the transitional

seasons (autumn and spring). In the winter and summer the average electricity consumption was higher than that

in the transitional season and also features days of peak demand due to extreme conditions of heat and cold.

In addition, the revenue of the Company in the various seasons is affected by the change in the charge rates for

consumers that pay based on load and time (load and time charge rate), representing approximately 60% of the

electricity consumption (in accordance with the data for 2011), as the load and time charge rates are higher on

average during the summer than the load and time charge rates in the transitional seasons and winter.

See Section 7.7.3.2 for details on forecast of peak demand for electricity.

Breakdown of revenue from electricity, net, for 2011, 2010 and 2009 (adjusted to the NIS of December 2011)

In NIS million

Q1 Q2 Q3 Q4 Total

2011 5,130 5,050 8,020 6,073 24,273

2010 3,809 4,443 6,480 4,887 19,619

2009 5,474 3,663 6,392 3,965 19,494

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Breakdown of revenue from electricity, net, for the period January-March 2012 and for 2011, 2010 and 2009 (adjusted to the NIS of March 2012)

In NIS million

Q1 Q2 Q3 Q4 Total

2012 6,453 - - - 6,453

2011 5,150 5,069 8,050 6,096 24,365

2010 3,823 4,460 6,505 4,906 19,694

2009 5,495 3,677 6,416 3,980 19,568

13. Research and development

13.1.1 General

The purpose of the expenditures for research and development activity is the development of tools for the

maximal utilization and the optimal implementation of modern technologies, for contending with the growing

strictness of the environmental requirements (in all of the spheres of operation of the Company) and for the

achievement of the reliability of supply objectives, while striving toward the minimization of costs. For the

purpose of the achievement of the objective of the investment in research and development, research projects

are carried out that focus, in summary, mainly on the following issues:

13.1.1.1 New technologies for the purpose of the improvement of efficiency along the electricity chain links

(generation, transmission and transformation and distribution). Studies with respect to modern technologies

in the electricity generation and supply field that are aimed at improving the efficiency of electricity

generation, reduction of transmission costs, quantitative and operational optimization of transmission system

costs, resulting in decrease in fuel consumption, decrease in the rates of emissions and saving in operation

costs.

13.1.1.2 The improvement of the reliability of the supply and quality of electricity. The conduct of studies and the

development of applications whose purpose is the reduction of the rate of faults in the transmission and

distribution grid, the identification of faults that may cause the spread of extensive disruptions to the grid and

the examination of systems that may be used to prevent or reduce greatly the deterioration of the system.

13.1.1.3 Demand side load management. The development of a “smart domestic electricity panel” that provides, inter

alia, for the remote reading of consumption data, the balancing of phases and the disconnection of heavy

electricity consumers in the home of the consumer (such as air conditioners, tumble dryers for laundry and so

on), through the use of an algorithm that has been prepared in advance, which is run as necessary (on a

remote basis) during times of peak demands for electricity.

13.1.1.4 The diversification of energy sources and renewable sources of energy. The conduct of studies on the impact

of renewable energy facilities on the stability of the electricity grid, the utilization of exhaust gasses for the

growing of algae for fuel production (biomass) and nutritional supplements.

13.1.1.5 Environmental aspects that are related to the operations of the Company. Conducting of studies for the

examination of advanced uses of fly ash (cleaning and adsorption of heavy metals in polluted soils, catalytic

materials in industrial processes and so on), the development of technologies for reduction of greenhouse

gases and the emissions of pollutants from coal power stations, capturing of carbon dioxide (CO2) and

possible uses in agriculture, methods for reducing magnetic fields that originate from power facilities.

13.1.1.6 The maximum utilization of soil reserves and other resources of the Company. Development of computer

models based on reliability of supply, energy loss and the necessary investments, in order to determine an

optimum size for substations in urban and rural areas, based upon the load density forecast in the feed areas

for the substations, the conducting of studies for the integration of advanced technologies for the generation

of electricity with the generation infrastructures of existing units.

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13.1.1.7 The improvement and streamlining of processes. The development of models and the execution of

simulations for the evaluation of caloric value losses in coal mounds and the examination of the types of coal

that are most suitable for strategic storage while minimizing caloric loss, the development of technology for

the separation of steam from exhaust gases for the reuse of the water in the electricity generation processes,

the development of a system for the rapid, precision identification of the location of faults due to short

circuits, the development of a model for the purpose of the simulation of the process of rinsing an online gas

turbine (at the current point in time, the rinsing of the compressor requires that the unit be turned off).

From time to time, the Company examines the conduct of studies that have potential for implementation in up

to five (5) years. The projects are conducted both by employees of the Company and by external parties

(universities, research institutions, companies, and so on). Not every study promises success and

implementation, but the knowledge and tools that are acquired during the conduct of the study are added value

that is made use of during the course of the engineering operations and the regular operations of the facilities

of the Company. In addition, the Company is acting to include in every engagement agreement for the conduct

of a study a section that secures its right to the results of the research (the ownership of study results and/or

the reimbursement of the investment and/or royalties, as relevant).

In 2011, the Company invested in research and development projects approximately NIS 7 million (not including

the technology incubator, in accordance with that which has been set forth below), without a change compared

with 2010; in the first quarter of 2012, the Company invested approximately NIS 0.9 million in research and

development projects, compared to NIS 0.6 million in the parallel quarter the year before, and in 2012 it is

expected that approximately NIS 8 million will be spent for these purposes (not including the technology

incubator, in accordance with that which has been set forth below).

13.1.2 Technological incubator (center for the promotion of innovative technological ideas)

In 2008, the Company started to take action toward the establishment of a technology incubator. Within the

framework of this effort, the Company established in 2009 the center for the promotion of innovative

technological ideas which supports entrepreneurs who have original ideas for development of products that are

intended to integrate in the core activity of the Company.

The entrepreneurs who are admitted to the Technology Incubator receive financial support (by way of the grant of

a loan that is convertible into shares in the amount of up to NIS three (3) million per project), the accompaniment

of a professional team and options of making use of the infrastructures and the connections of the Company in

Israel and overseas (usually, for use of this type, the Company charges a separate payment). Through to the date of

the Prospectus, agreements have been signed with ten (10) companies, within the framework of which the

Company has extended a total of NIS sixteen (16) million (of which approximately NIS 8.7 million was extended in

2011 and approximately NIS 1.2 million in the first quarter of 2012), which is to be repaid in accordance with the

loan agreements or converted, in accordance with that which has been set forth, into shares, subject to any

applicable statute. Usually, the Company is entitled to appoint one (1) director or an observer on its own behalf on

the Board of Directors of the project company, but without exercising of the option for conversion of shares. The

Company regularly takes action in order to locate new projects for the Technology Incubator.

The budget of the Company for 2012 includes an amount of approximately NIS 11 million that is necessary for

the purpose of the granting of loans to companies within the framework of the Technology Incubator, as well as

for the purpose of its regular operations.

On March 25, 2010, the Board of Directors of the Company approved the establishment of a subsidiary to

execute the activity of the Technology Incubator and the Company is holding discussions with the Companies

Authority to advance the subject.

14. Human capital

14.1 Organizational structure of the Company

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Divisions and Branches – Head Office and Service

Key to

symbols

VP

Brch Mgr

CEO

Unit

Dept Mgr

CEO

Vice President for Logistics, Security and Emergencies

Vice President for Finance and

Economics

Vice President for Strategic Resources

Vice President for Human Resources

Roster of employees (positions):

Head Office: 1,520 Service: 1,778

National Security

Regulation and

Economics

Supplies and Stores Branch

Logistics and Assets Branch

Organization, Quality and

Safety

Accounting and Economics

Finance Branch

Information Systems and

Teleprocessing

Planning, Development

and Technology

National Emergencies

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Engineering Projects

Roster of employees (positions):

2,006

Vice President for Engineering

Projects

Business Initiation

Project Performance

Branch

Engineering Planning Branch

Key to

symbols

VP

Brch Mgr

Unit

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Structure of the Organization by Divisions, Branches and Districts

* VP Generation and Transmission also serves as assistant to the CEO ** VP Human Resources serves in his capacity as the Human Resources Branch Manager

Key to

symbols

Division / assistant to CEO

Branch / district Unit

Board

CEO

Dept

Board of Directors

Legal Adviser and Corporate Secretary

Corporate Spokesperson

Internal Auditor

Secretary of the Board

Chief Executive

Officer

Assistant CEO

VP Human Resources

Organization, Logistics, Security

and Emergency Division

Finances and Economics

Division

Strategic Resources

Division

Generation and Transmission

Division

Engineering Projects Division

Customers Division

Supply and Storage Branch

Logistics and Assets Branch

Organization, Quality & Safety

Branch

Accounting and Economics Branch

Finances Branch

Information Systems &

Teleprocessing Branch

Planning, Development

& Technology Branch

Project Execution Branch

Engineering Design Branch

Generation Branch

Transmission & Transformation

Branch

Marketing Branch

Northern District

Southern District

Jerusalem District

Dan District

Haifa District

National Security

Regulation and Economics

Business Entrepreneurship

System Administration

Fuel Administration

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14.2 Employee roster by areas of operation

The personnel roster (number of positions) as of March 31, 2012 is as follows: 12,430 employee positions, in

comparison with 12,653 employee positions as of March 31, 2011. As of March 31, 2012, 12,697 employees

worked at the Company, compared with 12,865 employees as of March 31, 2011. The segmentation of the job

roster by segments reflects the organizational assignment in the Company and not the internal reciprocal activity,

which is done between the units of the Company in the different segments. Approximately 40% of the pay of

Corporation employees is assigned to the Electricity Sector development activities of the various activity

segments.

The employee roster at the Company in the two years preceding the date of the Prospectus is as specified below:

Field Employee roster (positions)

As of March 31, 2012 As of March 31, 2011

1. Generation 2,449 2,469

2. Transmission and transformation (including system administration)

470 464

3. Distribution (marketing and districts) 4,256 * 4,326 *

4. Headquarters (strategic resources, finances and economics, general administration)

1,498 1,541

5. Service (logistics, security and emergency economy, supply and storage organizations)

1,751 1,804

6. Engineering projects (planning and execution) 2,006 ** 2,049 **

Total: 12,430 12,653

Field Employee roster (positions)

As of December 31, 2011 As of December 31, 2010

1. Generation 2,470 2,460

2. Transmission and transformation (including system administration)

459 470

3. Distribution (marketing and districts) 4,339 * 4,284 *

4. Headquarters (strategic resources, finances and economics, general administration)

1,548 1,520

5. Service (logistics, security and emergency economy, supply and storage organizations)

1,788 1,778

6. Engineering projects (planning and execution) 2,073 ** 1,977 **

Total: 12,677 12,489

* Including employees working in the construction of the distribution system and transmission lines. ** Working mainly in the construction of power stations, substations and switching stations.

14.3 Changes in the personnel roster

The personnel roster in the first quarter of 2012 decreased by approximately 223 positions (1.8%) compared to

the parallel quarter the previous year.

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14.4 Material changes in the roster of senior officers

14.4.1 In March 2011, after more than three (3) years as the Chief Executive Officer of the Company, Mr. Amos Lasker

concluded his function at the Company.

14.4.2 On March 17, 2011, the Board of Directors of the Company decided to appoint Mr. Eli Glickman to the function

of Chief Executive Officer of the Company in the stead of Mr. Amos Lasker, who announced the conclusion of his

function in the Company.

14.4.3 On December 31, 2011, Mr. Yigal Ben Arie ceased to serve as a VP.

14.4.4 On January 12, 2012, Mrs. Sarit Giladi Dor, the spokeswoman of the Company, announced her wish to conclude

her function. Mrs. Giladi-Dor concluded her function on April 10, 2012.

14.4.5 On February 21, 2012, Messrs. Ram Erlichman and Mordechai (Muki) Ben Ami were appointed as directors in

the Company.

14.4.6 On February 29, 2012, Mr. Shimon Eckhaus ceased serving as a director in the Company.

14.4.7 On March 1, 2012, Mr. Avraham Natan announced his wish to conclude his function as a director in the

Company from April 10, 2012. See Immediate Report dated March 1, 2012, Reference No.: 2012-01-57762,

included by way of reference, for details on the circumstances of the resignation of Mr. Natan from the Board of

Directors of the Company.

14.4.8 On March 6, 2012, Ms. Varda Samet was appointed as a director in the Company.

14.4.9 Mr. Moshe Bachar concluded his function as Assistant to the CEO and Vice President for Generation and

Transmission on May 31, 2012. Mr. Yaakov Hain, who served in the Company as Vice President Engineering

Projects, and who will be appointed as the Assistant to the CEO from June 1, 2012, will replace him.

14.4.10 On June 1, 2012, Mr. Yitzhak Balmas was appointed as Acting Manager of the Engineering Projects Division

(before this, he served as the Director of the Engineering Planning Division of the Company).

14.4.11 On October 31, 2012, Mr. Asher Dahan will conclude his function as VP for Customers.

14.5 Training and instruction at the Company

14.5.1 The training system at the Company consists of five schools and a national training headquarters:

(A) School of Generation and Transmission Vocations – The School trains mainly the staff of the power stations

and the transformation and switching stations, as well as the employees of the national load management

unit. The school holds courses and continuing studies on the subject of the adoption of new technologies,

such as electricity generation using natural gas and a combined cycle, the operation and maintenance of

transformation and switching stations, the operation of control systems at power stations with

programmable controllers and permanent knowledge retention among professional staff in the division. In

addition, the school leads the Development Plans of the employees of the Company in the fields of

“environmental protection”, including curricula for MBA degrees in this field of study, which have been

undertaken at various colleges.

(B) School of Marketing and Grid Skills – The School trains workers of the districts in the fields of marketing and

service and in the fields of grid works. This includes training for staff of the 103 telephone help desk

workers, strategic customer coordinators, employees of the commercial accounts departments and the

collection departments. The school trains field personnel at the level of experienced electrical technicians

and practical engineer, provides complementary training for registered engineers in electricity for “strong

current”, and is preparing a program in cooperation with academic institutions for graduate degree studies

in strong current electricity.

(C) School of Engineering Projects – The School trains the formation of workers and managers in the

engineering projects division, including the engineering design branch and a project execution branch, as

well as a logistics and assets branch in the planning and technology development branch. In addition, the

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school serves as a certification authority for various occupations, such: the field of binding and hoisting

loads, operation of cranes, high rise works and more, as required by law and in accordance with the

directions of the competent authorities of the State of Israel, including the Ministry of Industry, Trade and

Labor. The school leads, develops and trains workers and managers in the areas of “project management”

and “renewable energies”.

(D) The School of Computers and Information Technologies – The School trains all of the employees of the

Company in all computer applications and trains all of the employees of the information systems and

teleprocessing branch in teleprocessing skills, and is developing instruction programs and systems for e-

learning and programs for a managerial reserve by the completion of academic education.

(E) The School of Management and Administration – The School trains and instructs the management sector of

the Company at all levels in the business fields and management and administration fields. Within the

framework of this setting, employees are trained as section managers and department managers and

administration and staff workers.

The training division of the Company is intended in order to provide support for the improvement of the

performance of the Company and in order to raise the level of human and professional capital of the employees

of the Company. The division provides vocational training in the primary areas in which the Company is engaged

and also provides the certifications that are required by Government ministries (Ministry of Industry, Trade and

Labor, usually), in accordance with laws and regulations. The staff of the training division engages in the

development of curricula and the training of workers and managers including vocational retraining and the

adoption of new technologies and occupational safety. In addition, the training division handles the formal

studies of the employees of the Company, such as technicians, practical engineers and engineers in the skills

that are required at the Company, mainly in the technological fields, as well as undergraduate degree studies

and general studies and graduate degree studies in the fields of electricity and environmental protection and

business administration. The training division acts on a regular basis in order to maintain its status in the fields

for which it has been authorized by the competent authority as a certification authority where required of the

staff of the Company, and the certification depends on participation in and passing of the requirements of

courses. In addition, the training division acts to expand the number of the curricula that have been approved

by the Ministry of Industry, Trade and Labor and the curricula and the courses that are recognized by the

Ministry of Education – the Study Compensation Committee, the Adult Training Unit.

14.5.2 Costs for training and instruction at the Company:

Following is a breakdown of the expenses for training and instruction at the Company for 2011 and 2010 and for

the three-month period that ended on March 31, 2012 and 2011:

14.5.2.1 The expenditures that were incurred by the schools in 2011 and in the three-month period that ended on

March 31, 2012 (lecturers, hospitality, equipment, student transport) were approximately NIS 11.4 million,

adjusted to New Israeli Shekels for December 2011; and approximately NIS 2.6 million, adjusted to New Israeli

Shekels for March 2012, respectively, in comparison with approximately NIS 8.6 million adjusted to New

Israeli Shekels for December 2011, and approximately NIS 3.3 million adjusted to New Israeli Shekels for

March 2012, in 2010 and in a period of three months that ended on March 31, 2011, respectively.

14.5.2.2 The course expenses of the Human Resources, Workers and Managers Branch in 2011 and in the period of

three months that ended on March 31, 2012, were approximately NIS 11.1 million (adjusted to New Israeli

Shekels for December 2011 and March 2012) and approximately NIS 1.4 million, respectively, in comparison

with approximately NIS 8 million (adjusted to New Israeli Shekels for December 2011 and March 2012) in

2010 and approximately NIS 1.6 million in the three month period ended on March 31, 2011, respectively.

14.5.2.3 Payment for courses, study days and conferences that took place outside of the Company in 2011 and in the

three-month period that ended on March 31, 2012, was approximately NIS 1.3 million (adjusted to New Israeli

Shekels for December 2011 and March 2012) and approximately NIS 0.2 million, respectively, in comparison

with approximately NIS 2.3 million (adjusted to New Israeli Shekels for December 2011 and March 2012) in

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2010, and approximately NIS 0.4 million in the three-month period that ended on March 31, 2011,

respectively.

The data that has been set forth above does not include direct and ancillary expenses for studies for higher

degrees and diploma studies that are noted at the expense of the salary of the employee and are taxable on the

basis thereof.

14.6 Employee compensation plans, benefits and employment agreements:

14.6.1 Employment agreements

The labor relations in the Company are regulated by the labor legislation and within the framework of collective

agreements (hereinafter: the “Employment Agreements”); these constitute a binding formula for the Company

with respect to the hiring and the termination of employees, terms of employment, labor relations, and the

rights and the responsibilities of the parties.

The Employment Agreements apply to all of the employees at the Company, with the exception of personal

contract employees with the qualifications that have been set forth therein.

The Employment Agreements (primarily in the Employment Rules, In accordance with that which has been set

forth below and company procedure) lay down most of the terms of employment of the employees of the

Company, including: salaries and terms of service, eligibility for an energy allowance, work and rest hours,

overtime work, shift work conditions, paid leave (vacation, illness, etc.), retirement conditions152

and more.

In addition, the Employment Agreements include various instructions that pertain to the management of the

human resources of the Company, including: the procedure for the hiring of employees and the procedure for

the termination of employees (including limitations over the reasons for which Corporation employees may be

terminated, the manner of the execution of the termination procedure and the circumstances in which it is

necessary to receive the consent of the labor union to the termination of employees); restrictions with respect

to the mobility of staff from function to function; disciplinary procedures and so on. Changes and updates in the

Employment Agreements are made from time to time, including following negotiations between the

management of the Company and the New General Labor Federation and the national labor committee for the

employees of the Company, and they require the approval of the Companies Authority, the Commissioner of

Wages and Employment Agreements at the Ministry of Finance and the Board of Directors of the Company.

The Company’s employees may be classified primarily into two (2) groups: administrative grade staff and

professional grade staff (which includes engineers, academicians, jurisprudents, practical engineers and

technicians). The Company has a single wage table, in which each administrative grade rank has a vocational

grade rank counterpart. The wage conditions, the pension rights of employees and other rights with respect to

the termination of the employer-employee relations vary in accordance with the group to which the employees

belong, in accordance with that which has been set forth below.

14.6.2 Employee relations and the conclusion thereof

The employment relations in the Company are based primarily on the principles that have been set forth in the

Employment Rules. The Employment Rules and the procedures that have been instituted thereunder constitute

the primary normative source in all matters that pertain to employment at the Company, the conclusion of

employment, labor conditions and employment relations. The effect of the Employment Rules, whose legal

status is that of a bilateral collective arrangement, is valid through to December 31, 2015.

Section 185 of the Employment Rules establishes that as a result of the needs of the Company, the management

of the Company is allowed to transfer an employee to another position or venue of work, on a temporary or a

permanent basis, subject to an agreement with the labor union, without worsening his or her terms of

employment or reducing his or her salary.

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The terms of retirement are governed by the Pension Regulations for Employees of the Israel Electric Corporation, dating from

1958; by the regulations of the Central Pension Fund; and by various Company procedures and provisions.

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The issue of the conclusion of the employment of employees of the Company to which the Employment Rules

apply is regulated in Sections 200-201 of the Employment Rules. In accordance with that which has been set

forth in these sections, the Company may dismiss an employee, inter alia, due to the reorganization of the units

of the Company or for any other satisfactory reason, and in any case of dismissal, with the exception of a

temporary employee, the management of the Company will first confer with the labor union and the employee

will be dismissed in accordance with the agreement with the labor union.

In the absence of an agreement with the labor union in the region to which the employee belongs on the matter

of dismissal of an employee at the Company, the differences of opinion will be brought before the labor union

and the management, to the extent that no agreements are achieved at this level, in accordance with the

provisions of Section 223 of the Employment Rules, the issue will be brought forth for negotiation between the

CEO of the Company and the Israel General Labor Federation. The Employment Rules do not include a

mechanism for dispute settlement if no agreement is achieved between the CEO of the Company and the Israel

General Labor Federation.

The provisions of the Employment Rules that have been set forth indicate that the management of the

Company is limited in its ability to employ efficiency measures which involve the conclusion of the employment

of employees of the Company. In cases of differences of opinion on the layoffs of employees with the labor

union, it is possible, in accordance with that which has been set forth, to negotiate on the matter with the Labor

Federation, but to the extent that the negotiations should prove unsuccessful, there is no mechanism in the

Employment Rules that would provide for the implementation of measures of reorganization that involve

layoffs, without consent to these measures having been given. See Section 14.10 for the consequences that this

has over the implementation of the Structural Change.

See also Note 24 C to the Annual Financial Statements with respect to the labor relations in the Company and

the state of labor disputes as of the date of this Prospectus.

14.6.3 As a government company, the Company is subject to Section 29 of the Budget Foundations Law - 1985

(hereinafter: the “Budget Foundations Law”), which effectively limits its abilities to operate independently on

wage issues and benefits to its employees, and imposes upon it a commitment to receive the approval of the

Commissioner of Wages and Employment Agreements at the Ministry of Finance (hereinafter: the

“Commissioner of Wages”) on these matters.

From 2001 onward, the Company received a number of letters from the Commissioner of Wages, including

attention to the wage terms of the employees of the Company, pensioners of the Company and next of kin who

are entitled to pension payments, whereby, among other things, a number of wage components were paid to

employees and to pensioners / next of kin of employees of the Company in violation of the Budget Foundations

Law, as a result of which the Commissioner of Wages decided to cancel and/or change them, and ordered the

Company to demand that the employees, pensioners and next of kin of employees of the Company refund

them.

At the same time, a dialog was held on the subject between the Company and the labor union and the

Commissioner of Wages, and in January 2011, a wage agreement was signed, including the regulation of wage

overruns in the Company, against a reduction of 0.5% out of the total parallel pay rises that were established in

the wage agreement in the public sector, and a further reduction of 0.3% from the previous wage agreement

that was signed in the Company in 2008 was vested. See also Note 19 to the Annual Financial Statements on this

matter.

14.6.4 On January 31, 2011, two collective agreements were signed between the Company and the labor union and the

New Israel General Labor Federation, with the approval of the competent authorities, in other words, the

Commissioner of Wages and the Companies Authority. The wage agreement is based primarily on the age

agreement of the employees of the public sector that was signed on January 12, 2011, granting employees a pay

rise of 5.75%, which is to be paid in three (3) steps until January 2013 (the date of the last step). In addition, in

accordance with that which has been set forth above an agreement was signed on the issue of changing the

mechanism of update of pensions of members in the budgetary pension arrangement for linkage to the

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Consumer Price Index (see the pension agreement below). See also Immediate Report of the Company dated

February 1, 2011, Reference No.: 2011-01-035889).

(A) Main points of the wage agreement that was signed on January 31, 2010 follow:

(1) In February 2011, a pay rise of 2.25% was paid retroactively from January 1, 2011; From January 1,

2012, an adjunct to 3.75% was paid. From January 1, 2013, an adjunct to 5.75% will be paid.

(2) Within the context of the wage agreement, in February 2011, a one-time bonus was paid to employees

and pensioners / next of kin of NIS 2,000 before taxes.

(3) The agreement included, inter alia, an update of the charge rate for a lodging allowance, a gradual

increase in the rate of provisions and deductions for provident funds as elaborated in the agreement.

(4) Arrangement of the wage overrun: an employee whose employment at the Company started before

January 1, 2004, shall be entitled to a star rank153

and a 14th

[month] salary upon the completion of 20

and 25 years of employment at the Company, respectively.

(5) An employee who started to work at the Company on or after January 1, 2004, shall not be entitled to a

star rank or a fourteenth [month] salary.

(6) In addition, eligibility for a retirement rank and the manner of acquisition of rights for leave of absence

were prescribed in the agreement. With respect to retirement rank, a letter written by a Senior Deputy

of the Commissioner of Wages, dated June 24, 2001, stated: "Retirement rank - after considering the

subject - we accept the position of the Company that there is no room to cancel the longstanding

arrangement of many years in the Company of giving a rank upon retirement”. Later, the retirement

rank was prescribed in the agreement set forth of January 31, 2011, to the effect that from the

effective date of the Change of Method of Update of Budgetary Pension Law - 2012, an employee who

is entitled to a budgetary pension who will retire from the Company will be entitled immediately to a

retirement rank at the time of his retirement from the Company, irrespective of the date on which he

was given his last rank as an employee.

(B) Main points of the pension agreement

Implementation of the collective agreement dated January 31, 2010 with respect to the change in the

pension update mechanism for the members of the budgetary pension arrangement commonly used in the

Company was subject to legislation on this matter. On January 15, 2012, a collective agreement was signed,

dealing primarily with the deferral of the date set for completion of the legislative proceeding with respect

to the change in the method of linking the pension to the index. Following discussions of the bill in the

Knesset, on February 20, 2012 an additional collective agreement was signed, which included a certain

change in the understandings, at no extra cost to the Company.

On March 5, 2012, the Change of Method of Update of Budgetary Pension Law - 2012 was published in the

Official Gazette. The law complements and regulates the pension agreement.

The highlights of the law, the collective agreement dated January 31, 2011, and the complementary

agreement dated February 20, 2012 follow:

(1) A change in the pension update mechanism for members of the budgetary pension arrangement in the

Company, like the agreement established for the State of Israel in 2008, which also led to a change in

2009 in the Civil Service Law (Pension), whereby the pensions will be linked to the annual change rate

in the Consumer Price Index, in order to maintain their real value. The change will be valid from January

1012. The index linkage of the pensions shall start in January 2013 (in accordance with the annual

change that will occur in the Consumer Price Index in 2012) onward.

153

Star rank – an additional payment rank for male/ female employees with more than 25/20 years of seniority, respectively.

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(2) Payment of a once off bonus to pensioners eligible for a budgetary pension who retired from the

Company before January 1, 2011 (hereinafter: “Existing Pensioners / Next of Kin”). In February 2011,

the first payment was made; another payment was made in July 2011.

(3) The payment of a percentage addition to a pension, of 8% to 12% for existing pensioners / next of kin

(in accordance with their rank), effective from January 2012.

(4) In addition, a small group of pensioners (of low ranks as defined) will be entitled to another percentage

addition to their pension of 6% more four (4) years after the date of publication of the new law as set

forth and onward. This addition will be financed by reducing the payments to the welfare fund for

pensioners (as set forth in Subsection (5)). In view of that which has been set forth above, the Company

shall allocate, from 2012 until July 1, 2023, only half (50%) of the total amount to the welfare of

pensioners who are entitled to a budgetary pension, until the completion of the full financing.

(5) From January 2012, a welfare fund for pensioners who are entitled to a budgetary pension will be

established, like the fund that was established for the Civil Service, subject to the provisions in

Subsection (4) above.

(6) Within the approval of the Commissioner of Wages to the pension agreement, eligibility was approved

of every employee and pensioner of second generation onward (whoever was hired from April 1, 1975

to June 10, 1996, inclusive, as a permanent employee of the Company) and their next of kin to a

budgetary pension from the Company”.

(7) The effect of this law, which was expressed in the Financial Statements for the first quarter for 2012, is

an increase in the actuarial commitment of Israel Electric Corporation, from approximately NIS 2.8

billion and noting of an expense in the profit and loss statement of approximately NIS 1.8 billion, before

tax effect.

14.6.5 In the calculation of the actuarial commitment as performed by the actuary of the Central Pension Provident

Fund of Israel Electric Corporation Workers in accordance with the rules of the Capital Market, Insurance and

Saving Division at the Ministry of Finance, the linkage of the pension to the index was taken into account, and

accordingly, the law did not affect the cash flow of the Company. See Note 4 to the Quarterly Financial

Statements. In view of the signing the wage agreement described above and regulation of the wage overruns (in

accordance with the letters of the Commissioner of Wages), in 2011, the provision for recovery of amounts that

were paid to employees of approximately NIS 152 million, adjusted to the NIS of December 2011 and

approximately NIS 153 million adjusted to the NIS of March 2012, which was included in previous periods as an

asset in the balance sheet of the Company was cancelled (NIS 76 million was listed as an increase in wage cost

and NIS 76 million an increase in pension expenses, adjusted to the NIS of December 2011 and adjusted to the

NIS of March 2012). In addition, an increase of approximately NIS 84 million (adjusted to the NIS of December

2011 and adjusted to the NIS of March 2012) has occurred in the calculation of the actuarial liabilities due to the

cancellation of the effects of the wage overruns over the actuarial commitment less the cancellation of the

effect of the rest of the previous wage agreement to a magnitude of 0.3% (approximately NIS 22 million was

listed as an increase in wage costs and approximately NIS 62 million as an increase in pension expenses,

adjusted to the NIS of December 2011 and adjusted to the NIS of March 2012).

On February 20, 2012, a letter was sent to the Company from the Commissioner of Wages on the matter of

apparent wage overruns, with respect to payment of increased compensation to special agreement employees

(as stated in Section 14.6.9). On March 25, 2012, the Company forwarded its comments on the matter to the

Commissioner of Wages, dealing mainly with: the component of increased compensation for special agreement

employees has been practiced in the Company for decades, predating passing of the Budget Foundations Law;

this payment is vested in a list of collective agreements that were signed decades ago; in the view of the

Company, information on this matter was brought forth for the information of the Companies Authority. As of

the date of the Prospectus, the comments by the Commissioner of Wages about the position of the Company

had not been received. In 2010, increased compensation was paid to 28 employees in the amount of NIS 1.53

million and in 2011 an amount of NIS 2.71 million was paid to 61 employees. The actuarial commitment for

increased compensation as of December 31, 2011, is NIS 26.8 million and for March 31, 2012, NIS 28.6 million.

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In addition, on March 22, 2012, the Deputy Commissioner of Wages addressed the matter of apparent wage

overruns on the issue of pension global overtime to rank B rated management members, payment of overtime

that was not consistent with actual execution, payment of per diem and meal expenses and a command

surcharge. On May 31, 2012, the Company forwarded its response on this issue to the Commissioner of Wages,

in which the Company rejected the statements in the Commissioner’s letter, because in its opinion, these are

not wage overruns but wage elements that are paid as required by law. In the opinion of the Company, its

explanations and documents in its possession that had been forwarded to the Commissioner of Wages proved

that these elements had been paid as required by law.

The degree of the possible effect (theoretical only, because the Company, as set forth, rejects outright the

contentions in the Commissioner’s letter) is as follows:

(1) Pension global overtime to members of Management – the effect (decrease) over the actuarial

commitment for December 31, 2011 is estimated at approximately NIS 30 million.

(2) Payment of overtime that was not in accordance with actual execution – the letter by the Commissioner

does not have enough data to quantify the exposure. These are subjects that are related to arrangements

of recording and reporting. This demand does not have an actuarial effect.

(3) Per diem and meal expenses – this demand has no actuarial effects.

(4) Command surcharge – the estimate of the Company for the degree of effect (decrease) over the actuarial

commitment for December 31, 2011, was estimated at approximately NIS 270 million.

14.6.6 Central pension provident fund - as of March 8, 2005, the Company has been depositing money for covering the

pension liability for first generation and employees (employees hired through to March 31, 1975) and second

generation employees (those hired from April 1, 1975 to June 10, 1996) in the central pension provident fund

(“the Fund”). The Fund operates pursuant to the Income Tax Regulations (Conditions for Approval and

Management of Provident Funds), 1964 and it is being managed as of the time of the Prospectus by a managing

company by the name of Infinity. See Note 4M A to the Quarterly Financial Statements for December 31, 2011

for details.

14.6.7 The trust fund – for liabilities that are not of allowance types (as set forth below), the Company deposits

amounts into a trust account that is managed by the United Mizrachi Bank Trust Company Ltd. (hereinafter: the

“Trust Account”), in accordance with a trust agreement that was signed on March 23, 2000 (hereinafter: the

“Trust Agreement”).

Pursuant to the Trust Agreement, the Company asked to deposit money in a trust account to be used only for

payments of pensions to employees who are defined as “first generation” employees and “second generation”

employees in the arrangement set forth with the Government on June 10, 1996, and not for any other purpose.

The Trust Agreement stated that the Trust would operate only to the benefit of eligible employees and the

Company would have no right to withdraw and/or use the money and/or give instructions to the Trustee with

respect to the use thereof, except one of the following three options: an instruction to the Trustee to transfer

the money to the pension fund once established; a special payment order to make payments on the account of

pension amounts to eligible employees; an instruction to the Trustee to pay the Company money from the trust

money if the Company proves that it has actually paid eligible employees amounts, without which payment by

the Company it should have been paid to those employees by the Trustee out of the Trust Account.

Upon the formation of the Central Allowance Fund, amounts that had accrued in the Trust Account up to that

day were transferred to it, reflecting the actuarial commitment of the Company (as of the day of forming the

central fund) with respect to the allowance payments. However, it was learned that not all of the amount

deposited in trust could be transferred to the fund: amounts related to payment of various lump sums to

employees relating to conclusion of employer-employee relationships were not transferred to the fund, as they

do not have an allowance character, meaning that in accordance with the amendment in the Income Tax

Regulations (Rules for Approval and Management of a Provident Fund) 1964, they could not be transferred to

the fund. In addition, in accordance with the amendment to the said regulations and the interpretation of the

Capital Market, Insurance and Saving Division of the Ministry of Finance, money for actuarial commitment

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stemming from non-allowance rights that are given to pensioners (such as free electricity, holiday gifts) may not

be transferred to a fund.

As of the date of the Prospectus, amounts are deposited in the account to cover the commitment of the

Company to pay the following components: gift for vacations (including grossing up); disability gratuity; grossing

up of imputation of the benefit for tax for the “discounted electricity” component; bonus for non-utilization of

sick leave; bonus for more than 35 years of employment; bonus for up to 35 years of work; extra compensation

for third generation employees (employees who were hired after June 10, 1996); and a liability for increased

compensation for temporary, special agreement employees. In total, as of the date of the Prospectus,

approximately NIS 2,061 million is deposited in the Trust Account.

In this context it is noted that from 2000 until 2009, deposits were made into the trust account for elements

that were perceived as constituting the actuarial commitment of the Company. The discounted electricity

element was perceived only in part of the period set forth as one of the components expressing the actuarial

commitment for which the deposits were made. Since 2009, the discounted electricity element is no longer

perceived as part of the said actuarial commitment. Owing to this, there is a surplus in the trust account (after

earlier, in the period in which the discounted electricity element was perceived as part of the actuarial

commitment for which deposits were made into the trust account, there was a deficit in this account).

In March 2011, the management of the Company formed a principles paper with respect to the regulation of

the manner of operation of the Trust Account. In accordance with this principles paper, a discounted electricity

component shall not be included in the components for which deposits will be made in the Trust Account.

Deposits made in the past (until 2009) into the Trust Account have led to an actuarial surplus in the Trust

Account, coming to a total, as of the date of the Prospectus, of approximately NIS 600 million (hereinafter: the

“Actuarial Surplus”).

On March 31, 2011, the Board of Directors of the Company adopted a resolution whereby it approved the

principles paper for regulating the trust account for non-allowance components, the application of the

principles taking effect after the approval of the Regulator Team (as defined in Section 22.4) that was founded in

accordance with the Government resolutions.

On January 26, 2012, the Electricity Authority published a document of principles for public comment (“the

Hearing Document”), with respect to the spread of the rise of the electricity charge rates for the years 2012-

2014. This included, as a condition for giving the Company government aid, a demand for Israel Electric

Corporation to transfer the amount of NIS 550 million from the Trust Account to the Central Pension Provident

Fund. See Section 7.1.3.2 for details on the Hearing Document.

On March 20, 2012, an outline of principles was formed with the consent of the Company and the Ministry of

Finance, for solving the cash flow problem of the Company, whereby, among other things, the Chairman of the

Board of Directors of the Company is to act to approve a resolution in the Board of Directors whose aim is to

transfer an amount of NIS 600 million from the Trust Account to the benefit of the Central Pension Provident

fund of Israel Electric Corporation Workers, in accordance with the rate of deposits required for this fund,

without any additional conditions. The State announced that the Board of Directors of the Company had to

ensure that any resolution that would be adopted on this issue would not infringe in any manner on resolutions

of the Regulator Team that was appointed for the issue and that it would not raise any absolute facts that would

affect the work of the Regulator Team in any way.

Further to that which was set forth and to the Hearing Document, the Electricity Authority adopted on March

22, 2012, a resolution to spread the increase of the electricity charge rates for the years 2012-2014, and which

was based on an assumption with respect to government aid for the Company. This aid was made contingent,

inter alia, on the Company taking immediately and unconditionally measures that were available to it by law to

release an amount of not less than NIS 600 million out of the Trust Account and to the Company being required

to continue acting with respect to the Trust Account, including release of money from it, to the extent required,

considering the position on the part of the Regulator Team and in accordance with the law.

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In addition and accordingly, on March 22, 2012, the Board of Directors of the Company made a resolution

whereby the Company is to act to transfer the Actuarial Surplus from the Trust Account to the Central

Allowance Provident Fund, without detracting from the resolution of the Board of Directors dated March 31,

2011, whereby a document of principles for regulating the Trust Account was approved, subject to the approval

of the regulator team.

Following this resolution, the employees of the Company started, in accordance with the instructions of the

labor union, on March 25, 2012, a list of sanctions, which led the Company to apply to the Regional Labor Court

in Haifa, on March 26, 2012, with a request to provide urgent temporary relief. On March 27, 2012, after

holding a discussion with the parties present, the Labor Court instructed the employees to return to regular

work forthwith, while at the same time the Court determined that until it was provided an argued resolution,

the Company would not act to transfer the actuarial surplus from the trust account to the Central Pension Fund.

On March 29, 2012, an argued resolution of the Regional Court in the temporary proceeding was given,

whereby the employees of the Company had to avoid sanctions, whereas the Company was allowed to act in

accordance with the resolution of the Board of Directors with respect to the transfer of the actuarial surplus

from the Trust Account to the fund.

A leave to appeal to the National Labor Court, which was filed by the Labor Federation and the labor union, was

dismissed on April 30, 2012. In its ruling, the National Court relied on the rule whereby in general, an appellate

instance does not intervene in temporary proceedings in which the factual deliberations are at the prima facie

level only, as opposed to deliberations in the verdict at the end of the principal proceeding. As of the date of the

Prospectus, the hearing of the primary proceeding involving the labor dispute is being held at the Regional

Labor Court

Following the ruling of the National Court, on May 8, 2012, the Company applied to the Trustee and asked it to

transfer the amount of NIS 50 million from the Trust Account to the Central Allowance Provident Fund on May

31, 2012, and in the future more requests will be forwarded for transferring money from the Trust Account to

the Fund. On June 14, 2012, Counsel for the Trustee stated that in the circumstances that had resulted and in

view of the conflicting positions of Israel Electric Corporation and the labor union with respect to the money in

the Trust Account, he had decided to apply to the competent Court with a petition for giving instructions in

accordance with the Trusteeship Law - 1979, to establish the rights of the parties. The application of the trustee

to the Central District Court was filed on June 12, 2012, in which he asked the Court to give him instructions on

the manner in which he was to act in view of the contradictory applications as set forth. The hearing of the

motion has been set for June 21, 2012. The Attorney General was present at this hearing.

At the hearing which was held before the District Court on June 21, 2012, the parties agreed to the proposal by

the Court, which was given the validity of a Court judgment pursuant to which the Court instructed the Trustee

to transfer to the Fund amounts of money according to an instruction by Israel Electric Corporation, provided

that the total of the amounts or assets which were to be transferred did not exceed NIS 600 million. Israel

Electric Corporation undertook, with the consent of the State, not to give the Trustee instructions for the

transfer of additional amounts from the Trust Account, as long as a legal proceeding was under way before the

Court, whereby, in this context, the Company, the workers’ organization and the State shall be able to approach

the Court, within 75 days of the date on which a resolution shall be adopted by the Board of Directors in the

matter of giving instructions to the Trustee with respect to the Trust Account above the amount of NIS 600

million.

On March 26, 2012, the Company received a document containing recommendations of the Regulator Team.

The position of the Regulator Team is that deposits that the Company made for components for first generation

employees that are not components enumerated in Appendix A of the ’96 agreement for first generation

employees that preceded March 4, 1996, and any deposit for components for second generation and third

generation employees and deposits for components, are deposits for which depositing is not mandatory.

The Conclusions chapter in the recommendations document of the Regulator Team stated that the Company

should do everything necessary, including before the Trustee or the beneficiaries, and by law, to release money

whose depositing in the Trust Account was not mandated, a resolution of the Board of Directors of the

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Company dated March 22, 2012 to release NIS 600 million constituted, in the view of the regulator team, a “first

step for the execution of the foregoing”. This is due, inter alia, to the fact that there is and has been no room to

deposit for a “free electricity” element, because this is a right that is granted in kind within the activity of the

Company. However, the regulator team believes that the arrangement that was shown by the Company, further

to the resolution of the board on March 31, 2011, contravenes the principles stated in the recommendations.

Therefore, the Board of Directors of the Company must discuss these conclusions and continue to make the

appropriate resolutions and act accordingly with respect to the balance of the money in the trust account, in

order to implement the principles above. Thus, the regulator team believes that the Company must consider

acting at the first stage immediately to implement the provisions of the Trust Agreement, in a manner that will

make use of the Trust Account Money for its purpose in accordance with the Trust Agreement. Among other

things, the Company must examine making immediate use of the money in one or more of the ways prescribed

in the Trust Agreement with respect to the use of the Trust Money. Concretely, it is the position of the team

that the Company must consider exercising its authority that is prescribed in the Trust Agreement to give

instructions to the Trustee to receive refunds from the Trust Account for payments that it has made from its

coffer.

It has also been determined that the Company should again consider, as the former of the Trust Agreement, all

of the measures that are available to it, including in accordance with the trust statues, for interpreting the Trust

Agreement or adapting it to the arrangements to which it is committed and no more than that.

The Company is studying the meaning of the recommendations of the Regulator Team on this issue and in April

2012 applied to the Regulator team to receive the legal expert opinion on which the recommendation of the

team relies.

See Note 4 to the Quarterly Financial Statements for further information on the employee compensation plan,

benefits and employment agreements.

14.6.8 Permanent employees – The Company has 9,817 permanent employees (as at the salary data for March 2012).

A permanent employee is one who has received tenure in accordance with the procedures of the Company. This

group of employees is divided into those who are insured in the budgetary pension arrangement (employees

who started to work at the Company by June 10, 1996, inclusive), in accordance with the pension regulations for

the employees of Israel Electric Corporation of 1958 and the regulations of the Pension Central Providence

Funds of the Employees of Israel Electric Corporation (managed from May 1, 2010, by Infinity, which is replacing

the IEC Pension Fund Company); and employees (who started their work at the Company on June 11, 1996, and

onward) who are insured in accumulating external pension funds.

14.6.9 Special agreement employees – The Company has 758 special agreement employees (as of the salary data of

March 2012) – an employee who is hired for a non-permanent position, for performing a defined task that lasts

for a set period, such as: the construction of power stations or substations. Such an employee is entitled, in

accordance with the collective agreement, to the rights as set forth in the Employment Rules with respect to

permanent employees, except the right to a budgetary pension and to an energy allowance. The compensation

that will be paid to special agreement employees, at the time of their termination shall be enlarged as follows:

for the first two years of work, compensation at 200% for each year of employment, and for the third year

onward, compensation at 300% for each year. On February 20, 2012154

, a letter was sent to the Company from

the Senior Deputy (Enforcement) to the Commissioner of Wages whereby the enlarged compensation

arrangement ostensibly contravened Section 29 (A) of the Budget Foundations Law. The Company forwarded its

comment on the matter to the Commissioner of Wages; in it, it discussed the normative sources whereby the

special agreement employees are paid compensation (see Section 14.6.5). As of the date of the Prospectus, no

response has yet been received to the comments of the Company.

In accordance with collective agreements on the subject, the maximum employment period of employees in a

special agreement, who started their work at the Company from January 1, 2005 onward, is up to five (5) years

154

A letter from the wage and employment agreements division of the Ministry of Finance dated February 20, 2012, with respect to

apparent wage overruns at Israel Electric Corporation.

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of employment, whereas the employment period of employees in accordance with that which has been set

forth above who started to work through to December 31, 2004, inclusive, is up to ten (10) years of

employment.

14.6.10 Temporary employees – The Company has 796 temporary employees (as of the salary data of March 2012) an

employee who is hired for a task that is not as specified with respect to a special agreement employee. Such an

employee is entitled to the rights as set forth in the Employment Rules, with the qualifications appearing

therein, except the eligibility for a budgetary pension and an energy allowance. The compensation that will be

paid to temporary employees will be as required by law.

14.6.11 Special agreement temporary employees – The Company has 1,268 temporary special agreement employees

(As of the salary data of March 2012) – a temporary employee who has worked for less than two years at the

Company and who has signed a document with respect to a transition to temporary status under a special

agreement. In accordance with the collective agreement, such an employee is entitled to rights that are set

forth in the Employment Rules with respect to a permanent employee, except the eligibility for a budgetary

pension and an energy allowance. The compensation that will be paid to temporary employees in a special

agreement will be as required by law. In accordance with collective agreements on the subject, the maximum

employment period of special agreement temporary employees who started their work at the Company from

January 1, 2005 onward, is up to five (5) years of employment, while the term of employment of such

employees who started their employment by December 31, 2004, inclusive, is up to ten (10) years of

employment.

10.6.12 Personal contract employees – The Company has 20 personal contract employees (as of the salary data of

March 2012) – an employee who is hired for any work at the Company and who has signed a personal contract,

which prescribes his salary and regulates all of his terms of employment at the Company.

In addition – the company has working in it 73 trainees and 17 scholarship recipients who are working within

the “Enlightened Future”155

project (as of the salary data of March 2012).

14.6.13 Because is a government company, the Company is subject to the Government Companies Law and the

regulations promulgated thereunder and the directives of the Companies Authority and the government

resolutions, inter alia on the issue of personnel. For example, the Company is bound by restrictions in the

employment of relatives and rules with respect to the manner of electing senior officers and the appointment of

special functionaries, in accordance with that which has been set forth in Section 22.5.2.10.

The procedures for hiring employees for the Company are subject to the Government Companies Regulations

(Rules of Employment of Relatives) - 2005, and to the internal instructions of the Company, which are adjusted

for the regulations and directions of the Board of Directors of the Company. In view of the above, restrictions

have been prescribed in the Company with respect to the employment of relatives in functions in which there

are subordination relations or when concern of conflict of interests may arise. Within the internal audit of all of

the operations of the Company, the issue of employment of relatives is also audited, and the Company acts in

accordance with the recommendations of the Internal Auditor of the Company.

In addition, in accordance with the provisions of the Government Companies Law, among employees at

government companies, in all positions and ratings, there shall be adequate representation, in the

circumstances of the matter, of persons who were born, or who had at least one parent born, in Ethiopia, or is a

member of the Druze community.

155

“Enlightened Future” is a project in which scholarships are granted to outstanding students from peripheral regions who are

studying subjects at universities in Israel that are in demand at the Company. In the framework of this project, students work at the Company during their studies; in exchange for scholarship grants, the students agree to work at the Company upon their graduation for a commitment period of several years.

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14.7 Employee compensation

In general, the Company has no compensation plans except the following:

14.7.1 The Board of Directors of the Company is allowed to decide to pay a bonus to the employees of the Company,

within the limits of the directions of the Companies Authority in this context156

, which state, inter alia, that the

distribution of a bonus to employees will not be permitted unless the following threshold conditions are

fulfilled: (1) the adjusted annual net profit return on capital is 5% or more, in the year for which the bonus is

being paid; (2) in the year that preceded the year for which the bonus is being paid, the Company had a net

profit return of 5% or more; and (3) for the year after the year for which the bonus is being paid, the budget of

the Company as approved by the Board of Directors expect a net profit return of 5% or more. It was also

determined that the cost of the bonus to the Company (including all payments involved that the Company must

pay for payment of the bonus) is not to exceed 10% of the net annual profit of the Company and that no

distribution of bonus to employees will be permitted if no dividend has been distributed in the year for which

the bonus is requested, except with extraordinary approval of the Director of the Companies Authority.. The

bonus is used for compensating employees for excellence and success of the Company, and its payment is

subject to prior approval of the Companies Authority with respect to the entire budget.

14.7.2 An efficiency gratuity in cases in which the threshold conditions for payment of a bonus are not met – if the

threshold conditions for payment of a bonus to employees are not fulfilled, but the company fulfills the

following conditions: (1) at least two years of profitability (the year for which the bonus is requested and the

year before it or the anticipation for the year after it); and (2) the Company has undergone a proven

recuperation or streamlining process (such as transition from loss to profit, employee cuts, reorganization), then

the Company will be allowed to pay its employees a gratuity of 50% of the amount that would have been due as

a bonus. The cost of the gratuity to the Company (including all payments involved that the Company must pay

for the payment of the gratuity) shall not exceed 10% of the net annual profit of the Company and payment of a

gratuity to employees shall not be permitted if no dividend was distributed in the year for which the gratuity is

being given, except with extraordinary approval of the Director of the Companies Authority. The gratuity will be

paid differentially up to a limit of one salary and in addition a gratuity will not be paid in the Company for two

consecutive years.

14.7.3 The CEO’s Prize for Outstanding Workers – In March 2011, the Companies Authority approved an allocation by

the Company of a cumulative amount of NIS 2 million for the purpose of this payment, for the year 2011.

14.7.4 The permanent employees and pensioners of the Company are entitled to an energy allowance, up to a

consumption limit of 18,000 kWh per year per employee or pensioner / next of kin, for their own residential

homes only, for their domestic consumption and personal use, subject to the Criteria that have been set forth

within framework of the procedures of the Company.

14.7.5 The senior officials of the Company, as defined in the Government Companies Law, who are employed by a

personal contract may be paid subject to the approval of the Board of Directors of the Company, an annual

bonus of up to 10% of their pension salary. The CEO of the Company and the Chairman of the Board of Directors

of the Company whose wage is derived from classification level 10(1) are not entitled to personal remuneration.

14.8 Promotion and training tracks

The promotion of employees is conducted on a professional basis and in accordance with their contribution to the

output of the organization, while promoting values of striving for excellence and the continuous update of

execution norms in accordance with changes in the technological, organizational and business environment in

which the Company operates, in conjunction with measurement and evaluation tools.

156

Circular of the Government Companies Authority 2008-4138, dated July 15, 2008.

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The promotion of employees to management echelons is based upon strict appointment processes, while giving

an answer to the policy of the CEO for the promotion of women into senior executive positions and the

empowerment of managers at all levels, with an emphasis on the issue of excellence.

The promotion of active employees – promotion in accordance with Section 103 of the Employment Rules is once

a year / two years (up to the peak rank), with the exception of the case of an arrangement within which the labor

union is updated with respect to abstention from promotion in rank.

The staffing of vacant functions up to the level of deputy division manager is usually carried out in accordance

with the procedure of the Company through a bipartite tenders committee, and in the case of a dispute among

the members of the tenders committee, the decision is given to the director of the human resources department

(in tenders up to the level of deputy department manager) and the CEO of the Company) (for tenders of functions

of up to the level of department manager).

The Company has both vocational and managerial promotion tracks, which are combined in a human resources

development system that is based on training within the plant in the various areas of engagement, and also with

plans for acquisition / completion of formal education, as part of a continuous, ongoing process of development of

human capital and the threshold requirements for the vocational / managerial promotion in the transition from

function to function.

The Company emphasizes the need for the expansion of areas of engagement and expertise of workers and

managers, and as a result, it promotes programs for mobility and internal retraining, including the rotation of

executives and people who serve in sensitive functions, based on a wish to maximize the potential of existing

personnel prior to procedures for the hiring and absorption of employees from outside of the Company.

14.9 Benefits and nature of agreements for employment of group of special officers and senior management at the

Company:

14.9.1 The CEO of the Company and the Chairman of the Board of Directors are employed within a personal

employment agreement in a uniform from that is dictated and required by the Companies Authority, in

accordance with the Companies Authority Circular No. 2001/1 dated November 7, 2001. See Chapter 8 of this

Prospectus for details on the terms of employment of the CEO and the Chairman of the Board of Directors.

14.9.2 In addition to the CEO, there are other senior employees employed at the Company, including 22 management

members, in accordance with the collective agreements and arrangements and four157

according to a personal

employment agreement in a form that has been approved by the Companies Authority.

14.10 Organizational change - economization plan

On May 14, 2008, the Board of Directors of the Company tentatively approved the outline of action of the

program for organizational change (hereinafter: the “Matzpen [Compass] Program”), which was shown to the

Board of Directors by the CEO of the Company, as per the position that he held at that time. The program was

based, inter alia, on the retirement of approximately 2,000 - 2,500 employees and of Corporation staff layoffs that

was supposed to be spread out over a period of approximately three (3) years, on the reorganization of the units

of the Company that will include a change in the span of managerial control, the joinder of functions that have

economy of scale, the elimination of duplications and the formation of supportive mechanisms whose goal is to

improve processes, management flexibility and optimum utilization of resources and personnel.

The initial estimate by the management of the Company was that implementation of the plan would involve

material costs. In accordance with the provisions of International Accounting Standard No. 19, the conditions for

the recognition of the expected costs of the program (with the exception of the retirement of employees) in the

Financial Statements of the Company have not yet been fulfilled. The Board of Directors has instructed the CEO of

the Company, as per the position that he held at that time, to conduct intensive consultation and negotiation

157

The Chair of the Company was also employed by a personal contract, in addition to the four other employees.

F-160

proceedings with the labor union as quickly as possible, as required by law with respect to the rights of

employees.

The labor union announced, after presentation of the plan, that it objected to the implementation of the plan and

prohibited employees from cooperating on the issue. Later, a few consultation meetings were held, which led to a

limited number of understandings between the parties.

In May 2009, the management and the labor union agreed to enter a dialog process, along with the competent

authorities of the State of Israel, with regard to the Structural Change in the Electricity Sector (in accordance with

that which has been set forth in Section 1.3 of this Prospectus), and with respect to organizational changes and

economization in the Company.

Within the Outline of Understandings of September 2010 with respect to the Structural Change in the Company,

as described above, it was agreed that all of the understandings on the outline required the consent to all of its

components (structural change, organizational change, economization, financial strength and employee rights).

See Section 1.3 and Note No. 1E of the Annual Financial Statements for further information. As of the date of the

Prospectus, the parties have not yet reached agreements on all of these issues, and the Outline of Understandings

has not yet been examined or approved by the competent government agencies, and there is no certainty

whether and when these understandings will be implemented, if at all, and whether these or other

understandings or other structural changes will eventually be applied, and what consequences they will have for

the employees of the Company, in accordance with the discretion of the competent agencies and subject to the

law.

In November 2011, the Board of Directors of the Company instructed the management of the Company to

advance the proceeding for structural change in the Company, including in the case in which the planned reform

in the Electricity Sector would not fully materialize during the upcoming year, and exhaust all legal options

available in the budgetary and cash flow field of the Company, to reduce the need to raise additional debt, to the

extent possible.

In December 2011, within the framework of the approval of the budget of the Company for 2012, the Board of

Directors of the Company decided to cut 400 permanent employee authorizations for the second half of 2012, and

stated that a multi-year plan for organizational change and streamlining, “Tnufat Or”, would be started, to be

advanced, at top priority, within the realization of the program for the overall reform in the electricity sector. The

new program is based upon the main aspects of the Matzpen Program and it includes structural and

organizational changes in the Company, among them the retirement of approximately 2,000 employees, of whom

retirement of approximately 400 employees until the latter half of 2012. However, in accordance with the

collective framework of labor relations existing at the Company, to lay off employees (except temporary

employees), the consent of the labor union is required, and as of the date of this Prospectus this has not yet been

obtained. See the Immediate Report of the Company dated January 1, 2011 (Reference No.: 2011-01-349938) for

further information on components related to human capital in the budget of the Company.

Following this decision, the Company was served with a notice of a strike in accordance with the Labor Dispute

Settlement Law. On January 22, 2012, the employees of the Company started to employ various sanctions, in

accordance with the directions of the labor union. These sanctions ceased, once understandings had been

achieved between the CEO of the Company and the labor union, on January 25, 2012, which dealt primarily with:

issues of tenure for 2012; the manner of execution of the overtime budget; advancing the implementation of the

understanding on trust account sums; and shifts of temporary employee authorizations in the Company. Apart

from this, as of the date of the Prospectus, the Company cannot assess the impact that this notice will have on the

business affairs of the Company, if any.

The Company estimates that the cost of retirement of employees, whether within the implementation of the

Structural Change, if implemented, or within the implementation of the multi-year plan for organizational change

and economization, with respect to which the Board of Directors decided that it would be performed in any case,

may be material.

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14.11 Labor disputes

14.11.1 On December 29, 2011, the Company was given a notice of a strike in accordance with the Labor Dispute

Settlement Law. The main matters in the dispute were:

(A) Unilateral moves on the part of the management of the Company on many issues that pertain to cuts in

employment agreements and benefits that have been given heretofore to employees, in the absence of the

conduct of negotiations with the labor union.

(B) The consequences of the refusal of the management to fill and complete existing staff authorizations that

are unmanned, with new employees for the scope of work and tasks of existing employees.

(C) The consequences of the refusal of the management to fill and complete existing staff authorizations that

are unmanned, including not giving tenure to eligible employees with the goal of outsourcing the work of

Corporation employees, while prejudicing the organizational power of the workers and their representative

organization.

(D) The consequences of the decision of the Company to dismiss 400 permanent employees without signing a

collective agreement and without filling the positions with employees who are currently employed at the

Company but do not hold the status of permanent employees.

(E) Disregard by the management for the demand of the labor union to reduce work via contractors while

establishing mechanisms in order to protect and improve the rights of contractor staff in the Company.

(F) Conduct on the part of the employer that is in bad faith and in a manner that is not acceptable in labor

relations in general and in labor relations in public service in particular. The employer is prejudicing the

status of the labor union by ignoring it and making unilateral decisions that may affect the work conditions

and rights of employees.

(G) With respect to all of the causes above, the employer is not conducting collective negotiations and is

ignoring repeat demands of the labor union.

The date of the strike had been set for January 15, 2012. On January 22, 2012, the employees of the

Company started to take various partial sanctions, in accordance with the directions of the labor union.

These sanctions stopped on January 25, 2012, following agreements that were reached between the

management of the Company and the labor union relating to tenure for 2012, the manner of executing the

overtime budget, advancement of the implementation of the understanding on the trust account money

and shifts of temporary employee organizations authorizations.

Later, on March 25, 2012, the employees of the Company started to take various partial sanctions, in

accordance with the direction of the labor union, due to the resolution of the Board of Directors of the

Company dated March 22, 2012, to operate to withdraw Actuarial Surplus from the Trust Account. These

sanctions stopped in accordance with a decision of the Regional Labor Court in Haifa on March 27, 2012.

See Section 14.6.7 for details.

14.12 The Increase of Enforcement of Labor Statutes Law

On June 18, 2012, the Increase of Enforcement of Labor Statutes Law - 2011 (in this Section: “the Law”) took

effect. The Law addresses two main subjects:

One is imposition of a financial sanction on an employer with respect to the violation of provisions of

existing labor laws;

The other is imposition of civil liability and criminal liability on a party ordering service with respect to the

violation of various labor laws by service providers that provide services using employees, in the guarding

and security, cleaning and dining trades (alongside the establishment of various safeguards that will be

available to the party ordering the service in this context).

In addition, the Law establishes a prohibition of transactions through “loss contracts”.

F-162

The Company, which has various agreements with contractors in the said trades, is preparing to adapt the

agreements and procedures applying to it for the implementation of the provisions of the Law.

On February 9, 2012, a collective agreement was signed between some of the employers’ organizations and the New

General Labor Federation, dealing with the limitation of the time for which cleaning staff may be employed by a

contractor under certain conditions, and for employees employed in the core occupation of the employer too. In

addition, duties of equalization of the conditions of contractor employees to Corporation employees have been

imposed, taking into account the type of work and seniority at work. The said agreement will take effect subject to its

expansion by an order by the Minister of Industry, Trade and Labor. Until now, no notice has been published on the

intent to expand the provisions of the agreement, as defined in the Collective Agreements Law 1957.

In addition, on February 12, 2012, an agreement of principles in the public sector was signed, dealing mainly with

benefits and improvements in the rights of contractor employees in the guarding and cleaning fields. This

agreement also includes a declaration whereby the state will avoid the employment of contractor staff “shoulder

to shoulder” with civil servants. In accordance with Section 12 of the agreement, the Minister of Finance shall act

to raise for the approval of the Government a decision proposal, whereby that which has been set forth above will

apply, mutatis mutandis and respectfully, to a budgeted body, as defined in Section 21 of the Budget Foundations

Law. The Company, as a government company, is a “budgeted body” for this purpose.

The two agreements set forth have not yet been developed into binding instructions with respect to the

operations of the Company, but the Company estimates that in the future the provisions of one of them will be

expanded to apply to the affairs of the Company as well.

15. Fixed assets, land and facilities

15.1 General

The Company owns the assets that it uses (subject to the statements in Section 15.3 with respect to the assets

arrangement) or possesses either within long term lease agreements (mainly with the Israel Land Administration)

or pursuant to purchase or expropriation, or within rights that were extended to the Company by property owners

(such as an easement or authorization of use at no cost that is not a lease, or possession rights that have a

contractual regulation process) or within rights that the Company has by statute. The Company operates within a

work plan for executing an arrangement and register of its rights to its principal assets, which may be registered

and regulated, and tracks those that it cannot perform such a proceeding for. In addition, the Company has rights

to thousands of small properties (mainly transformation rooms of different types) whose right regulation and

registration are advancing but are subject to restrictions in accordance with that which has been set forth below.

For a material part of the real estate assets, the rights of the Company are not registered or regulated. The

Company has been some or all of the assets, for a long period, and it is operating to sign contracts or arrange

rights when these are not regulated or to evict squatters, if there are any. The status of the real estate assets that

have not yet been regulated stems from a number of reasons, such as: planning reasons (absence of parcellation

or demands for regulating outline plans, a large number of properties, dependence on outside parties, absence of

documents), disputes with various authorities, including tax authorities, which prevent the receipt of approvals for

the registration of the rights. In view of the complexity, the Company cannot estimate the length of the period

until the conclusion of the registration settlement, but it estimates that the costs involved in this are not expected

to be material (see Note 11 B to the Annual Financial Statements).

It is the position of the Israel Land Administration that the land areas that were allocated by the Israel Land

Administration to the Company for public purposes, but which are effectively unused or are not being used for the

allocated purposes, should return to the possession of the Israel Land Administration. Based on various

considerations, the Company believes that this decision does not apply to the land that was leased to it by the

Israel Land Administration, based on the recognition of the management of the Administration that the Company

has a need to regulate sites for electricity with nationwide coverage in advance. However, even if this decision

were not to apply to the land allocated to the Company with a tender exemption, as of the date of the Prospectus,

the Company is making use of all of the land areas that have been allocated to it by the Israel Land Administration,

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except a few tracts whose usage date in accordance with the development plan is not yet due, and for which there

is future zoning for development and use. In addition, in accordance with the said decision, even if the Company is

required to return land that has not been used to the Israel Land Administration, the return to the Israel Land

Administration will require paying the Company consideration for the return, as prescribed on this matter in the

said decision, to the extent that the “properties arrangement” does not establish to the contrary; see Section 10.3.

In addition, the Company leases from various parties (such as the Israel Land Administration, local authorities,

private entities) approximately 80 more properties that are used for various purposes, including: offices,

storerooms, monitoring stations, temporary and portable substations. The agreements are made out for different

periods of time, from one year to ten (10) years and are renewed or updated in accordance with the needs of the

Company in various places and for different purposes, the rental agreements for the properties, including the

option period of the Company for their extension, end in 2012 to 2020.

The Company believes that it will be able to renew the rental agreements under conditions that are similar to those

existing as of the time of the Prospectus. The information on the preparations of the Company with respect to

extension of the rental agreements is forward looking information, as per its definition in the Securities Law. There

is no certainty with respect to such an estimate, this being, inter alia, due to it being based on the existing

information at the time of the Prospectus and its dependence on various factors that do not depend on the

Company, such as market conditions, the needs of the Company, agreements with the lessors and more.

The Company has created floating charges on all of its assets for securing some of its liabilities (see Note 18E to

the Annual Financial Statements), including for the assets and rights as set forth, part of them and one fixed

charge that the Company has created for securing its liabilities towards various financing entities for the financing

of Stage A of the Emergency Plan (see Note 18E to the Annual Financial Statements).

In addition, the main office building of the Company, covering an area of approximately 80,000 m2, is located at

the southern entrance to Haifa, and is built on land that is owned by the State of Israel and leased by the Company

from the Israel Land Administration on a forty nine (49) year lease (until June 2048), with an option for an

extension for an additional forty nine (49) years.

The Company has two head offices in Haifa and in Tel Aviv, as follows:

Name and location of the

site

Nature and registration of the right Land area in m

2

Comments

1. Head management offices – Haifa

The rights of the Company to this property are lease rights of the ILA for a lease period that ends in 2048 with an option for the Company to extend this period for 49 years more. A cautionary remark is registered to the benefit of the Company for its rights.

80,000 1. The land has comments registered for expropriations and an antiquities site.

2. An agreement exists with the Haifa Municipal Council whereby no additional parts of the parcel will be expropriated.

2. Head management offices – HaChashmal St., Tel Aviv

Ownership of the Company is registered at the Land Registration Bureau.

14,540 1. There are two comments of use – structure listed for preservation.

2. The Company is acting to improve the property, which will involve zoning of land for public purposes and additional construction rights and uses.

The Company has nine (9) logistics sites that are located on land used as storage areas, as follows:

Name of the site Location Type of site

Site area in m


1. Giborei Israel warehouse Tel Aviv Logistic 8,508 Lease from Tel Aviv Municipal

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Name of the site Location Type of site

Site area in m


Council

2. Kiryat Shemona warehouse Kiryat Shemona Logistic 3,000 Lease from ILA

3. Kiryat Gat compound * Kiryat Gat Logistic 3,600 Lease from ILA

4. North Akko logistic center * Akko Logistic 121,572 Lease from ILA

5. Area for storing equipment trolleys, Jerusalem

Jerusalem Logistic 775 Rental / authorization from Jerusalem Municipal Council

6. Beit Dagan warehouse Beit Dagan Logistic 85,108 Ownership / right of possession (without documents)

7. Leyland logistic center, Ashdod

Ashdod Logistic 106,000 Ownership

8. Orot Rabin logistic center Hadera Logistic 270,000 Sub-lease from the Caesarea Development Company

Total area 599,943

* As of the date of this Prospectus the property is vacant and is not being used for storage (is intended for intelligent utilization). ** Under construction.

15.2 Fixed assets

The fixed assets of the Company are divided into two key groups: operated fixed assets and fixed assets under

construction. Operated fixed assets consist mainly of power stations (including land, buildings and machines), and

substations, distribution grids, switching stations and 400 kV extra high voltage switching stations. The assets of

the Company that are under construction consist mainly of power stations and buildings.

The Company has assets (mainly distribution grids) in the territories of the Palestinian Authority. See Section 9.6

for details on areas that are in the territories of the Palestinian Authority.

15.3 Arrangement for the transfer of rights and assets pursuant to Section 62 of the Electricity Sector Law

15.3.1 General – the provisions of the law

Section 62 of the Electricity Sector Law states various provisions with respect to rights and assets that were held

by the Company prior to the expiration of the Concessions that were given to the Company pursuant to the

Electricity Concessions Order with (March 4, 1996), despite the statements in Section 46 in Part A of the

Addendum to the Electricity Concessions Ordinance (hereinafter: “Section 46 of the Concession”).

In accordance with Section 46 of the Concession, at the end of the concession period, the plant (as defined

below), with all its fixtures, instruments and materials, were supposed to pass to the title of the State (then the

Supreme Commissioner), at no cost, on the condition that the State was to pay suitable compensation for fuel

materials, mechanisms, meters and instruments, whether in storage or transported on the way to the Company

or ordered by it or belonging to it and paid for.

“The Plant” was defined in Section 46 of the concession as a business of generation, supply and distribution of

electric power in accordance with the concession and all of the assets of the Company with respect to that

business, but not money or collateral for money or debts in books. Section 46 of the Concession states that if

the Company established a laboratory, scientific institute or laboratory, and if the state took possession of

them, it would pay suitable compensation for them. However, in accordance with the provisions of Section 46 of

the Concession, the Company is entitled to claim adequate compensation for installation and repair works

under the conditions prescribed in Section 44(C) of the Addendum to the electricity Concessions Ordinance, as

through the Government had purchased the plant at the time at which the plant had passed to the possession

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of the Government. Section 46 of the Concession also stated that if during the transfer of the plant to the State,

a bond or loan capital of the Company (which was approved by the Supreme Commissioner in accordance with

the Electricity Concessions Ordinance) had not been fully paid up, the Supreme Commissioner would assume all

of the resulting liabilities of the Company (but would be entitled to benefit from the money present for

amortization of the liabilities).

Section 62 of the Electricity Sector Law states as follows:

(A) Despite the provisions set forth in Section 46 of the Concession, the liabilities of the Company and the rights

and assets thereof, which it possessed at the time of expiry of the Concession for which it is entitled to

compensation from the State of Israel in accordance with the section set forth, shall remain in the

possession of the Company (that is, would not pass to the State) and no compensation shall be paid for

them (hereinafter, for the sake of convenience: “Compensable Properties”158

).

(B) The rights and assets for which the Company is not entitled to compensation (in accordance with that which

has been set forth in Subsection A above), and which are used or are intended to be used, directly or

indirectly, for the operations of the Company in accordance with the Electricity Sector Law, shall be

purchased from the Company based on the values on the day of granting of the rights and assets, in

accordance with the settlement that will be signed between the State of Israel and the Company

(hereinafter, for the sake of convenience: the “Property Settlement”159

; in this section “being used” and

“intended to be used” are as prescribed by the Ministers (hereinafter, for the sake of convenience - “Non-

Compensable Used Properties”160

).

The Electricity Sector Law further states that until the time of execution of the Property Settlement (in

accordance with that which has been set forth in Subsection (B) above), the rights and assets for which the

Settlement is supposed to be made out shall remain in the possession of the Company, as they were at the time

of expiration of the Concession; if the parties do not reach such a Settlement within a year of the date of

expiration of the concession (which was until March 1997), the Ministers would establish provisions with

respect to the acquisition of the said rights and assets. In the first year after the expiration of the concession, no

negotiations were held between the parties and in any case the parties did not reach a settlement.

As of the date of this Prospectus, to the best of the Company’s knowledge, the Ministers did not establish which

properties were Used, Compensable Properties (the properties “used by” or “intended to be used by” the

Company) and/or provisions on the purchase of such rights and properties.

In addition, the Electricity Sector Law, like the Electricity Concessions Ordinance, does not have a classification

and assignment of the assets of the Company as of the time of the expiration of the concession. This means that

the Law does not specify which assets and rights are Compensable properties as set forth in Subsection (A)

above (and included in Section 62(A) of the law whereby these remain in the possession of the Company and it

is not required to pay for them to the State); and it does not specify which assets and rights are assets in use

that are not compensable as set forth in Subsection (B) above and for which the Property Settlement was

supposed to be made out (and which the Company shall be required to purchase from the State based on their

value at the time of provision of the rights and assets at the settlement execution time). Moreover, the

Electricity Sector Law does not define the manner and method for calculation of the value of the assets and

rights, based on which their cost of purchase will be established within the Property Settlement. As a result of

this, and in view of the time that has passed, the Company has no ability to assess when and if at all the

Ministers will prescribe instructions with respect to the Settlement and how they will be implemented.

Section 62(D) of the Electricity Sector Law further states that the State is to indemnify the Company for any

payment that the State has paid owing to any of the liabilities of the Company, which were valid at the time of

158

The definitions are not included in the wording of the Electricity Sector Law and are provided only for ease of reading. 159

The definitions are not included in the wording of the Electricity Sector Law and are provided only for ease of reading. 160

The definitions are not included in the wording of the Electricity Sector Law and are provided only for ease of reading.

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expiration of the concession, due to its expiration or as a result of execution of the provisions set forth in

Subsections (A) and (B) above.

15.3.2 The position of the State with respect to the classification of the assets and rights

In accordance with the expert opinion of the legal advisers of the Company, the Company has classified the

rights and assets into three (3) categories: (1) rights and assets referred to in Subsection (A), that is,

Compensable Properties; (2) rights and assets referred to in Subsection (B) above, that is, usable assets that are

not compensable, to which the Property Settlement shall apply; and (3) assets that are not Compensable

Properties (which are part of the first category of assets) and which are not used assets that are not

compensable (part of the second group of assets), for which Section 62 of the Electricity Sector Law prescribes

no settlement. However, as these assets are not used and are not intended for the use of the Company, they are

not included in the definition of a “plant” as defined in Section 46 of the Concession. Therefore, in the opinion

of the Company, relying on the expert opinion of its legal advisers, these assets were not supposed to pass to

the possession of the State at the end of the concession period in accordance with Section 46 of the Concession,

and in any case are remaining in the possession of the Company and it need not purchase them from the State

(hereinafter: “Unused, Non-Compensable Properties”).

It is noted that the State, in its expert opinion of 2000 (hereinafter: “the State Expert Opinion”), believes that

the assets in this third category passed to the title of the State at the end of the concession. According to the

expert opinion of the State “all of the other rights and assets for which no compensation is due and that were

not supposed to be purchased from the State are possessed by the State, in effect, from the effective date of

the Electricity Sector Law, with all resulting consequences”.

In the expert opinion of the State there is no breakdown of the possible consequences, meaning that there is no

certainty as to what financial or other settlement will be established for those properties. However, as it has

been the policy of the Company to purchase assets that were intended for use in the activity of the Company in

the generation and transmission of electricity, in the opinion of the Company, if such assets were indeed kept at

the time of the expiration of the Concessions, as of the date of the Prospectus they are of a small number and

their depreciated cost in the Financial Statements is low.

In accordance with that which has been set forth, as of the time of the Prospectus, no notice has been given by

the Ministers with respect to which assets are used or are intended for use for the activity of the Company and

therefore in effect it is not possible to classify the assets that are part of the third category as set forth, or state

with certainty their effect over the financial outcomes of the Company. In addition, there is no certainty that in

the end, such assets will remain in the possession of the Company or if they will be returned to the State, or

which monetary or other arrangement will apply to them.

In the expert opinion of the legal advisers of the Company, there is a contention whereby the concession

expired a day before the effect of the Law (the Law took effect on March 4, 1996) and therefore “the plant” did

not pass to the Government. The State disputes this contention in its expert opinion.

15.3.3 Expert opinion of the State of Israel

In February, 2000, the Company received a letter from the Deputy Budgets Commissioner at the Ministry of

Finance, in which he indicated that within a Government team that had been appointed to deal with the issue,

an economic and legal expert opinion of the State of Israel was formed, including an economic, accounting and

legal expert opinion, which were attached to his letter to the Company) on the matter of the Property

Settlement. The letter further states that according to the provisions set forth in the State Expert Opinion, the

implementation of the Property Settlement in accordance with the Electricity Sector Law might have a material

effect over the Company.

In accordance with the expert opinion of the State of Israel, with respect to the provisions of Sections 44(C) and

46 of the Concession, the Company is not entitled to compensation due to investments that have already been

returned to it through provisions for depreciation (meaning that these properties are not included in the

Compensable Properties category). The Company, in contrast, based on the classification of the properties in

the expert opinion of its legal advisers, believes that most of its assets as of the time of expiration of the

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Concession (depreciable properties that were fully depreciated at the time of expiration of the Concession and

depreciable properties that were not fully depreciated at the time of the expiration of the Concession except

properties to a minor magnitude) are Compensable Properties.

The State Expert Opinion included within the non-Compensable Properties to which the Property Settlement

was supposed to apply the following properties (some of which shall be defined as “used” or “intended for use”

and others as “not used” or “not intended for use”)161

: which at the time of expiration of the Concession were

fully depreciated or properties that have been partially depreciated, to the amount of the depreciation (that is,

owing to any facility, installation or repair that is compensable, the compensation shall be paid only for the

undepreciated balance), and the properties and rights of the Company that are not depreciable include land and

companies held by the Company but not cash and money collateral. In addition the State includes in its expert

opinion as non-Compensable Properties installations installed and repairs made by the Company if financed

from capital stock162

or payment of a party interested in a connection163

.

The economic expert opinion of the State includes a broader breakdown of non-Compensable Properties to

which the Property Settlement is supposed to apply and of Compensable Properties and states criteria and an

economic model (including calculation formulas) for assignment and sorting of such properties.

The adjusted cost of the properties fully depreciated, as set forth above, as indicated in the Financial Statements

of the Company dated March 31, 1996, is approximately NIS 4.46 billion (approximately NIS 7 billion as of

December 31, 2011, adjusted to the NIS of December 2011 and adjusted to the NIS of March 2012). These

properties include, as per the estimate of the Company, power stations, transmission and distribution facilities,

real estate and various assets such as equipment, automobiles and miscellaneous structures).

The net depreciated cost in the books of the Company of the assets that were partially depreciated to the

amount of the depreciated balance, less liabilities in accordance with a particular rate that depends on their

financing sources (these properties include, in the opinion of the Company, mainly power stations, transmission

and distribution facilities, certain land assets and additional equipment), and the non-depreciable assets of the

Company, in the view of the Company, mainly intangible assets and shares of held companies, but not cash and

stock, in accordance with that which has been set forth above, for March 31, 1996, is approximately NIS 4.5

billion (approximately NIS 7 billion for December 31, 2011, adjusted to the NIS of December 2011 and adjusted

to the NIS of March 2012).

The data set forth is data for March 31, 1996; however the effective date is the date of the end of the

Concession, in other words, March 4, 1996.

In total, in accordance with the calculation that was made by the Company in accordance with the expert

opinion of the State of Israel, the book cost of the non-Compensable Properties to which the Property

Settlement is supposed to apply and for which the Company will be required to pay consideration to the State of

Israel is approximately NIS 4.5 billion, as of March 31, 1996, and approximately NIS 7 billion as of December 31,

2011, adjusted to the NIS of December 2011 and adjusted to the NIS of March 2012.

In the opinion of the Company, one cannot conclude from the amounts indicated above with respect to the cost

of the assets in the books of the Company, the economic value of the assets based on which the amount that

the Company may be required to pay in accordance with the Property Settlement, even if the position brought

forth in the expert opinion of the State of Israel is accepted, and the value may be lower or higher.

In March 2000, soon after the receipt of the expert opinion of the State of Israel, the Director of the Electricity

Authority, who was then at the Ministry of Energy and Water (then the Ministry of National Infrastructures)

161

The description of the properties is taken from the economic expert opinion that was written for the chairman of the government

team for the property restoration settlement of Israel Electric Corporation by Dr. Ilan Maoz Amikal Ltd. and Yoram Abramson, Viskovsky Abramson and Co., C.P.A.

162 Profits that were not distributed that originate from a dividend and profits to which the “owners” were entitled in accordance with

Section 34 of the Addendum to the Electricity Concessions Ordinance 163

A payment / deposit paid by a party asking the Company for the connection of any place to the electricity supply system by the

construction of an electricity grid, including an addition of load.

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asked the Company in writing, in accordance with the directions of the Minister of Energy and Water, not to

respond to the application of the Ministry of Finance on the issue of the Property Settlement as long as the issue

has not been discussed in an orderly manner between the ministries of the Ministers, the Company and the

Ministry of Energy and Water. Because of this, at that time, the Company did not respond to this application of

the Ministry of Finance. To the best of the Company’s knowledge, this issue was discussed by a government

committee, but since then no progress had been made. The Company was informed that the need to deal with

the issue of the Property Settlement was referred to previously within discussions of various government

entities. See Section 22.4.7 for details on the response of the regulators’ committee on the issue of the Property

Settlement in the draft interim report of March 2012.

15.3.4 Expert opinion of the State of Israel

Based on the expert opinion of the legal advisers of the Company (in the absence of details with respect to the

classification of the assets in Section 62(A) of the Electricity Sector Law and the absence of case law on the

matter, and based on the purpose of the law and the legislative intent, as expressed in the discussions held prior

to the passing of the Electricity Sector Law), the interpretation whereby all of the depreciable assets, even if

fully depreciated at the time of expiration of the Concession, should be included in the compensable asset

category, should be preferred over the interpretation of the State in its expert opinion whereby all assets of the

Company that at the time of expiration of the concession were fully depreciated and recognized in the charge

rate through a provision for depreciation constitute non-Compensable Properties, while assets that have not

been fully depreciated constitute non-Compensable Properties to the amount depreciated less liabilities at a

certain rate.

Based on the expert opinion of its legal advisers with respect to the proper interpretation of the Property

Settlement, including on issues of classification of the properties to which it will apply, and considering the

provisions of the Electricity Sector Law (including those referred to above) and Section 46 of the Concession, the

Company classifies, as set forth, most of the assets that it possessed at the time of expiration of the concession

(both depreciable assets that were fully depreciated and depreciable assets that were not fully depreciated at

the time of expiration of the Concession, except properties to a minor magnitude) as Compensable Properties

and therefore as such are to remain to its title, and no compensation is to be paid for them by the State and

they shall not be included in the Property Settlement, to the extent that the Company shall not be required to

pay their consideration to the State. The Property Settlement will therefore apply, in the opinion of the

Company, to used properties that are not compensable only, and which did not constitute the majority of the

properties of the Company at the time of the expiration of the concession as set forth. Therefore, the Company

estimates that the Property Settlement was not supposed to have, and there is, no material effect over the

Company or over its financial outcomes or status.

However, this is subject to the deliberation of the Ministers. To the best of the Company’s knowledge, as of the

time of the Prospectus, the Ministers have not yet formulated any recommendation on the issue of the Property

Settlement. Therefore, the Company has no way of assessing what the actual summary with respect to the

Property Settlement will be, what its consequences will be (if any) over the Company and it has no certainty that

the implementation of the Property Settlement will not materially affect its financial status.

In addition, the Company is of the opinion, based on the expert opinion of its Legal Advisers, that the

interpretation of Section 62 of the Electricity Sector Law in such a way that will require the Company to pay the

amounts set forth above, or a similar amount, for the purpose of purchasing assets from the State of Israel will

conflict with the purpose and goals of the Electricity Sector Law and the proper and correct principles of

interpretation; the proper principles of interpretation require consideration, inter alia, of the damage to the

equity of the Company. In accordance with the expert opinion of the legal advisers of the Company, the

interpretation of Section 62(A) to the Electricity Sector Law that no material damage will occur to the equity

capital of the Company or severe damage to its financial strength, the possibility of calling loans that the

Company has taken for early repayment (including bonds issued by the Company) and casting in doubt its ability

to repay its liabilities and continue its functioning as a going concern, is to be preferred, because the clear intent

of the legislature was for the Company to exist and fulfill the functions that have been allocated to it and the

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tasks that have been imposed upon it in the Electricity Sector Law and in the licenses that were given to it

thereby.

Without derogating from the position of the Company with respect to the interpretation of Section 62 of the

Electricity Sector Law, based on the legal expert opinion that it has received, the Company shall have a good

contention whereby the cost of purchase of the assets and rights that would be borne by the Company, if and to

the extent that it were charged to pay for them in accordance with the Property Settlement, was supposed to

be recognized as part of the cost of the electricity charge rates, and therefore the acceptance of the expert

opinion of the State would mean that the electricity consumers would be required to pay again for assets whose

purchase by the Company was paid for by them previously through the electricity charge rate. The expert

opinion was made out based on the assumption that the Electricity Authority would find it difficult to confirm

these costs through the charge rates (again) for public reasons. The expert opinion of the State does not deal

with the issue of the recognition of the cost of purchase of the assets as part of the determination of the

electricity charge rates by the Electricity Authority.

Based on all of that which has been set forth above, and based on the legal expert opinion that it has received,

the Company estimates that the implementation of the Property Settlement was not supposed to have and

does not have any material effect over the business affairs, outcomes of activity or financial status of the

Company and that the Company will not be required to pay the State compensation for the depreciable assets,

even if fully or partly depreciated.

Notwithstanding that which has been set forth above, because the Property Settlement is subject, inter alia, to

the deliberation of the Ministers, the Company may be required to pay in the end material amounts for the

assets to which it will apply. In addition, with respect to part of the assets, there is no certainty as to which

monetary or other arrangement shall apply with respect thereto, or if they will remain in the possession of the

Company or will be returned to the State.

The Company further estimates that this issue will be regulated within the discussions of the Structural Change.


The information on the effect of the Property Settlement over the Company or the financial status of the

Company is forward-looking information, as per its definition in the Securities Law. Such information is based the

interpretation of legislation with respect to properties for which the Company shall be charged to pay and the

determination of the method for setting the value of those that are not under the exclusive control of the

Company, but depends, inter alia, on the Ministers. The Company has no ability to estimate which expert opinion

will be accepted – whether its own and that of its legal advisers or that of the State or another interpretation,

and what the method that will be used for the calculation of the value of the properties as set forth will be, and it

also has no certainty that the implementation of the Property Settlement, to the extent implemented, and in the

manner and method as implemented, will not have a material effect over the business affairs, outcomes of

activity or financial status thereof. In addition, this information is based on assessments of the Company at the

time of the Prospectus. These estimates may fail to materialize or materialize partly or differently from the way

expected, because, inter alia, of changes in the position of the Ministers and the government or the applicable

law, which are not under the control of the Company.

16. Intangible assets

16.1 Software

The Company engages in the characterization, development and implementation of information systems and

solutions that support business processes in the Company in the following fields: customer service and billing, the

electricity chain, planning and construction of engineering projects, programs on security and safety, and

programs that deal with managerial, business and logistic issues. In addition, the Company has extensive

experience and knowledge that have accrued on the following issues: planning, hosting and operation of

computer infrastructures on all types of platforms, telecom and command and control infrastructures and services

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(optic fibers, microwave, wireless), protection packages (CCTV systems, access control, alarm, monitoring, etc.)

specialization in diverse IT architectures and technologies with emphasis on information security and integration

and on all stages of the lifecycle of large-scale IT and telecom projects.

16.2 Patents

As of the date of the Prospectus, the Company has one patent, which is in the registration stage in Europe and in

Israel, with respect to chemical indicators for identification of hot spots in transformers. In addition, the Company

has a patent for recycling of residual heat pending in the United States.

In addition, the Company is dealing with patents in the Technology Incubator. See Section 13.1.2 for details on the

Technology Incubator.

16.3 Concessions

Jordan Properties Ltd. owns a license for the use of 20 VHF frequencies that was acquired from Arrowmid in 1999.

The acquisition was funded by the Company and in exchange for it, it was given exclusive rights to use the

frequencies, which are intended for use in the DMS project.

17. Suppliers

17.1 General

The transactions of the Company with its suppliers, domestic and overseas alike, are regulated in internal

procedures of the Company, which state, inter alia, the terms of the business transaction, the payment and the

manner of giving of the approval, including a deviation from each of these.

As a rule, in accordance with the provisions of the procedure for suppliers in Israel, the Company regularly pays

interest for a delay in payment to suppliers, which is required by an agreement with the supplier or by law, in

accordance with the “Comptroller General interest” rate as published by the Comptroller General at the Ministry

of Finance or as required by law.

The overseas supplier procedure divides the terms of payment to suppliers into three (3) categories:

(A) Payment for the supply of goods shall be made at least sixty (60) days from the date of the bill of lading.

(B) Payment for the provision of services or execution of works shall be sixty (60) days from the day of provision

of the services to the Company or from the day of execution of the works from the day of receipt of the

service request at the Company, whichever is later.

(C) The terms of payment with respect to advance payments will be sixty (60) days from the date of signing the

order or contract or thirty (30) days from the date of receipt of the payment requests at the Company,

whichever is later.

In addition, the procedure states that:

(A) Payment terms for a lien will be sixty (60) days from the date of approval of the milestones that have been

negotiated in a contract with the supplier or from the date of receipt of the demand for payment at the

Company, whichever is later.

(B) The terms of payment for services that are ancillary to import that are provided by suppliers in Israel shall be

60 days from the day of receipt of the payment demand at the Company or from the day of receipt of the

service at the Company, whichever is later.

(C) The terms of payment for an import record and taxes will be determined in accordance with the commonly

used terms of payment at the institutions or entities that are authorized by law to establish these payments,

subject to a contract that has been signed with the supplier.

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In the proceedings for transacting in which suppliers from abroad and in Israel participate, payment terms of sixty

(60) days at least will be determined.

The procedure regulates the manner of payment to suppliers and states that the payment will be made based on

the policy of the Company and the supplier contract through: a bank transfer, documentary credit; payment by a

financing party; checks, including bank checks.

17.2 Agreement with a material supplier

In September 2011, the Company transacted with Siemens AG (in this section: “the Supplier”) to upgrade its

energy management systems (EMS), including replacement of hardware and software in the current EMS system

of the Company at its facilities and the provision of integration services (in this section: “the Services”). The term

of warranty from the delivery of the system to the satisfaction of the Company shall be for twelve (12) months,

after which the Company is entitled to extend the term of the warranty for the entire system for two (2) additional

periods of twelve (12) months each, based on the realization option price prescribed in the agreement. The

agreement states various provisions for quality control, schedule for execution, changes in the Services and

insurance. In accordance with the agreement, the possession and ownership of the hardware will pass to the

Company from the time of its entry into Israel, will remain in its ownership and will grant it personal licenses for

using the software as elaborated in the agreement, which are nontransferable. The Supplier warrants that the

protection of copyright will remain to the benefit of the Company for five (5) years at least. In addition, The

Supplier undertook to provide the Company a surety in the amount of 10% of the contract price, for execution of

its undertakings in accordance with the agreement within thirty (30) days of the consolidation of the agreement

through an official letter from a foreign bank that attests to the existence of sufficient credit for guaranteeing the

fulfillment of the contract. Both parties undertook to maintain secrecy and indemnification for injury or death and

damage or loss to property as a result of negligent conduct or an error on the part of the indemnifying party. The

liability of the supplier is limited to compensation at 100% of the contract price, except its liability towards third

party claims. The parties shall not be responsible for any indirect or consequential damage and/or loss.

17.3 The following table shows the material suppliers of the Company, rates of purchase that in 2011 exceeded 5%

of the rate of purchases of the Company from suppliers throughout 2011:

Name of the supplier Raw material Acquisition rate

VITOL S.A. Diesel oil 14.65%

The National Coal Supply Corporation Ltd. Coal 46.23%

See Section 7.10 for details on the Company’s contracts with these suppliers.

17.4 The following table shows the material suppliers of the Company, rates of purchase that in the first quarter of

2012 exceeded 5% of the rate of purchases of the Company from suppliers throughout the first quarter of 2012:

Name of the supplier Raw material Acquisition rate

VITOL S.A. Diesel oil 26.5%

The National Coal Supply Corporation Ltd. Coal 18%

Glencore Energy Diesel and fuel oil

15.9%

Haifa Oil Refineries Diesel oil 8.3%

*** It should be noted that the purchases from the suppliers are not continuous throughout the year, and accordingly, data at

the quarterly level do not necessarily faithfully reflect the annual percentage of purchases from them.

See Section 7.10 for details on the Company’s contracts with these suppliers.

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18. Working capital

18.1 Credit policy

18.1.1 Customer credit:

The average days of credit for customers in the year that ended on December 31, 2011, is approximately 56

days, compared with 56.6 days in the parallel previous year. The average volume of credit for customers in the

year that ended on December 31, 2011, came to a total of approximately NIS 3,523 million, adjusted to the NIS

of December 2011 (approximately NIS 3,536 million adjusted to the NIS of March 2012), compared with

approximately NIS 3,422 million, adjusted to the NIS of December 2011 (approximately NIS 3,435 million

adjusted to the NIS of March 2012) in the parallel year before.

Average days of credit for customers over a three-month period that ended on March 31, 2012, are

approximately 49 days compared to approximately 57 days in the parallel period the previous year. The average

volume of credit for customers in the three-month period that ended on March 31, 2012, totaled approximately

NIS 3,739 million, in comparison with approximately NIS 3,344 million for the parallel period the year before.

18.1.2 Credit from suppliers:

The average days of credit from suppliers in the year that ended on December 31, 2011, is approximately 35

days, compared with approximately 34 days in the parallel previous year. The average volume of the credit from

suppliers in the year that ended on December 31, 2011, came to a total of approximately NIS 1,608 million,

adjusted to the NIS of December 2011 (approximately NIS 1,614 million adjusted to the NIS of March 2012),

compared with approximately NIS 1,239 million, adjusted to the NIS of December 2011 (approximately NIS

1,244 million adjusted to the NIS of March 2012) in the parallel year before.

Credit days from suppliers in a three month period that ended on March 31, 2012 are approximately 31 days

compared to approximately 38 days in the parallel previous year. The average amount of credit from suppliers

in the three month period that ended on March 31, 2012, came to a total of approximately NIS 2,755 million

compared to approximately NIS 1,865 million in the parallel period the year before.

19. Financing

19.1 General

The electricity charge rate for the consumer is determined based on the costs of the Company in accordance with

that which has been set forth in Note 3 to the Annual Financial Statements. In view of the principles of the charge

rate as set forth, the revenue of the Company (except the return on capital less dividend that was required in

accordance with the directive of the Companies Authority) does not constitute a principal source of financing of

the development activity of the Electricity Sector, and the Company is therefore required to raise most of the

necessary financing for this purpose from external financing sources.

However, in recent years, the financing of part of the Development Plan of the Company has been carried out,

inter alia, through the raising of the charge rate with special approvals of the Electricity Authority. For example,

the Electricity Authority approved, as of September 8, 2007, a recognized cost addition at a rate of 5% for a year or

up to the determination of the new charge rate basis for the generation segment, whichever is earlier, which

constitutes earlier recognition of the cost of investment164

. In addition, in the resolution of the Electricity

Authority of October 30, 2008, the Electricity Authority recognized the costs for the purposes of the financing of

Stage A of the development of the Emergency Plan at a cumulative amount of approximately NIS 2 billion. See

Section 7.7.5 for details on the financing of the Emergency Plan, inter alia, by recognition of the investment costs

in the charge rate.

164

See the Immediate Report dated August 9, 2007 (Reference No.: 2007-1-352966)

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The recognition was spread over a period of two years from January 2009 to January, 2011. In addition, on March

7, 2011, the Electricity Authority published a resolution whereby a debt in the amount of NIS 2 billion out of the

debt of the Company to consumers would be spread through to 2025 for the purpose of implementation of Stage

B of the Emergency Plan (see the Immediate Report of the Company dated March 17, 2011, Reference No.: 2011-

01-084180). See Note 20I to the Annual Financial Statements for further information.

In July 2010, the Board of Directors of the Company resolved to reduce the Company’s debt-to-balance ratio

(hereinafter: the “Financial Leverage”) to 60% over a period of six years (a reduction of debt which comes to a

total of approximately NIS 9 billion up to 2016). This resolution might affect the Company’s ability to raise debt in

the future for the purpose of financing its development programs.

In the matter of the Company’s ability to carry out an issue to the public in Israel which is not backed in its entirety

by a State Guarantee, see the notice by the staff of the Israel Securities Authority to the Company pursuant to

which, insofar as the Company intends to issue Bonds which are not secured in their entirety by means of a

Guarantee by the State of Israel, as long as uncertainties exist in the context of the effects of the Asset

Arrangement and the Structural Change on the Company, the Company shall be required to provide greater detail

in its description of the economic exposures with respect to the implications of these subjects for the Company, in

a manner which satisfies the staff of the Israel Securities Authority with respect to the format of the disclosure.

For details with respect to the Asset Arrangement, see Sections 15.3 and 29.3.8; for details with respect to the

Structural Change, see Sections 1.3 and 29.3.7.

19.2 Average interest rate of loans

The Company finances its actions using bank credit and non-bank credit. A breakdown of the average interest rate

for the twelve month period that ended on December 31, 2011, and for a three month period that ended on

March 31, 2012, for loans that are not intended for the exclusive use of the Company, segmented by short-term

credit and long-term credit from bank and non-bank sources, is provided below.

Details Average interest rate (%) for long term credit

Average interest rate (%) for short term credit

December 31, 2011 March 31, 2012 December 31, 2011 March 31, 2012

Bank credit sources 4.65 4.59 1.81 2.03

Non-bank credit sources 6.34 6.35 6.49 6.53

19.3 Restrictions applying to the Company at the time of receipt of credit

To finance the Development Plan of the Company, the Company will be required to have external financing

sources of significant magnitudes.

The ability of the Company to borrow from the Israeli banking system is limited because of the credit restrictions

that apply in accordance with the Proper Banking Management Regulations of the Bank of Israel (Regulation No.

313). In accordance with these regulations, the Bank of Israel will not extend loans to a “single borrower” at a rate

exceeding 15% of its equity capital, after adjustments, and in addition, the Bank of Israel will not extend loans to a

“borrower group” at a rate exceeding 20% of the equity capital of the bank, after adjustments. The term

“borrower group” includes, inter alia, the borrower, a person controlling it and any person that is controlled by

them, except banks. With respect to these restrictions, the State of Israel is not considered a borrower and it is

not included in the “borrower group”. To the best of the Company’s knowledge, government companies that do

not control each other do not together constitute a borrower group.

In accordance with the Income Tax Regulations (Rules for Approval and Management of Provident Funds), 1964, in

general, a provident fund is allowed to hold securities of a certain corporation, make deposits in that corporation

or extend to it loans at a rate of up to 5% of the revalued market value of its assets, or beyond this, subject to the

conditions prescribed in the aforementioned regulations.

F-174

In addition, in accordance with these regulations, a provident fund is allowed to hold negotiable bonds (that are

not bonds of the State of Israel) to a rate of up to 5% of the total par value of the bonds of that series (with

respect to an investor group, the investment increments range from 10% to 25%), or beyond this, subject to the

conditions prescribed in the aforementioned regulations.

In effect, the Company estimates, based on public publications of some to the financial institutions, the provident

funds do not reach the maximum rate that is permitted for them in accordance with the aforementioned

regulations.

The theoretical potential for the receipt of loans from the banking system and from the institutional market in

Israel stands, in accordance with the estimate of the Company, reaches an amount that is significantly lower than

the needs of the Company, which cannot in any case constitute a unique funding source for the Development Plan

of the Company. Regulatory restrictions that apply to the banking system and the institutional market in Israel,

along with internal investment restrictions that are prescribed by these entities, make it difficult for the Company

to raise the debt required for the Company in Israel and therefore the Company sometimes raises its required

credit from the capital markets and the banking system overseas.

19.4 Credit that has been obtained from the date of the statements until the date of signing this Prospectus

After March 31, 2012, and until the date of publication of this Prospectus, the Company raised approximately

NIS 1,500 million by means of an issue of bonds, in accordance with the following breakdown:

Date Fundraising Consideration in currency of origin Consideration in million NIS

April 10, 2012 Shekel Electricity 2013 Series 1,500 million shekels 1,500.0

19.5 Restrictions that apply to the Company pursuant to financing agreements

19.5.1 Some or all of the financing agreements of the Company have various conditions that may cause the calling of

debt of the Company thereby for immediate repayment, including:

19.5.1.1 If the Company violates its undertakings towards a certain lender, and that lender demands immediate

repayment as a result of this violation, this will lead to “cross acceleration”, whereby the other lender, the

agreement with whom has not been violated, will have a right to expedite its demand to immediate

repayment. As of March 31, 2012, these loans total approximately NIS 19,635 million; as of the date of the

Prospectus, approximately NIS 20,567 million.

In addition, in some of the financing agreements, the very existence of the right of a particular lender to

demand immediate repayment of a debt (in other words, even if it did not call the debt for immediate

repayment), which will lead to “cross default” and will grant another lender, with which the agreement has

not been violated, a right to demand immediate repayment. For March 31, 2012, these loans total

approximately NIS 17,782 million; as of the date of the Prospectus, approximately NIS 18,646 million.

This may have adverse effects over the business affairs, the business outcomes and the financial situation of

the Company.

19.5.1.2 Defaulting in the payment of principal or interest (or after a period of deferral of the repayment defined in

the agreement). In financing contracts that are quoted in foreign currency, the Company must pay principal

and interest in the quoted currency, and therefore the inability of the Company to purchase foreign currency

at the time and to the amount required may constitute a violation granting the lender the right to demand

immediate repayment of the debt.

19.5.1.3 A material violation of the undertakings of the Company in accordance with the financing document, issue of

a liquidation order, imposition of an attachment to a material amount of the assets of the Company or

appointment of a receiver for material assets of the Company. In the occurrence of these events, a lender to

which the Company has formed a floating charge or fixed large may realize its charge.

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19.5.1.4 Failure to dismiss a verdict against the Company beyond a certain amount (in most cases 25 million dollars or

more).

19.5.1.5 In financing documents in which the liabilities of the Company are secured by State guarantees – cancellation

of the State guarantee or introduction of changes therein without the consent of the lender.

19.5.1.6 Transfer of assets without the consent of the lender. In some of the financing agreements the Company has a

right to transfer assets subject to the conditions / restrictions included therein, including receipt of approval

of the lender, in some the transfer of assets to subsidiaries of the Company is permitted on the condition that

these assets constitute less than 5% of the assets of the Company, some state that the Company is allowed to

transfer its assets only upon the fulfillment of cumulative conditions, as follows: A) that the transfer is being

made at market value (as determined by an appraiser or by the Company); B) at least 75% of the

consideration has been received in money or in kind; and C) the Company shall invest the proceeds in active

assets.

19.5.1.7 The transfer of the liabilities of the Company that are the object of the financing to another party, without the

receipt of the approval of the lender. According to Israeli law, there is no possibility to assign a charge without

the consent of the creditor.

19.5.1.8 Violation of the representations of the Company in the financing agreements (that is, the representations

were or have become erroneous or are missing to a material degree), such as on the matter of the

correctness to the Financial Statements, the ownership of assets of the Company and the right to use them,

the existence of licenses that are required for the activity of the Company, satisfying their conditions and

timely renewal thereof, etc.

19.5.1.9 Non-disclosure to a lender of a material detail that may cause a material adverse change in the business

affairs or repayment ability of the Company, or failure to give a current update on events (including legislative

changes and Government Resolutions and including structural changes altogether) that affect or may affect

adversarial the activity and/or the financial strength of the Company.

19.5.1.10 The existence of a material adverse change in the business or financial situation of the Company (MAC) that

endangers the ability of the Company to fulfill its undertakings towards the lenders. The financing agreements

of the Company include MAC Stipulations of three types: (1) an MAC Stipulation whose operation is subject to

a test of reasonableness in accordance with the provisions of the Agreement; (2) an MAC Stipulation that

leaves discretion to the lender on the question of the existence of a material adverse change; and (3) an MAC

Stipulation that leaves discretion to the lender as to the question of the existence of a material adverse

change but is subject to a test of reasonableness. The volume of the financing agreements of the Company

that include an MAC Stipulation comes to a total of NIS 16,804 million and approximately NIS 17,188 million

for March 31, 2012, and for the date of the prospectus, respectively.

19.5.1.11 Decrease in the rate of holdings of the State in the Company below 51% or due to a change in the control of

the Company.

19.5.1.12 In the financing agreements that are insured by credit risk insurance companies, cancellation of the insurance

constitutes a cause for immediate repayment and also cancellation of the insured purchase contract.

19.5.1.13 In accordance with the statement of general conditions for opening of a credit account in Israeli currency and

in foreign currency, which the Company signed with a banking corporation – there is a right to call certain

debts for immediate repayment in the case of the credit rating of the Company by Maalot S&P being lower

than BBB. The international credit rating of the Company by Maalot S&P is BB+, but as of the date of the

Prospectus, and in 2011, the Company had no such debts that were callable for immediate repayment. The

Company intends to amend the general conditions and remove this stipulation, and through to this stipulation

date it shall take no credit in accordance with the general conditions.

19.5.1.14 Violation of the undertakings of the Company for a negative charge.

19.5.1.15 Cancellation of the licenses of the Company that are required for the conduct of its business affairs or failure

of the Company to satisfy their conditions.

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19.5.1.16 Violation of the provisions of the law applying to the Company (including laws on environmental protection)

that have a material adverse effect over the Company.

To the best of the Company’s knowledge, as of the time of signing the Financial Statements, none of the

lenders with which it has transacted has a cause to call for early repayment the debt of the Company towards

them. See Note 18G to the Annual Financial Statements and Note 7E to the Quarterly Financial Statements for

further information, including with respect to the position of the Company on the absence of a cause for

immediate repayment pursuant to MAC Stipulation.

19.5.2 See Section 19.9 for details on causes for calling for immediate repayment that are included in the financing

agreements that the Company has executed that are defined as “material loans” with respect to the

implementation of the directive of the Securities Authority.

In accordance with the financing agreements, the Company is not required to comply with any financial criteria

(such as debt service ratio or debt to cap ratio (financial debt plus equity capital) with respect to a debt that it

has raised from banks or from others. However, within some of the financing agreements that the Company has

executed, the Company is required to receive the approval of the lender for the transfer of the assets that are

the object of the specific financing agreement. See Note 18 G to the Annual Financial Statements and Note 7E to

the Quarterly Financial Statements for details with respect to the main restrictions applying to the Company

pursuant to its financial liabilities and primary causes for calling for immediate repayment in loan and bond

agreements of the Company.

19.6 Credit facilities for March 31, 2012

As of March 31, 2012, the Company has no credit facilities that are available for utilization.

19.7 Variable interest credit

As at December 31, 2011 and March 31, 2012, the Company has variable credit interest coming to a total of

approximately NIS 4,158.6 million and approximately NIS 3,986.2, respectively. A breakdown of the variable

interest credit that the Company has received follows:

Currency

Interest rate range Interest range in

2011 (in %)

Interest range as at the date of the

Prospectus

Balance for December 31, 2011

(in millions)

High Low High Low High Low Original currency

NIS

U.S. dollars Libor 6m + 1.7

Libor 6m + 0.1875

2.41 0.64 2.44 0.94 324.2 1,283.8

Euro Libor 6m + 1

Libor 6m + 0.325

2.71 1.46 2.25 1.33 540.3 2,668

Swiss franc Libor 6m + 0.5

Libor 6m + 0.5

0.76 0.55 0.64 0.55 0.4 1.7

Pound sterling Libor 6m + 0.5

Libor 6m + 0.5

1.62 1.53 - - - -

Unlinked shekel Telbor 6m + 1.15

Telbor 6m + 1.15

4.63 2.89 3.56 3.56 250 250

19.8 Credit rating

The total ability of the Company to fulfill its financial liabilities is rated by two (2) local rating companies and two

(2) international rating companies. The credit rating of the Company in each of the rating companies follows:

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Local rating:

Rating company Nature of rating Last rating date Rating Outlook Reference Document to

Immediate Report

S&P Maalot

The rating of the Company and debt that was raised before June 30, 2010

July 1, 2012 ilAA-

Keeping of the rating in the CreditWatch Negative List

See the Immediate Report dated July 1, 2012 (Reference No.: 2012-01-172908).

S&P Maalot

The rating of the Company and debt that was raised before June 30, 2010

May 31, 2012 ilAA- CreditWatch Negative list

See the Immediate Report on the Stock Exchange website of May 31, 2012.

Midroog Ltd. Bonds, Series 2022, Series 22

May 24, 2012 Aa3 Negative

See the report of the Company May 25, 2012 (Reference No.: 2012-01-135222).

Midroog Ltd.

2013 shekel electricity bonds (secured by State guarantee) and additional series with a State guarantee, which the Company intends to issue through to mid-July 2012, in a private issue, based on a prospectus.

May 24, 2012 Aaa

See the report of the Company May 24, 2012 (Reference No.: 2012-01-135222).

Midroog Ltd.

2013 shekel electricity bond (secured by State guarantee) Series 22 bonds, series 2022 bonds, rating of additional series with state guarantee that the Company intends to issue through to mid July 2012, by public issue, based on prospectus

May 31, 2012

Series 22 and Series 2022: Aa3 Electricity shekel 2013 and additional bonds: Aaa-

Series 22 and series 2022 – Ofek: negative rating

See the Immediate Report on the Stock Exchange website of May 31, 2012.

International rating:

Rating company Nature of rating Date Rating Outlook Reference Document to

Immediate Report

Standard and Poor’s

1. The rating of the Company’s debt in foreign currency

2. The rating of the senior bonds in foreign currency that are secured by a floating charge

June 29, 2012 BB+

Keeping of the rating in the CreditWatch Negative List

See the Immediate Report dated July 1, 2012 (Reference No.: 2012-01-171489).

Standard and Poor’s

1. The rating of the Company’s debt in foreign currency

2. The rating of the senior bonds in

April 5, 2012 BB+

Rating added to CreditWatch Negative list

See the Immediate Report of April 5, 2012 (Reference No. 2012-01-096093)

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Rating company Nature of rating Date Rating Outlook Reference Document to

Immediate Report

foreign currency that are secured by a floating charge

Moody’s The rating of the Company

November 2, 2011 Baa3 Negative

See the Immediate Report of November 2, 2011 (Reference No.: 2011-01-314919).

Moody’s The GMTN plan of the Company (issue overseas, see this section below).

November 2, 2011 (P)Baa3 Negative

See the Immediate Report of November 2, 2011 (Reference No.: 2011-01-314919).

See Section E1 of the report of the Board of Directors dated December 31, 2011 and Section E1 in the report of

the Board of Directors for March 31, 2012 for further information on the rating of the overall ability of the

Company to fulfill its financial liabilities.

19.9 In accordance with Legal Position No. 104-15 of the Securities Authority of October 30, 2011 with respect to a

reportable credit event (in this section: “Securities Authority Directive”), a disclosure with respect to the material

loan agreements to which the Company is a party follows165

.

165

It shall be noted that after the Company has examined all of its liabilities for March 31, 2012 (coming to a total of approximately

NIS 64 billion), the Company has determined that for the purpose of implementation of the Securities Authority Regulation in its periodical reports, a “material loan” shall be any loan whose outstanding balance as of the date of the relevant statement constitutes more than 5% of the total liabilities of the Company for that time, in other words, an amount of NIS 3.2 billion as of the date of this Prospectus.

F-179

Loan / bond

contract

Characteristics of the lender

Revalued principal balance

as of date of Prospectus

Amortization schedule Contractual interest and

effective interest

Linkage mechanisms

Sureties extended to the lender

Restrictions applying to the Company with respect to the loan

Negative charge

undertaking

Comments on material

conditions to receipt of credit (*)

Material changes that occurred in

the loan agreements /

credit extension

agreement

Series 22 Bond negotiable

in Israel

Revalued balance NIS 6,779.8

million

Principal will be repaid in twelve (12) equal

quarterly installments from May 20, 2012 to

February 20, 2015 On May 20, 2012 the Company repaid the

first installment of the bond principal

Contractual interest 6.5% and effective

interest 5.50%

Linked shekel loan (principal and interest), linked to the

Consumer Price Index

None ---- ---- ----

Other material conditions –

The bond holders have a right to immediate repayment of the loan based on common grounds, and when:

1. An attachment is imposed to a material amount against the assets of the Company and has not been removed within 30 days of its imposition.

2. Genuine risk that the Company will cease to continue its business affairs and this will pose a danger to the rights of the bond holders.

3. A cause for calling for immediate repayment, in the case of realization by the Company asset charge holders of the charges that were given to their benefit that they have, in

part or in full.

F-180

Loan / bond

contract

Characteristics of the lender

Revalued principal balance

as of date of Prospectus

Amortization schedule

Contractual interest and

effective interest

Linkage mechanisms



Cross default or cross acceleration

clause

Negative charge

undertaking

Comments on material conditions

to receipt of credit (*)



credit extension

agreement

Issue in the USA

05/2008 (GMTN)

Non-negotiable overseas bond

Revalued par value balance NIS

3,892.0 million

Principal will be repaid in one

installment on January 15, 2019

Contractual interest 7.25% and effective

interest 7.41%

U.S. dollars

Floating charge on

all assets of the

Company

The bond holders have a right of early

repayment in the following cases: (1)

debt towards lenders of the Company in

the amount exceeding US$ 25

million or equivalent has not been paid (after the remedy

period for non-payment has ended); or (2) another lender of the Company has

a right to call the debt to it for immediate

repayment in the amount exceeding NIS 25 million or equivalent in NIS

Negative charge

undertaking, except: (A)

floating charges of

equal degree to a floating

charge securing the bonds and

securing amounts

relative to the amounts

secured by this floating charge; (B) permitted charges as per its definition in

the bond terms.

---- ----

Other material conditions –

A. Endorsement of the debt to the transmission company: in the case of another company, which is not the Company, engaging in all or most of the electricity transmission activity

in Israel (“the Transmission Company”), the debt in accordance with the agreement shall be endorser to the Transmission Company, and this company will assume the place of

the Company as the issuer of the bonds (hereinafter: the “Relevant Time”) and the Company is committed to act (in accordance with certain conditions) for this debt endorsement

to take effect.

F-181

B. The Company shall manage, finance and operate its business affairs in an adequate manner, while considering its cash flow, subject to any law, including demands that are in its

incorporation documents and environmental permits.

C. The bond holders have an option (under certain conditions) to demand early repayment of the bonds (a put option), inter alia, in accordance with common causes and upon the

fulfillment of one of the following conditions.

(1) At the Relevant Time (as defined above), the following cumulative conditions are fulfilled: (A) the State of Israel has an investable rating; (B) the bonds are rated below an

investable rating; and (C) the Company has not taken the utmost effort to achieve an investable rating for the bonds; or

(2) At the Relevant Time (as defined above), the Company was not acting in accordance with its commitments for the endorsement of the debt to the Transmission Company to

take effect;

(3) The Company does not legally engage in electricity transmission activity in Israel, or, at the Relevant Time (as defined above) or thereafter, the primary occupation of the

Company has ceased to be electricity transmission;

(4) The state of Israel has ceased to be, directly or indirectly, the controlling shareholder of the Company (on this matter, “controlling” means the ability to direct the operations

of the Company or a holding of 50% or more of the voting rights of the Company);

(5) In the occurrence of a case or circumstances that may constitute an event that has a material adverse effect over the Company – as such an event is defined in the terms of

the bonds.

D. The bond holders have a right (under certain conditions) to immediate repayment of the loans in accordance with common causes, inter alia, upon the fulfillment of:

(1) Attachment or expropriation of the assets of the Company to the benefit of the creditors to a value in excess of US$ 25 million, or equivalent to this amount in foreign currency.

(2) Impairment of the validity and/or enforceability and/or rating of the floating charge in accordance with the terms of the bonds.

(3) The Company has ceased to rate the bonds through S&P and/or Moody’s (as long as the outstanding principal of the bonds is at least US$ 25 million)

F-182

Loan / bond

contract

Lender characteristics

Revalued principal

balance as of date of report

Amortization schedule

Contractual interest and

effective interest

Linkage mechanisms



Cross default or cross acceleration clause

Negative charge

undertaking

Comments on material conditions

to receipt of credit (*)



credit extension

agreement

Electricity 2022

Non-negotiable bond in Israel

Revalued par value

balance of NIS 3,634.8

million

The principal will be repaid in six

equal semiannual installments from July 18, 2020 to

January 18, 2023

Contractual interest 6% and

effective interest 4.57%

Linked shekel loan

(principal and interest) linked to the

Consumer Price Index

Floating charge over the assets

of the Company

The bond holders have a right of

immediate repayment in the case of a debt of another financial

financer of the Company in the

amount exceeding US$ 100 million or equivalent in NIS being called for

immediate repayment

Negative charge

undertaking, except: (A)

floating charges of

equal degree (pari passu) or inferior than that of the

floating charge given to secure the

bonds; (B) permitted

charges as per its definition

in the terms of the bonds

---- ----

Other material conditions -

The mechanism for raising the contractual interest for the bonds in the case of decreasing of the rating

The bond holders have a right to immediate repayment of the loan in accordance with common causes, and when:

1. The State of Israel has ceased to be the controlling shareholder of the Company (“controlling” – as per its definition in the Securities Law).

2. A material deterioration has occurred in the business affairs of the Company and there is genuine fear that the Company will not be able to repay the bonds.

F-183

3. A termination of rating for a period that exceeds sixty (60) consecutive days (except as a result of changing of the rating company).

4. A merger has been performed without the receipt of prior approvals of holders of at least 75% of the par value of the bond, unless the Company or the receiving company, as

relevant, has declared towards the bond holders that there is no reasonable concern that due to the merger the receiving company will not be able to fulfill the undertakings

towards the bond holders.

5. An attachment to a material amount is imposed on the assets of the Company and is not removed within forty five (45) days of its date of imposition.

F-184

20. Taxation

20.1 General

On this matter, see Note 22 to the Annual Financial Statements.

20.2 Change of corporate taxation

On December 6, 2011, the Law for the Change in the Tax Burden (Legislative Amendments) - 2011 (hereinafter:

the “Tax Burden Change Law”), which dealt mainly, from 2012, in a change in corporate taxation, was published in

the Official Gazette. These changes will include, inter alia:

Stopping of the detrimental outline of the corporate tax rates that has been set within the Economization Law

(Legislative Amendments for Implementation of the Economic Plan for 2009 and 2010), 2009.

An increase in the rate of corporate tax, capital gains tax and betterment tax to 25%.

Accordingly, the Company has adapted its assets and liabilities for deferred taxes at a tax rate of 25%. The effect

of this adjustment has led to an increase of approximately NIS 1.2 billion in the net deferred tax liabilities of the

Company. These changes materially affected the results of the activity of the Company for the year ended

December 31, 2011, but these changes have no effect on the cash flow of the Company. In addition, these changes

have no effect over the results of the activity of the Company for the first quarter of 2012.

20.3 Arrangements with the tax authorities

In 2012 the tax authorities approved the spread of current tax payments such as VAT and deductions for giving a

solution to the cash flow problem of the Company. See Section 28.4.5 for details.

21. Environmental risks and environmental regulation – general

See Section 7.13.10 for details on this subject.

21.1 Hazardous materials

The Logistics and Assets Branch possesses a poison permit for conveying hazardous materials for the national

transport segment, which is renewed every two years, and a poison permit for a logistic site in Ashdod. In

addition, applications have been filed for a poison permit for two (2) other logistic sites and they are being cared

for.

21.2 Regulation of environmental protection and quality control issues

All of the units of the Company are certified for the ISO9001:2008 standard. Some units of the Company

implement a combined management system in accordance with the requirements of the standards ISO9001

and/or ISO14001 and/or OHSAS18001 and/or SI 9301, and based on principles that were determined by the policy

of the Company. In addition, the ISO/IEC 27001 standard is being implemented in some of the units of the

Company (as a separate management system).

In addition to the certificates indicated above, some of the laboratories of the Company are certified for the ISO /

IEC 17025 standard. The Jerusalem district of the Company has had a certificate for five years for the ISO14001

standard.

Additional units in the Company are undergoing certification for compliance with the following stands: ISO 14001

and/or OSHAS18001 and/or SI 9301.

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The Company has a quality control segment in operation whose functions include conducting quality control for

equipment that is purchased at the Company from the stage of preparing the specification and in the

manufacturing process to its receipt at the Company; participation in the handling of non-conformances that are

discovered in the course of checking products manufactured for the Company; participation in the processing of

equipment in which a non-conformance is discovered in the warranty period; professional consultation to the

units of the Company on quality control issues.

21.3 Planning and construction

In accordance with the provisions of Section 197 of the Planning and Construction Law - 1965, a land rights owner

is allowed to file a claim against the local committee in whose jurisdiction an outline plan applies for

compensation for harm to land other than by expropriation, as a result of the approval of the plan. For certain

outline plans, the Company has undertaken to indemnify the local committees in whose jurisdiction these plans

apply to the full amounts that the committees would have to pay to the affected landowners, subject to and in

accordance with the provisions in the text of the indemnification statement (except one plan in which the burden

of compensation will be shared among the institutional bodies involved in the plan).

The legal proceedings for the undertakings of the Company within these indemnification statements are set forth

in the Financial Statements (see Note 24 B.8 to the Annual Financial Statements).

21.4 Business licensing

Various activities of the Company at the logistic and administrative facilities require licensing in accordance with

the Business Licensing Law. As of the date of the Prospectus, the Company is operating to regulate the licensing of

the activities whose licensing proceeding has yet to be completed in accordance with the provisions of the law and

the requirements of the authorities. The operation of the sites of the Company without a business license

constitutes a violation of the Business Licensing Law and may lead to the termination of the activity of the

business.

21.5 Material events or matters relating to environmental protection

As of the date of this Prospectus, to the best of the Company’s knowledge, it is not exposed to material events or

matters with respect to environmental protection in its activities, which have not been set forth in the Prospectus.

21.6 Material legal or administrative proceedings with respect to environmental protection

A number of class actions and other material actions have been filed against the Company. See Note 24 B to the

Financial Statements, for details.

21.7 The policy of the Company in environmental risk management

See Section 7.13 for details on this issue.

21.8 Environmental costs and investments of the Company in environmental protection

A breakdown of the investments of the Company in environmental protection in the generation segment, over the

three (3) years that preceded the Prospectus and for the first quarter of 2012166

, in shekels of December 2011, is

as follows. The figures do not include the generation segment for which separate information has been provided

in Section 7.13.10, and includes the transmission and transformation segment and the distribution segment and

general expenses that may not be attributed to a particular segment.

166

In NIS million, current prices.

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March 31, 2012 2011 2010 2009

Total investment in environmental protection facilities, misc. purchases and investments

Approx. 1

Approx. 7

Approx. 6

Approx. 6

Current costs (without depreciation) (fuels, research and development and more)

Approx. 3

Approx. 9

Approx. 4

Approx. 2

The Company is of the opinion that the material costs that are required for compliance with the provisions of the

legislation pertaining to environmental protection, to the extent that there are any, will be covered within the

electricity charge rates, based on the fact that in the past similar expenses were approved by the Electricity

Authority, even if after many discussions and cost controls. The decision on the recognition of the cuts is with the

Electricity Authority.

The assessment of the Company is forward looking information, as this has been defined in the Securities Law,

which is based on the past experience of the Company in its connections with the Electricity Authority, which have

no certainty of materialization, in part or in full.

22. Restrictions and control over the operations of the Company

22.1 Provisions of the Electricity Sector Law, regulations promulgated thereunder, licenses issued thereunder and

resolutions of the Electricity Authority

22.1.1 General

From March 4, 1996, the activity of the Electricity Sector has been regulated under the Electricity Sector Law

and its regulations and the Company operates thereby. The provisions of the Electricity Sector Law state that

its purpose is to regulate the activity in the Electricity Sector to the benefit of the public, while securing

reliability, availability, quality, efficiency and while creating conditions for competition and minimization of

costs.

In accordance with the Electricity Sector Law, shall conduct activity in the Electricity Sector other than under a

license that has been given to them pursuant to this law. The types of licenses that are given for activities in

the Electricity Sector are as follows: (1) a license for generation of electricity; (2) a license for transmission of

electricity – transmission of electricity from a high voltage or extra high voltage generation source to a

substation; (3) a distribution license – transfer of electricity from a substation to a consumer, through

medium and low voltage lines; (4) a supply license – sale of electricity to consumers in general or types; (5) an

own-use generation license – generation of electricity for own use without selling it to another party, with

certain exceptions; (6) a license for system administration – administration of the electricity system in the

generation and transmission segments, including constant balancing out of the supply and demand of

electricity, and securing the survivability of the electricity generation and transmission array, management of

the transfer of energy from power stations via the electricity grids or substations at the required reliability

and quality, scheduling of the execution of maintenance works in the generation units and in the transmission

units, management of trade in electricity under competitive, equal and optimal conditions, including

execution of agreements for the purchase of available capacity and energy from electricity producers and

planning of the development of the transmission and transformation system. In addition, the Electricity

Sector Law states that a holder of a license for system administration, transmission or distribution of

electricity, and a holder of a generation license for which the Minister has determined that it concentrates a

material part of the generation in the Electricity Sector – will be considered as a holder of an essential service

supplier license.

In accordance with the Electricity Sector Law, the Minister is the party in charge of execution of the law. In

addition, in accordance with the Electricity Sector Law, the Electricity Authority, which was established

pursuant to this law, shall act in accordance with its goals and the policy of the Government, the policy of the

Minister in accordance with their lawful authorities in the Electricity Sector field, and shall be responsible for

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giving the licenses in accordance with the law and supervision of fulfillment of the provisions of the law and

the licenses. In addition, the Electricity Authority fulfills the functions that have been prescribed for it in the

Electricity Sector Law (or that have been imposed upon it in accordance with any other law), including the

setting of electricity charge rates and ways to update them, establishing of criteria for the standard and

quality of the service that an essential service supplier license holder provides and supervision of fulfillment

of its duties in accordance with these criteria. In addition, in accordance with Section 37 (2) of the Law, the

Electricity Authority has the authority to check and decide on complaints of consumers.

The Electricity Sector Law empowers the Electricity Authority to give licenses for all of the activities in the

Electricity Sector. A license will take effect after its approval by the Minister. The Electricity authority is

allowed to prescribe in a license conditions and to restrict or not restrict its valid period. The Electricity Sector

Law states that the Electricity Authority, when deciding whether to give a license or establishing conditions

therein, shall act in accordance with the policy of the Government or the policy of the Minister in the

Electricity Sector field, and will consider, inter alia: the contribution of giving of the License to the level of

services to the public, the benefit of consumers and the contribution of giving of the License to competition in

the Electricity Sector.

The Electricity Sector Law states that the Minister is allowed, if he considers it necessary for the advancement

of the goals of the Law and the policy of the Government or his own policy in the field of the Electricity Sector,

to order the Electricity Authority to give a license, to change a condition or the conditions of the License, to

add to or subtract from its conditions (based on explanations that will be given, after hearing the position of

the Electricity Authority on the matter and after giving the government a notice thereof).

The Electricity Sector Law further states that the Minister, upon consulting the Electricity Authority, is allowed

to establish conditions for giving a license. Accordingly, in 1997, the Electricity Sector Regulations (Terms and

Procedures for Granting Licenses and Obligations of the License Holder), 1997 (“Conditions and Procedures

for Giving a License”) were updated to prescribe, inter alia, procedures and conditions that a license applicant

must comply with, including: conditions on the matter of minimal equity capital, minimal self-financing rate

and so on.

The Electricity Sector Law has been amended on numerous occasions, inter alia with the goal of regulating

structural changes in the Electricity Sector, including the future structure of the Company. See Section 1.3 for

details on the provisions of the Electricity Sector Law pertaining to the Structural Change in the Company that

is required by the provisions of the Electricity Sector Law and the preparations of the Company to implement

them.

22.1.2 Licenses that have been granted to the Company pursuant to the Electricity Sector Law

In accordance with that which has been set forth above, the Electricity Sector Law replaced the Electricity

Concessions Order, whereby the Company is continuing its activities and the provision of its services in

accordance with license that were granted to it pursuant to this law.

The first license that was granted to the Company pursuant to the Electricity Sector Law, in 1997, is a license for

transmission, distribution, supply, sale and trading of electricity, which is referred to by the Company as “the

general license” (hereinafter: the “General License”). In addition, the Company has been granted generation

licenses for the generation units that it operates. In 2007, a new sphere of operations was included in the

Electricity Sector Law that was defined as “system administration”. The system administration activity is carried

out by the Company within the General License, without it having been given an additional, specialized license

for system administration.

As the Company holds a license for the transmission and distribution of electricity, it is considered to be an

“essential service supplier” in accordance with the Electricity Sector Law. In addition, as the Minister has stated

that the Company concentrates a material part of the generation in the Electricity Sector, the provisions of the

Electricity Sector Law relating to an essential service supplier apply to it.

In accordance with that which has been set forth in Section 1.3 of this chapter, the licenses of the Company

were extended from time to time during the years by the Ministers, by an order, usually for periods of one year

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each time, for all of its activities. Pursuant to their authority under Section 60(D11) of the Electricity Sector Law

(as worded before amendment 10 of the Electricity Sector Law).

On January 4, 2012, the Electricity Authority submitted for the approval of the Minister an extension of the new

generation licenses that were granted to the Company in accordance with the transitional provisions in the

Electricity Sector Law for power stations that had been included in the Development Plan of the Company that

was approved until January 1, 2009, this being until April 15, 2012 (in this section – “the New Generation

Licenses”)167

. On January 31, 2012, the Minister approved the extension of these licenses through to April 15,

2012. At the same time, the Electricity Authority sent a letter to the Ministry of Energy and Water clarifying that

all of the New Generation Licenses were in effect on the date of the adoption of the resolution of the Electricity

Authority above. In the opinion of the Company, these licenses have already been extended by the ministers in

the past with the other licenses of the Company, and that accordingly, this extension of the new generation

licenses was not necessary.

In Amendment 10 to the Electricity Sector Law, the generation licenses of the Company have been extended to

January 1, 2013. The Company believes that the extension applies to all of its licenses. The Electricity Authority

states that the extension does not apply to the new generation licenses and in its view, the authority for

extending these licenses is granted to it. In April 2012, the Electricity Authority and the Minister extended the

new generation licenses of the Company to January 1, 2013. In Amendment 10 to the Electricity Sector Law, the

manner of extension of the licenses of the Company has been changed, whereby the authority of the ministers

to extend times in accordance with Section 60 (D11) was limited to only one period, which will not exceed a

years (as opposed to periods of up to one year each time prior to this amendment). Accordingly, the licenses of

the Company may be extended again by the Ministers, upon consulting the Electricity Authority and the

Companies Authority and with the approval of the Knesset Economic Affairs Committee, in one period that shall

not exceed a year, that is, by January 1, 2014 only. An additional extension beyond this time will involve

legislative amendment.

The Company estimates that there is no certainty that without the implementation of the Structural Change

outline prescribed in the Electricity Sector Law (see Section 1.3), its licenses will be extended (in full or in part

and for which period) or that no change will occur in the conditions of the licenses in comparison with the

existing licenses (in part or in full). However, in accordance with that which has been set forth above, based on

past experience the Company expects its licenses to be extended in the future through to the implementation of

the Structural Change, but in view of the uncertainty with respect to the implementation of the Structural

Change, there is no certainty as to whether, for what periods and under what conditions its licenses will be

extended, in part or in full, if they are extended at all. The Company estimates that after the implementation of

the Structural Change, the Company will receive new licenses in accordance with the Structural Change outline

that will be implemented, but there is no certainty with respect to the conditions that will be included in those

licenses and there is no certainty that the Company will indeed receive them.

This information with respect to the Company’s anticipation of extension of the licenses and the period for which

they will be extended is considered as forward looking information, as per its definition in the Securities Law,

that is based, as set forth, on past experience, but whose materialization is not certain, primarily because of the

fact that the extension of the licenses after January 1, 2014 involves a legislative change and is not under the

control of the Company. On this matter, see also Section 1.3 and Note 1 B to the Annual Financial Statements.

In accordance with the licenses of the Company, the Company must act in accordance with the provisions of the

law, including any law that takes effect after the giving of the licenses and international treaties to which Israel

is a party with respect to the actions pursuant to the License, which as set forth is subject to the law. A violation

of the law constitutes a violation of the licenses, and the Electricity Authority is allowed to cancel or suspend the

licenses if it has found that any of their conditions has been violated (as stated above, see Section 22.1.4 with

respect to the power of the Authority to cancel the licenses). As of the date of the Prospectus, except in

accordance with that which has been set forth in Section 22.1.3.6 with respect to the violation of duties related

167

See Section (C) 1.3.2.2(C) for details on the transitional provisions as set forth.

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to activity and reporting as profit centers, the Company materially complies with the terms of the licenses that

have been given to it. It is further stated that as of the date of the Prospectus, the Company has not received a

notice that it is not complying with any of the terms of its licenses.

22.1.3 Duties and restrictions in accordance with the provisions of the Electricity Sector Law, the regulations

promulgated thereunder and the provisions of the licenses of the Company

22.1.3.1 Duties of the Company with respect to the type and nature of the services provided by it

In accordance with the provisions of the Electricity Sector Law, the Company as an essential service license

provider holder is committed to –

(1) Providing service to the entire public without discrimination in accordance with the Criteria that the

Electricity Authority has prescribed with respect to reliability and efficiency, and in accordance with the

terms of its license and any law; see below for the Criteria that have been established.

(2) Purchasing electricity from a private electricity producer, and providing infrastructure services and

Backup Services, in accordance with the terms of its licenses and in accordance with any law;

(3) Providing Backup Services to a self-consumption generation license holder, at its request, in accordance

with the terms of its licenses and in accordance with any law;

(4) Acting in order to ensure the provision of all of its services throughout the period of its licenses, including

the provision of services in accordance with the Development Plan that has been approved in accordance

with the Electricity Sector Law (see Section 7.7.1 on this matter), while performing all of the actions

required for the provision of these services.

In accordance with the licenses of the Company, it has been determined that the activities that are being

performed by it and the services provided by it pursuant to its licenses will be executed by the Company

reliably and efficiently, without discrimination and in a manner that will not infringe on the possibility of fair

cooperation.

In addition, the General License of the Company states that the Company shall provide infrastructure and

Backup Services to other license holders and that the Company will purchase electricity from private

electricity producers in accordance with the terms of their licenses and in accordance with the rules that will

be prescribed by the Minister, including quantities of electricity to be sold and the dates of sale. See Section

7.4.1.

The Electricity Sector Law further states that an essential service supplier license holder will charge payments

in accordance with the charge rates that the Electricity Authority has prescribed and that an essential service

supplier license holder shall pay payments to a license holder or to a consumer in accordance with the charge

rates that the Electricity Authority has prescribed. The term “charge rates” includes all of the following

payment types: (1) that a consumer, private electricity producer or self-consumption generation license

holder pays to an essential service supplier, including payments for provisions of infrastructure services and

Backup Services; (2) that an essential service supplier license holder pays to another license holder, except

payment that is prescribed in a tender that has been published by the State of Israel; and (3) that an essential

service supplier pays to a consumer for generation of electricity by the consumer and payments to the

consumer within the electricity demand management arrangement.

In addition, in accordance with the provisions of the Electricity Sector Law, the Electricity Authority will

establish criteria by which an essential service supplier license holder will be allowed not to provide the

service or not to make the acquisition that it is required to provide or make in accordance with the Electricity

Sector Law, terminate, delay or restrict them, if the payments for them have not been paid to the license

holder as required by law or if the conditions for the provision of the service of execution of the acquisition

have not been fulfilled as required by law. The Electricity Authority has prescribed such criteria in the Book of

Criteria that have been set forth below. In addition, the Minister has prescribed the Electricity Sector

Regulations (Rules, Conditions and Cases for Termination of Electricity Supply), 2003, which regulate the cases

in which an essential service supplier license holder is allowed to terminate the electricity supply.

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In August 2011, the Electricity Authority published, pursuant to Section 30 (B) of the Electricity Sector Law,

the updated version of the Book of Criteria, which prescribes criteria and metrics with respect to the level,

standard and quality of the service that a holder of an essential service supplier provides168

. The prescribing of

the Criteria is intended to regulate the activity in the Electricity Sector, supervise and secure the quality of

electricity and the standard of service that the Company provides to consumers.

The Book of Criteria covers, inter alia, the following issues:

(A) Electricity consumption:

(1) Consumer affairs – determining the quantity of electricity consumed, making a consumption

estimate, checking the precision and working condition of an electricity meter, registration of a new

consumer, etc.;

(2) Bills and payments – duty of payment, sending of the bill, its content and terms of payment and so

on.

(3) Electricity consumption charge rates – the Electricity Authority determines the electricity charge

rates and the manners for their update. The Book of Criteria regulates issues that are related to the

electricity charge rate that the consumer pays for consumption, such as rounding of the bill, changes

in the charge rate during an account period, reduced payment for entitled parties and consumers

that are charged in accordance with the load and time charge rates. See Section 8.1.2 for further

information.

(4) Consumer applications and complaints – means of application and manner of processing of

complaints.

(B) Connections to the electricity grid

Regulates issues such as connection to low voltage and medium voltage, submission of the application for

connection, execution of the connection works, testing the facility and voltage level, technical

coordination and more.

(C) Reliability of supply

Regulates issues such as scheduled power cuts, resumption of power supply after cuts, electricity supply

methods, frequency shedding169

, damage to electrical appliances.

(D) Infrastructure services – manner of provision of service to a holder of a license to use the electricity grid

of the Company for transmission and distribution of electricity to another party.

(E) Purchase of electricity, maintenance and operation regime of private generation license holders.

The Electricity Sector Law states that the Electricity Authority will prescribe instructions with respect to

payments that an essential service supplier license holder is to pay consumers due to violation of the Criteria

prescribed thereby. Accordingly, the Electricity Authority has determined in the Book of Criteria that an

essential service supplier that violates one or more of the Criteria shall pay the consumer for this violation

payment in accordance with that which has been set forth in each of the Criteria that have been violated,

within sixty (60) days of commission of the said violation. In 2011 and in the first quarter of 2012, the

Company paid consumers following cases of failure to fulfill the provisions of the Criteria, of various types

(mainly for failing to meet the schedule prescribed in the Criteria for performing an action) approximately NIS

205 thousand (in current shekels) and approximately NIS 48 thousand (in current shekels), respectively.

22.1.3.2 The duty of the Company to submit Development Plans for the Electricity Sector

168

The Book of Criteria is made available to the public on the website of the Electricity Authority, at the address:

http://www.pua.gov.il/31-339-he/Electricity.aspx 169

Its purpose is prevention of the risk of a power cut when the balance between the demand and supply is violated, through rapid, automatic disconnection of consumers, which join the arrangement on a voluntary basis but are disconnected in a mandatory manner. In exchange, these consumers enjoy a charge rate incentive of 3% discount off their total annual consumption.

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The Minister, upon consultation with the Electricity Authority, is allowed to demand that the Company, as a

holder of an essential service supplier license, submit for his approval a Development Plan, complete or in

parts, for the purpose of its activities in accordance with the provisions of the Licenses, and if it has not

submitted a Development Plan for his approval, the Minister is allowed to prescribe for the Company, upon

consultation with the Electricity Authority, a Development Plan, in which case it must act in accordance with

it. See Sections 7.7, 8.6 and 9.7, respectively, for details on the Development Plan of the Company.

Accordingly, the licenses of the Company state that a license holder that is an essential service supplier is to

submit to the Minister a Development Plan with respect to its activity in accordance with the License.

In addition, in accordance with the Electricity Sector Law, the Minister, upon consulting the Electricity

Authority, is allowed to establish regulations with respect to the responsibility of a transmission license holder

for the development of the transmission system, in accordance with the Development Plan that has been

approved in accordance with that which has been set forth above, and in accordance with the planning of the

transmission system by a system administration license holder. As of the date of the Prospectus, no such

regulations have been prescribed.

22.1.3.3 Restrictions to the types of activities that the Company is allowed to execute

The Electricity Sector Law states that no essential service supplier license will be given except to a company

that has undertaken to engage only in activities in accordance with the licenses that have been given to it

pursuant to the Electricity Sector Law and ancillary actions thereto. However, an essential service supplier

license holder is allowed to engage in other actions, that the ministers have approved for it, upon

consultation with the Electricity Authority, engagement in which will not impair its actions or the supervision

of fulfillment of its duties in accordance with the Electricity Sector Law.

Accordingly, each of the licenses of the Company states the activity for which the License has been given and

in which the Company is allowed to engage. In addition, the licenses of the Company state that the license

holder is allowed to perform actions that are ancillary to the activities in accordance with the license, which

are set forth, in most of the cases, in the appendix to the License. In some of the licenses, certain ancillary

actions require the approval of the Manager of the Electricity Administration. An action that is not included in

the appendix requires the approval of the ministers, in accordance with the provisions of the Electricity Sector

Law.

Therefore, when the Company is going to engage in activity that is not regulated within its licenses (including

activity that is ancillary to the activity in accordance with the licenses), the Company applies to the ministers

for approval for this purpose.

22.1.3.4 Restrictions to the transfer, pledging or attachment of a license

In accordance with the Electricity Sector Law, a license or any part thereof may not be transferred, pledged or

attached, directly or indirectly, except with the approval of the Minister. In addition, guarantees that a license

holder or money stemming from their realization may not be pledged or attached. In addition, in accordance

with the law, the Minister is allowed to determine in the License that certain properties of the license holder,

which are required, in the opinion of the Minister, for the execution of the activity in accordance with the

provisions of the License, may not be transferred, pledged or attached, directly or indirectly, except with the

approval of the Minister. The Minister, upon giving approval for such a transfer, pledge or attachment, shall

act in accordance with the policy of the government or the policy of the minister in the Electricity Sector field,

and will consider, inter alia the contribution of giving of the License to the level of services to the public, the

benefit of consumers and the contribution of giving of the License to competition in the Electricity Sector.

In accordance with the provisions of the Electricity Sector Law in accordance with that which has been set

forth above, the licenses of the Company prohibit the pledging, transfer or attachment, directly or indirectly,

of assets as set forth in the licenses (which include most of the assets of the Company), except with the

approval of the Minister. The General License also states that the Minister is allowed to add to or subtract

from the list of assets that are in the appendix to the License, during the term of the License. The inclusion of

or reference to an asset, in the appendix, does not serve to grant the license holder any right to the asset or

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detract from its duties with respect to it in accordance with the provisions in the Electricity Sector Law. In

addition, the licenses state that if any third party is granted, as of the effective date of the License, rights with

respect to any of the properties that are used for the provision of the activity of the license holder, the license

holder shall ensure, to the maximum extent possible that no situation will occur in which the exercising of

rights to a property as set forth may impair the execution of its undertakings in accordance with the License.

See Section 15.3 and Note 1 G to the Annual Financial Statements with respect to the Property Settlement.

In accordance with the provisions of the law and the licenses of the Company as set forth, the Company is

applying for the approval of the Minister for creating charges on its assets – whether a floating or fixed charge

of assets that are included in the licenses of the Company as set forth.

In the past, the approvals that the Minister gave for the charges on the assets of the Company did not include

special stipulations with respect to charge realization, but charge realization will require approval in

accordance with the provisions of the law. In a private issue of the bonds (Series 2022) that the Company

performed in January 2011, the approval for a floating charge on the assets of the Company, including

restrictive conditions. The conditions that were included in the approval include, inter alia, the following:

- No sale, transfer or rental of assets that are being used for carrying out activity in accordance with the

Electricity Sector Law is to be made except to a party that is allowed pursuant to the law in Israel to engage

in activity as set forth using those same assets, which will receive its rights to and keep the assets for

executing those activities, in accordance with licenses permitting their execution;

- The assets set forth shall be kept at all times by a party that has a license to operate them in accordance

with the Electricity Sector Law and shall be used at all times for the purposes of the licenses only;

- The appointment of a temporary or permanent receiver (in this section: the “Receiver”) shall be contingent

to its undertakings to act in a manner that fulfills the duties of the Company, as they may be from time to

time;

- The identity of the Receiver requires prior approval of the Minister and his appointment will be contingent

to further fulfillment of the duties in accordance with the licenses of the Company, including continuing the

regular operation of the activities in accordance with the Electricity Sector Law, using the assets and

facilities of the Company;

- The authorities that are granted to the Company by law as the license holder shall apply, mutatis mutandis,

to another holder of the pledged assets.

The approval of the Minister to the amendment to the charge that the Company formed to the benefit of a

banking corporation, within a credit agreement that it executed in December 2011, included additional

restrictive conditions (in addition to the conditions set forth above), including:

- The approval for creation of the charge does not constitute an approval to realize the rights conferred

under the charge, including appointment of the Receiver;

- The banking corporation must inform the Minister in writing of its intent to realize the charge and/or

appoint the Receiver and state the identity of the intended Receiver;

- The approval for the realization of the charge, if given, shall be contingent to continued fulfillment of the

duties prescribed in the licenses of the Company, including the continued regular operation of the activities

in accordance with the Electricity Sector Law, using the assets and facilities of the Company.

Such approvals for a charge state that the approvals do not detract from any other undertaking of the

Company, including pursuant to other charge agreements, and do not establish priorities for other charges of

the Company.

22.1.3.5 Restrictions over change or reorganization in a license holder

The Electricity Sector Law states that the Minister is allowed to state in the License that a change or

reorganization in the license holder, including merger, split of compromise, settlement or voluntary

F-193

liquidation, require the approval of the Minister. Accordingly, such a prohibition is prescribed in most of the

licenses of the Company.

In addition, the Electricity Sector Law and the generation licenses of the Company state that control of a

license holder shall be transferred, directly or indirectly, except with the approval of the Minister. In addition,

a license holder shall not purchase or keep means of control of another license holder, and shall not control it

in any other way, directly or indirectly, except with the approval of the Minister. In accordance with the

Electricity Sector Law, the Minister is allowed to approve the transfer such control, as long as of the time of

the transfer, the conditions that are required to give the License in accordance with the Electricity Sector Law

are fulfilled as well.

The Conditions and Procedures for Granting Licenses Regulations state that the Minister is allowed to

stipulate conditions of a license of an essential service supplier, such as a requirement for an organizational

and legal structure of the license applicant or to the giving of an undertaking to make a structural change as

set forth and order a change of organizational and legal structure during the period of validity of the License.

The Minister shall not order as set forth until after having given the license holder a notice, a reasonable time

in advance, and an opportunity to voice its contentions before the Minister with respect to his instructions as

set forth. As of the date of the Prospectus, the licenses of the Company have not been made contingent upon

any particular organizational or legal structure.

22.1.3.6 Execution of activity as a profit center, manner of making out and submitting Financial Statements

The Electricity Sector Law states that an essential service supplier license holder shall make out Financial

Statements as the ministers prescribe, after consultation with the Minister of Justice with respect to the

degree of elaboration therein, the accounting principles to be used for their preparation, the declarations and

notes that are to be attached thereto.

Accordingly, in accordance with regulations, conditions and procedures for the giving of a license, an essential

service supplier is required to submit Financial Statements separately for each area, for each activity and for

each profit center, and to submit consolidated statements with respect to its activities in accordance with all

of the licenses that are in its possession. A “profit center” is defined in these regulations as “a unit that has a

closed income and expense structure170

, without cross subsidy with the operations of another unit, and

because of whose actions Financial Statements that are separate from the other actions of the license holder

will be submitted”.

A similar instruction with respect to the matter of submission of Financial Statements is also vested in the

General License of the Company and most of its generation licenses. These licenses also stated that any

operations of the Company shall be carried out as a separate profit center, and a certain activity may be

executed in more than one profit center. The licenses further state that the profit centers shall be as the

Minister, the Electricity Authority or the Electricity Administration Manager order, in accordance with the

relevant text of each license. Some of the generation licenses state that the profit centers will be as the

Minister orders in accordance with that which has been set forth in the appendix to the License, but the

appendix with respect to the profit centers has not been attached to the generation licenses in which such a

provision has been made.

The Company manages its activities as separate profit centers as required in its licenses.

However, the Company does not submit audited Financial Statements for profit centers as required in most of

the licenses and does not submit audited annual Financial Statements separately for each area, for each

activity, for each generation unit or power station, but submits audited Financial Statements for the

operations of the Company in its entirety. To the best of the Company’s knowledge, abstention from

submission of Financial Statements as required in the licenses of the Company is known to the Electricity

Authority and to the Ministry of Energy and Water. In the new generation licenses that the Company has

170

The definition of “expenses” in the Conditions and Procedures for Giving a License Procedure is “including costs due to employees,

assets and other liabilities”.

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received, the Electricity Authority has obligated the Company to submit Financial Statements in the manner

set forth. As of the date of the Prospectus, no sanctions have been imposed on the Company on this matter.

See Section 22.1.5 for details on the sanctions that may be imposed on the Company pursuant to the

electricity Sector Law for violation of the terms of the licenses.

The issue of financial reporting and management of the operations of the Company in accordance with profit

centers constitutes a component in the Outline of Understandings that was formed with respect to the

Structural Change (see Section 1.3) whereby the Company is to act through profit centers, which will provide

for full transparency and assignment of costs in a model that will be determined in accordance with the

character of the operations of the Company. Therefore, the Company estimates that this issue is supposed to

be regulated within the Structural Change that will be agreed to. The Outline of Understandings, which does

not correspond with the provisions of the Electricity Sector Law, has yet to be examined or approved by the

competent government agencies. The granting of binding legal effect to the Outline of Understandings and

the implementation of the Structural Change in the Electricity Sector in accordance with the said Outline, to

the extent the implementation thereof is agreed upon, requires approvals of the competent parties of the

State, including the approval of the Government, making necessary legislative amendments and other actions,

none of which has been agreed to or adopted as of the date of this Prospectus and whose fulfillment is

unknown. As of the date of the Prospectus, there is uncertainty as to whether and when these

understandings will be implemented, if at all, and whether these or other understandings or structural

changes will eventually be implemented, at the discretion of the competent agents and subject to the law. If

all of these will not be fulfilled, then the Company may be required to implement the Structural Change as

laid down in the Electricity Sector Law, whether in the manner that the Company understands that the

Electricity Sector law may be implemented, as described in Section 22.1, or in another outline.

However, in the opinion of the management of the Company and the Board of Directors, as long as the issue

of reporting by profit centers is not resolved, there is exposure reflecting in the possibility of steps or

proceedings being taken against the Company for failure to fulfill the said provisions in its licenses.

22.1.3.7 The responsibility of the State of Israel within the framework of the licenses and the duties of the Company

towards it

In accordance with the provisions of its licenses, the Company is committed to indemnifying the Company for

payment that it is charged for an act or default of the Company, with respect to its activity in accordance with

the License. In addition, the Company will bear all of the legal and other expenses of the State of Israel, to the

extent that there are any for the said charge. The duty of indemnification shall not apply unless the Company

has been given, at a reasonable time, a notice of the claim that a third party filed against the State of Israel in

order to allow it to participate in the defense and the State of Israel has consented to the participation of the

Company in the legal proceeding. This duty of indemnification is not limited in time or amount.

In addition, in accordance with the terms of the licenses, any approval, permit or instruction that has been

given to the Company for the purpose of or within the License, whether given before the giving of the License

or given thereafter, shall not impose on the State of Israel any liability towards the Company or any third

party and shall not serve as a cause of claim of the Company or a third party towards the state.

In addition, the authority of approval or supervision that is given in accordance with the License, including the

exercising of such authority, does not impose on the State of Israel any liability that is imposed pursuant to

the License on the Company, or negate or diminish from that liability.

22.1.4 Cancellation, suspension and change of the terms of the licenses

22.1.4.1 In accordance with the Electricity Sector Law and the provisions of the licenses of the Company, the Electricity

Authority is allowed, at any time, to cancel or suspend a license, and it is allowed, with the approval of the

Minister, to add or modify conditions, rules and duties therein, if it has found that any of the conditions of the

License has been violated, that any of the qualifications for receiving it is fulfilled or the capacity required for

its possession by law has ceased to be fulfilled. In addition, in accordance with the Electricity Sector Law and

the provisions of the generation licenses of the Company, the Minister or Electricity Authority is allowed (as

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prescribed in the License) to do so, based on considerations of the contribution of the License to the level of

services to the public, the benefit of consumers or the contribution of the License to competition in the

Electricity Sector. A cancellation of deliberation of the Electricity Sector with respect to the voiding of the

terms in the License or the part of a condition shall only apply to the condition or part of the condition as

relevant and they by themselves will not impair the binding validity of the License or detract from the duties

of the Company in accordance with the License. The Electricity Authority shall not cancel or suspend a license

unless the license holder has been given an opportunity to voice its contentions. In the case in which the

License that have been given in accordance with the Electricity Sector Law has been cancelled, suspended or

modified based on these considerations, the Ministers may prescribe rules for giving compensation to the

license holder, but in accordance with the rules as set forth, the compensation rate may be zero.

Although some of the generation licenses of the Company confer upon the Minister rather than to the

Electricity Authority the authority to cancel, suspend or modify the terms of the License, in view of

Amendment No. 3 to the Electricity Sector Law171

whereby the authorities of the Minister with respect to the

giving of licenses and the regulation thereof has been transferred to the Electricity Authority, including such

authority, the instructions in these licenses are to be read as granting the authority to the Electricity

Authority.

As of the date of the Prospectus, the licenses of the Company have not been suspended or cancelled and the

Company has not received a notice that it is not fulfilling any of their conditions.

22.1.4.2 In addition to that which has been set forth above, the Electricity Authority is granted authority to cancel the

validity of an essential service supplier license (after having warned the holder of this license), if it has learned

that the essential service supplier license has not made the payments that are due (in accordance with the

Electricity Sector Law or the terms of the License) to another license holder. The Company, except in

exceptional cases and in circumstances that have not been under its control, (such as a strike), has made sure

to pay other holders of licenses for activities in the Electricity Sector the payment that is due to the by law, on

time and as required. In effect, the Company has not received any notice of intent to cancel the validity of a

license that has been given to it and it estimates, in view of its function as an essential service supplier in the

Electricity Sector, that even in the case of violation of the duty to pay another license holder a payment that is

due to it by law, the likelihood for such a severe sanction of far-reaching consequences for the Electricity

Sector to be enacted is very low.

The information with respect to the likelihood of enactment of sanctions in the case of violation of a duty of

payment towards another license holder is forward looking information, as per its definition in the Securities

Law, and is based on estimates of the Company in view of its status as an essential service supplier in the

electricity economy. However, the future effects of the declaration as set forth may be affected by external

factors that are not under the control of the Company.

22.1.4.3 In accordance with the Conditions and Procedures for Granting Licenses Regulations, the authority has been

vested in the Minister172

to demand by license the giving of guarantees or sureties for securing the fulfillment

of the undertakings of the license holder to execute the activity pursuant to the License. Accordingly, in May

2007, the Electricity Authority announced its intent to establish in the permanent generation licenses, a duty

to deposit a guarantee to secure the fulfillment of the terms of the licenses. In accordance with the

resolution, the limit of the guarantee for a license holder shall not exceed a total amount of 15 million dollars.

In accordance with the resolution set forth, the demand to extend guarantees for the generation licenses that

have been given to the Company shall be executed in accordance with the progress in the Structural Change

proceedings of the Company, including providing of licenses for the operations of the Company. As of the

date of the Prospectus, the Company has not yet been requested to extend such a guarantee in effect.

171

Dated April 11, 2005, which was made within the Economic Policy for the 2005 Fiscal Year Law (Legislation Amendments), 2005. 172

Although in the Regulations, authority has been conferred upon the Minister, in accordance with Amendment No. 3 to the

Electricity Sector Law, the authorities of the Minister with respect to the giving of licenses and control thereof have been transferred to the Electricity Authority, as set forth above, and the regulations are considered to grant this authority to the Electricity Authority as a result.

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22.1.5 Sanctions for execution of activity in accordance with the Electricity Sector Law without a license, for violation of

the terms of the licenses and for violation of other duties of the Company in accordance with the Electricity

Sector Law

The Electricity Sector Law states that the execution of the activity that is licensable in accordance with the

Electricity Sector Law (including in the field of generation of electricity) without a license constitutes a criminal

offense punishable by three (3) years’ imprisonment or a fine that is four times the fine rate set forth in Section

61(A)(3) of the Penal Code 1977 (hereinafter: the “Penal Code”) and an additional fine for each day that the

offense continues, at four times the fine rate set forth in Section 61(A)(3) of the Penal Code.

In addition, the Electricity Sector Law states that a violator of the provisions of Sections 17(B) (dealing with the

preparation of Financial Statements in accordance with the principles prescribed by the Ministers), 17(C)

(dealing with the duty of collection of payments in accordance with the charge rates determined by the

Electricity Authority), 34 (dealing with accounting entry as determined by the Electricity Authority) or 35

(dealing with requiring an essential service supplier license holder to submit to the Electricity Authority reports

in accordance with its licenses), or a license holder violating any of the terms of the License, with respect to the

activity of the license holder, is liable for one (1) year’s imprisonment or a fine of three (3) times the rate of the

fine set forth in Section 61(A)(2) of the Penal Code, and an additional fine for each day on which the offense has

continued, at three times the rate of the fine set forth in Section 61(C) of the Penal Code. In addition, in

accordance with Section 65 of the Electricity Sector Law, this law is part of the list of laws specified in the first

addendum to the Administrative Offenses Laws - 1985.

The Electricity Sector Law further states that the violator of the provisions of Section 17(A) (dealing with

provision of service to the entire public without discrimination, purchase of electricity from a private producer

and provision of infrastructure and Backup Services to a private producer, provision of Backup Services to a self-

generation license holder and ensuring the provision of all of its services throughout its license period, including

provision of services in accordance with the development plan that was approved pursuant to Section 19, while

performing all actions required for providing these services) is subject to three years’ imprisonment or a fine

that is four times the fine rate set forth in Section 61(A)(3) of the Penal Code and an additional fine for each day

on which the offense continues, at four times the fine rate set forth in Section 61(C) of the Penal Code. In

addition, the Electricity Sector Law states that an officer who has violated a duty to supervise and do everything

possible to prevent violations of the law by the Company or any of its employees is punishable by one (1) year’s

imprisonment or a fine (as set forth in Section 61(A)(3) of the Penal Code). The Electricity Sector Law states that

if a violation of it has been committed by a corporation or any of its employees, it is presumed that the officer in

the Company violated the said duty of regulation, unless he proves that he acted without mens rea and without

negligence and did everything he could to fulfill his duty.

22.1.6 Provisions of the electricity Law and the Resolutions of the Electricity Authority with respect to the electricity

charge rate

In accordance with the provisions of the Electricity Sector Law, the Electricity Authority prescribes the electricity

charge rate. As set forth above, most of the electricity consumers pay one weighted charge rate for electricity,

which includes all segments of activity.

See Sections 7.1.3.2, 8.1.3 and 9.1.4 for details on the principles for setting the charge rate and the manner of

setting the electricity charge rate in each of the segments.

22.2 Contentions of the Company with respect to the electricity charge rate

In the view of the Company, the resolutions of the Electricity Authority on the matter of the charge rate do not

provide full, adequate coverage for its costs. In its view, the non-recognition by the Electricity Authority, within

the charge rate, of the costs that the Company has incurred on the issues such as those that have been set forth

below, leads to significant erosion of the revenues of the Company, which is estimated to be to the tune of billions

of shekels. It is the position of the Electricity Authority, as delivered to the Company, that the electricity charge

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rate need not recognize all of the costs of the Company in accordance with its actual costs, if they are not required

in the opinion of the Electricity Authority for discharging the duties of the Company as an essential service supplier

The Company transferred to the Electricity Authority a number of lists including a breakdown of the subjects for

which the Company has objections, including data and explanations on the unrecognized costs and requests to

receive coverage for the costs set forth.

The issues for which the Company has applied to the Electricity Authority include: the objections of the Company

with regard to the manner of setting the new generation charge rate basis (for which it is the view of the

Electricity Authority that the charge rate basis reflects, as set forth, the costs required for this segment) - including

non-recognition of the construction costs of the fixed assets, mechanism for depreciation of recognized costs that

will apply to the Company if it does not keep to the normative schedules for operating the generation units; the

depreciation coefficient rates; the fuel basket (including issues such as gas incentive calculation, deferral of

conversions of power stations to natural gas power and calculation of the demand forecast); exogenous expenses;

financing costs; electricity consumption at the facilities of the Company; date of operation of the Alon Tavor

combined cycle; recognition for liabilities for pension; delays in updating the charge rate bases for the distribution

and transmission segments and more. Such non-recognition of the costs of the Company within the charge rate

has caused and will cause a material decrease in the revenues of the Company and non-recognition of some of its

property, which leads to losses and significant erosion in the equity of the Company.

On most of the issues, the resolution of the Electricity Authority was adopted, and no resolution was adopted on

others. The resolutions of the Electricity Authority that were adopted bind the Company unless the Electricity

Authority reverses its resolution. In accordance with that which has been set forth above, in the view of the

Company, the resolutions that have been made by the Electricity Authority do not provide as set forth full

coverage for its costs and it is continuing to apply to the Electricity Authority on these issues for receipt of charge

rate coverage for these costs. There is no certainty as to whether the position of the Company will be adopted and

what the degree of effect of the resolutions of the Electricity Authority will be, if changed, over the Company and

its financial outcomes.

22.3 Resolutions of the Government

In accordance with that which has been set forth above, the operations of the Company are materially affected by

the resolutions of the government, including on the issue of the Electricity Sector and because of its identity as a

“government company” (see Section 22.5). Since 1995 (before the end of the validity of the Concessions) and in

the year thereafter, the Government and the Socio-Economic Cabinet adopted various resolutions with respect to

the Electricity Sector, including on the issue of the Structural Change in the Electricity Sector. Some of the

resolutions were vested in amendments to the Electricity Sector Law, but some were not implemented at all

because of various considerations, including the continued discussions between the Company and Government

entities on the issue of the Structural Change and the sanctions of the employees with respect to these

resolutions. See Section 1.3 for details on the Government resolutions pertaining to the Structural Change in the

Company; see Sections 6.4 and 7.4 for details on government resolutions pertaining the promotion of the

competition in the Electricity Sector.

22.4 Formation of a team of regulators for increasing efficiency efforts and coordination of regulation of the

Company

On May 12, 2009, pursuant to a Government resolution173

, a team was established with the participation of the

Director General of the Ministry of Energy and Water, the Budgets Commissioner in the Ministry of Finance, the

Director General of the Companies Authority, the Manager of the Electricity Administration in the Ministry of

Energy and Water, the Electricity Authority, the Superintendent of Wages and Employment Agreements and the

Comptroller General at the Ministry of Finance or their representatives (“the Regulator Team”) for increasing the

173

Resolution No. 129 dated May 12, 2009: Increase of Competition in the Electricity Sector, dated May 12, 2009.

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coordination and efficiency of the regulation of the Company, the transparency of the work of the entities

supervising the Company, increasing the efficiency of the regulation and consultation budgets, and giving

recommendations with respect to the manner and degree of regulation of the Company, including regulation of a

fixed coordination procedure among the team members. The activity of the team is to focus on material issues of

the operations of the Company, including in the field of pension, wages, actions permitted by law, in accordance

with the authorities of the regulatory agencies of the State of Israel.

The Ministers shall report to the Ministerial Committee for Social and Economic Affairs, through to August 1, 2009,

with respect to the initial conclusions of the work of the Regulator Team. In addition, the Ministers will report

once a quarter to the Ministerial Committee for Social and Economic Affairs the progress of the work of the team.

In November 2010, a Government resolution174

was adopted to appoint the head of the Regulator Team that was

established in accordance with that which has been set forth, the Director General of the Companies Authority

and to attach to the team, in addition to all of the elements set forth in the said Government resolution, the

Superintendent of the Capital Market or his representative, and the Assistant Attorney General (Economic-Fiscal)

or his representative.

It was further decided to order the Regulator Team to act so that a check would be made on its behalf of the

following matters:

22.4.1 Recovery of surplus money, to the extent that there is any, that has been transferred by the Company to third

parties (the Central Pension Fund, or other accounts that are included in the Financial Statements of the

Company, with respect to pension and pension and non-pension components).

22.4.2 The manner of dealing with differences between the assessment of the liability of the Company towards the

insureds in the statements of the Company and the assessment of the liability in the central pension fund.

22.4.3 Management of the risks and sharing of the responsibility between the Company and the central pension fund

in all matters relating to the management of investments of the money of the fund.

22.4.4 Examination of the factors that led to errors in the pension clauses, in the Financial Statements of the Company

for previous periods that were corrected in the Financial Statements for June 30, 2009.

22.4.5 The factors for the tardiness in the publication of the quarterly and annual Financial Statements of the

Company.

22.4.6 Examination of the aspects related to the reserve money of the Company deposited in a trust account for the

purpose of payment of various undertakings of the Company for wage components that are not included in the

central pension provident fund.

22.4.7 On the matters mentioned above, particularly in Sections 22.4.4 – 22.4.6, the Regulator Team shall operate to

the extent that the team decides that coordination is required between the regulators and the Company, via the

Companies Authority, inter alia, for coordination between the work that will be conducted by the Regulator

Team and additional checks and the lesson-learning process that will be conducted by the Board of Directors

and the committees of the Company for identifying the factors accounting for the said issues. The team will

submit an interim report to the Ministers within ninety (90) days. The interim report will state a date for

submission of the final report.

On March 9, 2011, a draft interim agreement was forwarded for the comments of the Company, whose main

points are as follows:

(A) Unique arrangements for supervising the decision making with respect to actuarial assumptions that are

included in the Financial Statements of the Company must be examined.

(B) Explanations must be received from the Company with respect to accounting rules, accounting options and

making out the calculations with respect to the creation of the accounting provision for non-pension

174

Government Resolution No. 2442, dated November 18, 2010.

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elements to an amount of approximately NIS 2.2 billion in the statements of the Company (for December

31, 2009), and it is necessary to examine whether it is possible and correct to transfer the sums that were

deposited for these elements to an amount of approximately NIS 1.7 billion (for December 31, 2009) from

the trust account to the Company and whether there is a restriction in the transfer to the Company.

(C) Explanations must be received from the Company with respect to the involvement of the Board of Directors

of the Company and its representatives in the Board of Directors of the Fund.

(D) The interface between the Board of Directors and the Management, the flow of information and the

overarching checks on all matters relating to decision making with respect to the Fund must be examined.

(E) The decisions at the Company and the tools available to it with respect to changes in the articles of the

Fund, which affect, inter alia, the deposits into the Fund, compared to the global standard, must be

examined while considering the charge rate and cash flow coverage ability of the Company.

(F) The comparison between the rights in the articles of the Fund of 2004 and the rights included in the

calculation of the undertaking for pension in the Financial Statements of the Company, compared to the

rights that were included in the pension regulations of 1958 and elements that were duly approved after

1958, including the rights included in the pension agreements of 1975 and 1996 and the rights included in

the employment and wage agreements in the Company must be completed.

(G) The taxation arrangements related to depositing in the Fund must be examined.

(H) It is advisable to reexamine the meanings of the Property Settlement, in accordance with Section 62 of the

Electricity Sector Law - 1996, including, in view of the existing legal and economic expert opinions on the

subject and its consequences when implementing the restructuring.

(I) It is proposed that the team establish rules by which each regulator will update the team with respect to

the material information before it from the Company and with respect to events or decisions in its fields of

responsibility that relate to the Company, which may materially affect its conduct and in particular, insofar

as these pertain to the responsibilities of other regulators.

Also, it was written within the draft interim report that it is advisable to determine that the interim report was

to be submitted to the Ministers by April 1, 2011, and the summary report be submitted to the Ministers by

October 1, 2011.

The Company forwarded its comments to the draft, but as of the date of the Prospectus, no summary report

with respect to all of the matters described had been received at the Company.

On March 26, 2012, the Company received a document containing recommendations of the regulator team with

respect to the issue described in Section 22.4.1 above, whereby the regulator team believes that the Company

should do everything that is required, including the trustee or with the beneficiaries, in accordance with any

law, for the release of money that it is not required to deposit into a trust account as defined in Section 14.6.7

(in which the Company deposits amounts for actuarial liabilities for non-allowance components). See Section

14.6.7 for details.

22.5 Provisions of the Government Companies Law and status of the Company as a government company

As of the date of the Prospectus, the Company is a “government company” as per its definition in the Government

Companies Law. As a government company, the Company is subject to the provisions of the Government

Companies Law and the regulations promulgated thereunder. Subsidiaries of the Company, which are government

subsidiaries as defined in the provisions of the Government Companies Law (a company in which more than half

of the voting power in its general meetings or the right to appoint more than half of its number of directors is

possessed by a government company, government subsidiary or a government company along with a government

subsidiary) are governed by most of the provisions of the Government Companies Law, with the modifications

stated in Section 57 of the Government Companies Law.

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Below follows a description of the main provisions that apply to the Company pursuant to the Government

Companies Law. In accordance with Section 2 of the Government Companies Law, the Companies Ordinance and

the Companies Law shall apply to the Company subject to the provisions of the Government Companies Law

22.5.1 Investments in the Company175

: as long as the Company is a government company, the Government shall not

invest in the Company except with the approval of the Knesset Finance Committee.

22.5.2 Actions and resolutions that require the approval of the Government:

In accordance with the provisions of Section 11 of the Government Companies Law, a number of resolutions of

a government company on require the approval of the Government: (1) A change in the purposes of the

Company; (2) an increase in the registered capital stock of the Company; (3) a change in the rights attached to

shares of the Company; (4) an allocation of shares of the Company or consent to the transfer of shares that is

required in accordance with the founding documents – whether they will lead to a material change in the power

relations between the members of the Company or provide a new member 10% or more of the par value of the

capital stock or the voting power in the Company or the right to appoint a director; (5) an issue of redeemable

preferred shares by the Company; (6) the issue of bonds that are convertible into shares, and conversion into

shares of bonds that have been issued without a right of conversion or loan that the Company has received; (7)

the transformation of the Company from a non-private company to a private company or from a private

company to a non-private company; (8) reorganization, voluntary liquidation, compromise, settlement of the

Company or a merger with another company; (9) the formation of a company, alone or with others, and the

purchase of shares in an existing company, except the purchase of shares on the Stock Exchange by a company

when such an acquisition is one of its ordinary occupations. On this matter – “company” – includes another

corporation, and a venture that fulfills the conditions that the Minister of Finance prescribes; (9A) a right that a

company has granted or an undertaking that the Company has assumed that may serve to limit, directly or

indirectly, the Government, including with respect to the execution of structural changes and privatization,

advancement of competition and regulation of the industry in which the Company operates; (9B) an offer of

securities to the public by prospectus, if the Companies Authority believes that as a result of publication of the

prospectus, the State of Israel, as a controlling shareholder in the Company, may assume liability for damage

that will be sustained due to a misleading detail that was in the prospectus, in accordance with the Securities

Law, and announced this to the Company; (10) an action as a shareholder in a government subsidiary on one of

the matters set forth in Paragraphs (1) to (9B); (11) an undertaking to make one of the actions set forth in

Paragraphs (1) to (10).

Such resolutions of a government subsidiary also require the approval of the Government, and they shall be

brought forth before the ministers176

, through the parent company for the sake of obtaining this approval177

.

A resolution of a government company to sell shares that it holds in a government subsidiary thereof also

requires the approval of the Government and the approval of the Knesset Finance Committee178

.

22.5.2.1 Business resolutions and appropriation of profits of a government company:

In accordance with Section 4 of the Government Companies Law, a government company is to act in

accordance with the business considerations by which a non-government company regularly acts, unless the

Government has prescribed to it, with the approval of the Knesset Finance Committee, other considerations

of operation. As of the date of the Prospectus, the Company has had no other considerations of action

175

Section 10 of the Government Companies Law. The approval of the government shall be received in accordance with the suggestion of the Minister of Finance and the Minister of Energy and Water that was filed to the government plus an expert opinion of the Government Companies Authority. The Minister of Finance shall bring the decision of the government to the knowledge to the Knesset Finance Committee.

176 “The Ministers” – the Minister of Finance and the Minister responsible for the government for the affairs of the government

company (As of the date of the Prospectus, the Ministry who is responsible for the affairs of the Company is the Minister of Energy and Water).

177 Section 57(2) of the Government Companies Law.

178 Section 15(A) of the Government Companies Law.

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prescribed for it. As long as the Company is a government company, the government, with the approval of the

Knesset Finance Committee, is allowed to adopt additional resolution pursuant to which the Company will act

in accordance with other considerations of action.

In accordance with Section 9(E) of the Government Companies Law, the provisions of Section 9 of the

Government Companies Law shall apply, mutatis mutandis, once the Government has made a resolution in

accordance with Section 4 of the Government Companies Law as set forth above too.

In accordance with Section 33(C) of the Government Companies Law, a resolution of the Board of Directors

with respect to the appropriation of profits of the Company or with respect to distribution, as per its

definition in the Companies Law, requires the approval of the Companies Authority. If the Companies

Authority disputes a resolution of the Board of Directors, the Company shall act based on a resolution of the

Companies Authority as the Government has approved.

Notwithstanding that which has been set forth above, Section 63A of the Government Companies Law states

that Sections 4(A) and 33(C) of the Government Companies Law shall not apply to a company for which the

government, with the approval of the Knesset Finance Committee, has decided that reasons of offering shares

to the public required them not to be applied to it. As of the time of this Prospectus, the Government has not

made such a resolution, so the provisions of Sections 4(A) and 33(C) of the Government Companies Law shall

continue to apply to the Company for as long as it is a the Government Company.

See Section 4 for additional details with respect to the provisions that apply to the Company on the matter of

distribution of dividends.

22.5.2.2 Financial statements in government companies:

(A) In accordance with that which has been set forth in Section (C) below, Section 33(A) of the Government

Companies Law states that the Board of Directors must make have made out a balance sheet, a profit and

loss statement, including appropriation of profits, resources and their manner of use and in government

companies that have subsidiaries – consolidated Financial Statements. In accordance with Section 33(A1)

of the Government Companies Law, the Minister of Finance is allowed, after consultation with the

Minister of Finance, to establish that certain government companies are to submit annual, periodical and

immediate statements too, in accordance with the provisions of the Securities Law. In addition, Section

33(B) states that the Minister of Finance may require a government company to make out an additional

report and state a dates for submission. Accordingly, the Government Companies Regulations (Additional

Report on Actions Taken and Representations Given to Ensure Additional Reports on the Effectiveness of

the Internal Audit of Financial Statements) - 2005, have been promulgated, whereby government

companies are required to attach to the Financial Statements an additional report with respect to the

actions that have been taken and the representations that have been given to secure the correctness to

the Financial Statements and the report of the Board of Directors, including separate signed declarations

of any officer who has signed those reports. In addition, pursuant to that section, the Government

Companies Regulations (Additional Reports of Effectiveness of Internal Control of Financial Statement),

2007, (in this section: the “Government Companies Regulations“) have been promulgated, whereby

certain government companies, including the Company, have a duty to attach to the Financial Statements

an additional statement with respect to the effectiveness of the internal control over financial reporting,

elaborating the material weaknesses, if any, and including signed declarations of each officer signing the

reports, and a report of the auditing accountant of the Company that will include his expert opinion on

the effectiveness of the internal control of financial reporting in the Company and material weaknesses

that he has identified.

In accordance with an amendment to the Securities Regulations (Periodical and Immediate Statements) -

1970 (hereinafter: the “Reporting Regulations”), which was approved on November 24, 2009, the duty

applies to all reporting corporations whose securities are listed for trading on the Tel Aviv Stock

Exchange, to declare the effectiveness of their internal control over their financial reporting and

disclosure.

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An additional amendment that was set for October 7, 2010, was intended to allow the Chairman of the

Securities Authority to exercise his authority, in accordance with Sections 9B(F) and 38C(F) of the

Reporting Regulations, to establish that a government company, which is also a reporting company in

accordance with the Securities Law, which implements the Government Companies Authority

Regulations, is to report the effectiveness of the internal control in the form prescribed in the Companies

Authority Regulations.

The Company applied to the Chairman of the Securities Authority with a request for him to exercise his

authority in order to establish that the Company, by definition as a government company that complies

with all of the Government Companies Regulations, including those set forth above, is to report the

effectiveness of its internal control in the form prescribed in the Companies Authority Regulations.

In answer to the application of the Company, the Chairman of the Securities Authority decided on

January 4, 2011, to grant its request for the reports of the Company with respect to the effectiveness of

the internal control to be made out in the form prescribed in the provisions of the Government

Companies Regulations, as long as the Company would comply with these instructions.

This arrangement is subject to the undertaking of the Company whereby on each statement date, the

Company shall examine whether any change event involving the set of facts that was shown before the

staff of the Securities Authority in the applications of the Company has occurred and shall inform it of any

such change. Within this undertaking, the Company shall examine changes in the provisions of the

Regulations or the provisions of the Government Companies Regulations, changes in the status of the

Company that affect the law applying to it, changes in the manner of implementation of the provisions of

the Government Companies Regulations in the Company and any other relevant change.

As of the date of the Prospectus, the Company has complied with the stipulations that have been

imposed upon it and has found no change in the Regulations or other relevant change.

The differences between the Reporting Regulations and the Government Companies Regulations

pertaining to the implementation of principles of internal control over financial reporting in Israel follow:

(1) Application of the regulations: the application of the Government Companies Regulations and the

Reporting Regulations is from December 31, 2009, and from December 31, 2010, respectively.

(2) Attention to the disclosure in the “description of business affairs of the Company report” and “Board

of Directors report”

In accordance with the Reporting Regulations, a declaration must be made in the additional report with

respect to the effectiveness of the controls over the disclosure in these reports too (the duty applies to

the Company and not to the auditing accountant).

In accordance with the Government Companies Authority Regulations, the effectiveness of the controls

over the disclosure in these statements is not within the outline of the work.

(3) The attention to business processes that are included in the outline:

In accordance with the Reporting Regulations, upon determining the outline of the business

processes, one must focus on assessing the effectiveness of the internal control of the processes

defined as “very material to financial reporting” only and not to any material business process.

In accordance with the Government Companies Regulations, upon determining the outline of the

business processes, any material business process shall be included. This difference between the two

regulations reduces the scope of the project, in the view of the Securities Authority, to a great

extent.

(4) Attention to poor control at the level of a material weakness that was not rectified in the year after

the subsequent year:

In accordance with the Reporting Regulations, if there is a “material weakness” that was not rectified

in the year after the subsequent year “the statements of the Company will be considered as not

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having been duly completed and may not be published”. It was stated in the regulations that the

Chairman of the Securities Authority is allowed to exempt a company and to approve the publication

of its statements even if it has not complied with the requirement. In the Government Companies

Regulations, there is no attention to this.

(5) Quarterly report with respect to the effectiveness of the internal control over financial reporting and

disclosure:

In accordance with the Reporting Regulations, a quarterly report is to be attached on the issue, giving

disclosure as to whether a change has occurred in the assessment of effectiveness over the internal

control over financial reporting and disclosure as brought forth in the previous reporting period.

In accordance with the Government Companies regulations, only an annual report is to be attached,

and the quarterly Board report is to give disclosure of whether a change has occurred in the

assessment of effectiveness over the internal control over financial reporting and disclosure as

brought forth in the previous year.

(B) Section 33A of the Government Companies Law states that in addition to the provisions of any statute,

the Minister of Finance may prescribe, after consultation with the Minister of Justice, and with respect to

a public company after consultation with the Securities Authority, at the suggestion of the Companies

Authority, rules for making out Financial Statements of a government company for which he has

determined that it provides an essential service to the public.

In accordance with this instruction, the Government Companies Regulations (Rules for Preparing

Financial Statements of Israel Electric Corporation Ltd.) (Provisional Order), 2004, (“Financial Reporting

Regulations”) by which the Company makes out its Financial Statements and not in accordance with the

Securities Regulations (Annual Financial Statements) 2010, although the company is a public one. See

Note 2A to the Quarterly Financial Statements for further information.

In accordance with the letter of the Director of the Companies Authority to the Minister of Finance of

May 2012, the Companies Authority recommended to the Minister of Finance to extend the Financial

Reporting Regulations to December 31, 2014, and according to its position, from January 1, 2015, the

Company will have to implement fully the Financial Reporting Regulations.

Further to this, on May 22, 2012, the Ministry of Finance signed the extension of the validity of the

provisions of the Financial Reporting Regulations, and the amendments thereto, until December 31,

2014, and the extension of the Regulations was published in the Official Gazette on May 30, 2012.

Accordingly, as of January 1, 2015, the Company is to implement in full the international financial

reporting standards (hereinafter: “IFRS”). See Notes 2A and 2E in the Annual Financial Statements and

Note 2A1 of the Quarterly Financial Statements for details on the expected transition of the Company to

reporting in accordance with the IFRS rules.

The Financial Reporting Regulations state that the Financial Statements of the Company are to be

completed in accordance with the IFRS, subject to two exceptions:

(1) The Company will compile its Financial Statements adjusted to the changes in the general purchasing

power of the shekel (in accordance with the rules prescribed in Manifesto No. 36 including the

provisions prescribed in Manifestos nos. 40, 50 and 56 of the Institute of Certified Public Accountants

in Israel (hereinafter: the “Manifestos”)).

(2) The Company is a regulated company and therefore compiles its Financial Statements in accordance

with the rules of the U.S. Financial Accounting Standards Board (FASB), as enumerated in the

standard Chapter RE6 in regard to regulated activities in the consolidated version of the standards of

the board set forth, including amendments, clarifications or additions to these rules as they are from

time to time.

The Companies Authority informed the Company in May 2012 that the essence of the calculation of the

decrease in value of fixed assets relies, for a company of the type of the Company, on the charge rates of

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the Company that are established by regulation, thus setting the economic value of the assets of the

Company. The Companies Authority believes that the Company should conduct an examination or

reduction of the decrease in value of fixed assets in accordance with FAS 144 (ASC980 and ASC360) and

therefore in view of discussions that were held between the Companies Authority and the Securities

Authority on the matter, the Companies Authority examines, inter alia, with relevant agents of the State,

the options for implementing its professional position with an amendment to the Financial Reporting

Regulations.

(C) Section 33B of the Government Companies Law states that in a case in which the Companies Authority

has seen that a public interest necessitates it, it is allowed to order a government company to provide

details in its Financial Statements or in any other report that the company is required to submit by law, as

long as the instructions on this matter have not been prescribed in rules, in statute or in generally

accepted accounting principles or generally accepted reporting rules; and it is allowed, if it has seen that

a public interest necessitates it, to order a company to disclose the position of the Companies Authority

and describe the disputes in the Prospectus. Section 33 of the Government Companies Law empowers

the District Court, at the request of the Companies Authority, to order a company and officers of a

company that have not acted in accordance with the provisions of Sections 33A and 33B, to act in

accordance with the said provisions. In addition, Section 33D of the Government Companies Law states

the sanctions that the Companies Authority is allowed to take against the Chairman of the Board of

Directors and CEO of a government company that has not acted in accordance with the provisions of

Sections 33A and 33B.

For further details and instructions that the Companies Authority has given to the Company with respect

to the manner of presentation of details, see Note 36 to the Annual Financial Statements.

(D) The Financial Reporting Regulations state that if the Company has not implemented the instructions of

the Government Companies Authority, the Company shall not complete the Financial Statements in

accordance with the provisions set forth in the manifestos, as defined in the Regulations. The

“instructions of the Authority” are defined in these regulations as “instructions of the Authority pursuant

to Section 33B of the Law that were given to the Company on March 2, 2004, and on September 14,

2004, and additional instructions pursuant to the section set forth with respect to the activities of the

Company, as shall be given from time to time”.

As of the date of the Prospectus, to the best of the Company’s knowledge, it is implementing the

Instructions of the Government Companies Authority as set forth, to the extent that they apply to it.

22.5.2.3 The Government Companies Authority

The Government Companies Law states179

that the Companies Authority shall consult the Government, via

the Minister of Finance, and shall consult the ministers on matters related to the government companies;

shall handle, in accordance with the directives of the Government, matters that are shared by all of the

government companies; shall track the fulfillment of the recommendations of the State Comptroller relating

to government companies and shall assist in their fulfillment; shall advise and assist government companies in

the conduct of their business affairs; shall continuously track the activity of each of the government

companies, the fulfillment of their goals, course of business, financial state and wage policy and shall

announce its findings to the Ministers; shall inspect reports that are submitted to it from a government

company and the material on which the reports are based and shall make its comments on them to the

company and to the Ministers; shall deal with and handle the formation and the execution of liquidation,

merger, compromise, settlement, renewal, organization and sale of shares of government companies; deal

with and assist in the construction and execution of liquidation, merger, compromise, arrangement, renewal,

organization and sale of government companies; consult the Ministerial Committee on Privatization and deal

with the execution of privatization resolutions; shall discharge towards a government company any duty that

179

Sections 51 to 56 of the Government Companies Law.

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the Government or the Ministers impose on it and any other duty that is intended for it in accordance with

the Government Companies Law.

The Government Companies Authority may send to any board meeting of a government company a

representative on its behalf. The representative of the representative of the Companies Authority in such a

meeting is as that of a director, except that his voice is not to be counted in the quorum, and that he has no

voting right.

22.5.2.4 Directors on Behalf of the State

(A) Appointment of directors on behalf of the State

A director for the State in a government company (in this Subsection: “Director for the State” or

“Director”) is appointed by the Ministers after consultation with the Appointments Scrutiny Committee

whose composition and functions are elaborated in the Government Companies Law.

(B) Competency to serve as a Director for the State

The Government Companies Law states terms of competency for serving as a director, qualifications to

competency for serving as a director, the term of office, terms of service and provisions on the expiry of

the office and suspension of directors.

In accordance with Section 16A of the Government Companies Law, a resident of Israel who is at least 25

years old, who has fulfilled one of the following, is to serve as a director in a company: (A) he has an

academic degree in one of the subjects enumerated in the said section; (B) he has at least five years of

experience in one of the following, or has at least five years cumulative experience at least in two or

more of the following: (1) In a senior function in the field of business management of a company that has

a significant volume of business; (2) In a senior public office or in a senior function in the public service on

economic, commercial, managerial or legal issues; (3) In a senior function in the primary areas of

engagement of the company. Notwithstanding that which has been set forth above, in accordance with

Section 16A1(A), a person who has a second or third academic degree is also competent to serve as a

director in a government company even if he does not fulfill the provisions in Subchapter (1) above.

Notwithstanding Section 16A1(B), in a government company in which the State of Israel appoints more

than six (6) directors, the number of directors as set forth in Section 16A1(A) shall not exceed one (1), and

in a government company in which the State of Israel appoints seven (7) directors at least – two (2)

directors, at least one (1) of whom shall have a third (doctoral) academic degree.

According to Section 16A2 of the Government Companies Law, each government company shall have at

least one director appointed whom the Appointments Scrutiny Committee has found to have accounting

and financial expertise, as defined in Section 240 of the Companies Law. The ministers shall be allowed to

appoint directors for a government company in accordance with the Government Companies Law, even if

no director has yet been appointed in accordance with Section 16A2 of the Government Companies Law

in that company, as long as this does not prevent his appointment.

In accordance with Section 17(A) of the Government Companies Law, the following are not competent to

serve as a director in a company: (A) a Minister, Deputy Minister or a Member of Knesset; (B) an

employee or worker of the company, except the Chief Executive Officer and an elected representative of

the employees of the Company, the Chairman of the Board of Directors shall not be considered as an

employee of the Company for this purpose; (C) a member of the public, whose other occupations may

create a conflict of interest with his capacity as a director in that company; (D) the Director and the

Employees of the Companies Authority, unless the company is under liquidation or winding up of

business; (E) a person who has been convicted of an offense that in the opinion of the Attorney General is

flagrant or compels him not to be appointed; (F) a person who is barred from serving as a director in

accordance with the Companies Ordinance [New Version] - 1983 or by any other law.

According to Section 17A of the Government Companies Law, no person shall be appointed as a director

if he has economic affiliation with the company or a personal relationship with the management of the

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company or the management of a company that is related to the company, as these terms are defined in

the Government Companies Law.

In accordance with Section 18C of the Government Companies Law, if the Appointments Scrutiny

Committee has found that a candidate for serving as a Director, Chairman of the Board of Directors or

Chief Executive Officer of a government company, has a personal, business or political affiliation with any

of the Ministers of the Government, it shall not recommend his candidacy unless if it has found that he

has special skills in the fields of operation of the Company or for whom there are considerations of other

special competency in addition to the terms of competency required pursuant to this law for that service.

In addition, the Appointments Scrutiny Committee is allowed, even if a candidate fulfills the terms of

competency prescribed in the Government Companies Law, to consult ministers with respect to the

aptitude of the candidate for the function, taking into account, inter alia, the needs and size of the

Corporation and composition of its Board of Directors and the ability of the candidate to devote the

proper amount of time to the function.

Directive 6.5000 of the Attorney General, titled “Appointments in government companies and public

corporations” addresses appointments in government companies and public corporations and also

applies to the appointment of a director for the State and a Chief Executive Officer in government

companies. The main points of the directive follow: (1) a director of a government company has a

fiduciary duty to it and must act to the benefit of the company and not to his own benefit or that of the

shareholders who have appointed him. The principle with respect to the prohibition of being in a state of

concern of conflict of interests also applies to the personal conflict of interests of the officers and an

institutional conflict of interests, and each case shall be examined individually; (2) there is no room for

civil servants of the most senior ranks, who have authorization to make material resolutions with respect

to a government company, to serve as directors in that company. the direction establishes further

restrictions for other civil servants too, and exceptions to those restrictions; (3) an appointment that is

made due to proximity to or affinity with or dependence on the appointing party of a degree that gives

reasonable grounds to believe that there is an illicit tendency, is an illicit appointment; (4) Section 18C of

the Government Companies Law does not prohibit the appointment of persons with political, business or

personal affinity to any of the ministers of the Government, but sets an objective test, whereby a

candidate who has such an affinity must have special skills in the field of activity of the company or have

considerations of special other competency in addition to the terms of competency required by the

Government Companies Law for that office. In addition, Section 18C does not exclude the principles of

public law with respect to the illicitness of political appointments; (5) the necessary approach is that the

suggestion of candidates with an affinity is not to be done routinely, but in exceptional cases and when

these appointments are worthy beyond any doubt due to a unique, highly significant contribution; (6) the

directive also states that an external director at companies to which the directive applies that are also

public companies is not a director for the State and therefore Chapter C of the Government Companies

Law does not apply to his appointment. However, the suggestion of a candidate for an external director

function or a proposal for one candidate or another in a meeting is an administrative action that is

subject to the rules of administrative law. The demand of competency in the law constitutes a proper set

of minimal requirements for an appointment and therefore it is not proper for ministers to suggest a

candidate for an external director position, or vote for his appointment, unless he is approved by the

Appointments Scrutiny Committee in accordance with the rules employed with respect to the director for

the State.

Resolution No. 3849 of the Government dated July 27, 2008, titled “Appointment of Directors in

Government Companies, in Government Subsidiaries and in Mixed Companies – Continuation of

Discussion” has also established rules with respect to directors and appointments. The resolution stated,

inter alia, that: (1) a public figure who is a candidate for a director function in a government company,

government subsidiary or mixed company, who is being appointed in accordance with the competency

conditions enumerated in Section 16 (A) of the Government Companies Law (in accordance with that

which has been set forth above), shall be appointed for his function only if in addition he has at least two

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years of experience in his field of education, in the field of management or in the primary field of

occupation of the company; (2) the Director General of the Companies Authority may establish, upon

consulting the minister in charge of the affairs of the company (as set forth above, the minister in charge

for the affairs of the Company is the Minister of Energy and Water), with respect to directors who are not

civil servants, aptitude conditions dealing with expertise and professional competency, considering, inter

alia, the fields of occupation of the company, its scope of activity and the composition of its Board of

Directors, which will apply to up to a third (1/3) of the maximum number of directors in the company.

The aptitude conditions set forth shall bind the ministers when they appoint directors; further to the

Government resolution, the Director General of the Companies Authority stated that the company would

have: one director with at least 7 years of experience and expertise in the financial field and a relevant

academic degree, one director who has server or is serving in a senior function (VP at least) in a company

to a financial volume of NIS 300 million and higher, one directors who is an engineer in the field of

occupation of the company, with 7 years of experience in his function, one director with experience in

the environmental protection of approximately 5 years at least and a relevant academic degree, one

director with experience in the field of labor relations of approximately 5 years at least and a relevant

academic degree and one director who is a jurisprudent with experience in the commercial field or in the

field of occupation of the Company, of 5 years at least. (3) If the Appointments Scrutiny Committee has

made use of the authority of consultation given to it in accordance with Section 18(C) of the Government

Companies Law (as set forth above in this Section) and has transferred its recommendations to the

Ministers in writing, the Ministers shall act considering the recommendations of the committee. The

Ministers are allowed to transfer argued written objections to the Appointments Scrutiny Committee, if

they do not agree to its recommendations.

(C) Instructions with respect to compensation and expenses of directors on behalf of the State

Section 19 of the Government Companies Law empowers the Minister of Finance, upon consulting the

Companies Authority and with the approval of the Knesset Finance Committee, to promulgate regulations

with respect to compensation and expenses to be paid to a director. Accordingly the Government

Companies Regulations (Rules of Compensation and Expenses of a Director from the Public in

Government Companies) 1994 (hereinafter: the “Directors’ Compensation in Government Companies

Regulations”) have been promulgated. The Directors Compensation in Government Companies

Regulations regulate the amount of the compensation that is to be paid to directors on behalf of the

State and its manner of calculation, in accordance with the rank of the Company as set forth in the said

regulations that as of the time of the Prospectus is rank 10.

22.5.2.5 Directors from among employees

The Government Companies Regulations (Rules for Determining a Selected Representative out of the

Employees of the Company as a Director) 1977 state manners of election of a representative out of the

employees of the company who is proposed for appointment as a director (hereinafter: “Elected

Representative”) and terms of competency. The Regulations state the manner and process of election of

Elected Representatives, and specific terms of competency, which are not identical to the ordinary rules of

competency prescribed in Section 16A of the Law with respect to a director for the State. An Elected

Representative shall be determined as a director only in a government company or government subsidiary

employing at least one hundred (100) employees that is not a bank. The number of directors out of the

employees of the Company shall be two (2). As of the date of the Prospectus, two (2) directors from among

the Employees serve in the Board: Messrs. Muki Ben Ami and Ram Erlichman.

22.5.2.6 Instructions with respect to the composition of the Board

In accordance with Section 17(D) of the Government Companies Law, the number of directors out of the

employees of the Company shall not exceed two thirds (2/3) of all members of the board who have been

appointed as representatives of the Government.

In accordance with Section 18A and Section 18A1 of the Government Companies Law, the composition of the

board of the Company as a government company shall give adequate expression to the representation of

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both sexes and the representation of the Arab population, respectively. As of the time of the Prospectus, one

director from the “Arab population” and eight (8) female directors and ten (10) male director serve on the

Board of Directors of the Company.

22.5.2.7 Duties of disclosure of information to the State

Section 20 of the Government Companies Law states that a director must, in accordance with any other law,

give the Ministers and the Companies Authority, upon their demand, information on the affairs of the

Company and his actions therein.

22.5.2.8 Term of office and expiry

In accordance with Sections 18(B) and 18(C) of the Government Companies Law, the statement of

appointment is to be delivered to a director from the Ministers, after receiving the expert opinion of the

Appointment Scrutiny Committee, a copy of which will be delivered to the Company via the Companies

Authority. The appointment will be valid from the day of delivery of the appointment letter to the Company,

unless another time is set therein.

Section 21 of the Government Companies Law states that a Director shall be appointed for a period of not

more than three (3) years from the beginning of the validity of his appointment. A director who has ceased to

serve may be reappointed.

Section 22 of the Government Companies Law states that a director shall cease to serve before the end of the

period for which he was appointed, in the occurrence of one of the following: (A) he has resigned by giving a

resignation letter to the Ministers; (B) he is absent from four (4) consecutive meetings of the board or six (6)

meetings within a year, unless if the Ministers, after consultation with the Companies Authority, have stated,

by notifying the Company, that there was a justified reason for the absence; (C) he is unable to do his duty

and the Ministers, after consultation with the Companies Authority, have informed the Company to that

effect; (D) he has been convicted of an offense that in the opinion of the Attorney General is flagrant or

requires, in his opinion the termination of his service; (E) he fulfills one of the circumstances that disqualify a

person from being a director; (F) the Companies Authority, or the Ministers, after consultation with the

Companies Authority, have seen that he is not doing his duty properly and have transferred him from his

office after notifying the Company; (G) the Companies Authority has determined that he is not doing his duty

in a manner that advances the performance of a privatization resolution or has acted by deed or default in a

way that impairs the ability of the Company to fulfill an instruction or demand that has been duly given in

accordance with Sections 59D or 59E of the Government Companies Law.

A director who has been appointed while being a civil servant or an employee in another government

company and who has ceased to be such a servant or employee shall cease to serve from the day on which

the Companies Authority has announced this to the Company, but the Ministers are allowed, after

consultation with the Companies Authority, to reapprove his appointment.

If the Government has sold shares that it has held in a government company, the directors will cease to serve,

if this is necessitated by the sale transaction, from the day on which the Authority announces this to the

Company.

In accordance with Section 23 of the Government Companies Law, if a director is suspected of an offense that

in the opinion of the Attorney General is flagrant, the Ministers are allowed to suspend him by a notice to the

Company, and appoint a substitute for the term of his suspension.

22.5.2.9 Quorum and its completion

In accordance with Section 28 of the Government Companies Law, the quorum for a meeting of the Board of

Directors is a majority of its members, among them at least one director on the part of the State; the

decisions will be made with a majority of ballot participants; in the case of a tie – the chairman will break the

tie; all when there is no provision to the contrary in the foundation documents. See Section 7.5.26 of Chapter

7 of the Prospectus with respect to the provision whereby the articles of the Company state that the

chairman has a tiebreaking vote.

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In accordance with Section 23A of the Government Companies Law, if the number of members of the Board

of Directors who are allowed to participate in its meetings is less than the quorum for its meetings, and this

situation continues for more than 30 days, or the number of members is less than the minimal number

prescribed in the Articles of Incorporation of the company and this situation lasts for more than 60 days, the

Government is allowed, upon consulting the Appointments Scrutiny Committee, to appoint a director or

directors to the number required to complete the quorum.

22.5.2.10 Provisions with respect to the Board of Directors of a Government Company

(A) The Chairman of the Board of Directors

Section 24 of the Government Companies Law states that the Board of Directors of a government

company shall elect one of its members as the chairman of the Board of Directors, and his election

requires the approval of the Ministers after consultation with the Appointments Scrutiny Committee. The

Government is allowed to appoint a chairman of a board out of its members, if it has considered this to

be necessary and after having consulted the Appointments Scrutiny Committee.

The Government Companies Law states that a person who fulfills the provisions set forth in Section 16A

of the Government Companies Law with respect to the competency of directors on behalf of the State

(see Section (B) above) and one of the conditions in Paragraph (2) of that section, is competent to serve

as the Chairman of the Board of Directors of the company. In exceptional cases a person who does not

fulfill the condition in Paragraph (1) of that section may be elected, if he fulfills the conditions prescribed

in the Law on this matter, and the Appointments Scrutiny Committee has confirmed that there are special

grounds for his election as set forth. The Chief Executive Officer of the company shall not be the

Chairman of the Board of Directors.

The Chairman of the Board of Directors must, despite any other law, give the Ministers and the Authority,

once every six months and at any time upon the demand of the Ministers or the Authority, a written

report on the actions of the company and the work of the Board of Directors. In addition, he must submit

to them the budget proposal, the work plans and the draft Financial Statements, before discussing them.

(B) Work of the Board of Directors

The meeting of the Board of Directors of the company shall be held in accordance with the needs of the

company and at least once every two months, unless the Ministers have determined after consultation

with the Companies Authority, other times, based on the nature of the business affairs of the company.

In addition, the Board of Directors must hold a special meeting if the ministers, the Companies Authority

or any of the directors have prescribed this. The Chairman of the Board of Directors shall summon the

meetings of the Board of Directors and shall set their time, place and agenda subject to that which has

been set forth in the Law. An invitation to meetings of the Board of Directors shall also be delivered to

the Companies authority, and it is allowed to send to any meeting a representative who shall be allowed

to participate in the meeting, and his status shall be that of a director, but he shall not be considered in

the quorum and shall not have a voting right.

The Board of Directors is allowed to establish out of its members permanent or ad hoc committees,

whose summaries shall be considered as recommendations to the Board of Directors, and he it is allowed

to adopt, modify or reject them. In accordance with Section 29A of the Government Companies Law, the

Board of Directors shall appoint an auditing committee out of its members, whose number of members

shall not be less than three (3), and whose powers shall be as prescribed in the Government Companies

Law. The Board of Directors is allowed to delegate powers to the committee and establish that its

members shall not be of the status of recommendations only, except for powers that are mandatory

powers of the Board of Directors in accordance with the Companies Law.

(C) Functions of the Board of Directors

Section 32 of the Government Companies Law prescribes a list of matters that the Board of Directors of a

government company must decide upon, which authorities it cannot delegate. Among other things, the

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Board of Directors must establish the general policy of the company in the field of its goals, its financial

actions; establish its budget each year, the action plan and authorization of employees of the company;

track continuously the fulfillment of the policy, plans and budgets of the company; approve senior

appointments; discuss the Financial Statements and any other issue that the Ministers or the Companies

Authority have chosen to put on the agenda It is noted that the Minister of Finance may, with the

recommendation of the Authority, establish rules for making out the budgets and the action plans of all

of the government companies or government companies of certain classes.

In addition, pursuant to Section 33(A) of the Government Companies Law, the Board of Directors must

have Financial Statements made out as set forth in the Government Companies Law (see Section 22.5.2.2

for details).

In addition, the Board of Directors receives reports on resolutions to employ relatives (in accordance with

the Government Companies Regulations (Rules on Employment of Relatives, 2005) and has the duty

(pursuant to other legislative and pursuant to the circulars of the Companies Authority) to discuss various

issues, such as setting of the risk management policy, setting the policy for advancing environmental

aspects in the actions of the Company and discussion of the State Comptroller reports with respect to the

Company.

22.5.2.11 The Chief Executive Officer

In accordance with Section 37 of the Government Companies Law, the Chief Executive Officer is appointed by

the Board of Directors, and the appointment requires the approval of the Ministers after consultation with

the Appointments Scrutiny Committee, but the Government is allowed to appoint the Chief Executive Officer

if it considers this to be necessary, in which case the provisions of the Government Companies Law will apply

to the matter. The Law states that a person who fulfills the provisions in Section 16A of the Government

Companies Law and one of the conditions in Paragraph (2) in that section, is competent to serve as a Chief

Executive Officer in a government company. In exceptional cases, a person who does not fulfill the provisions

of 16A(1) of the Government Companies Law (does not have an academic degree in one of the professions

enumerated therein) may be appointed, if he fulfills the conditions prescribed in the Law for this matter, and

the Appointments Scrutiny Committee has confirmed that there are special grounds for his election as set

forth.

The Chief Executive Officer is responsible for the regular management of the affairs of the Company within

the annual budget and the operation plans of the Company that have been prescribed by the Board of

Directors and within the resolutions of the Board of Directors. The general meeting is allowed to restrict or

qualify the powers of the Chief Executive Officer, as is the Board of Directors.

Section 41 of the Government Companies Law states that the Chief Executive Officer must inform the Board

of Directors, without delay, on any material matter in the company that pertains to the function of the Board

of Directors.

According to Section 42 of the Government Companies Law, the service of the Chief Executive Officer shall

expire in certain cases, including: resignation, the resolution of the Board of Directors or the Government,

conviction for an offense that in the opinion of the Attorney General is flagrant or requires in his opinion the

termination of the service of the Chief Executive Officer or the liquidation of the company. In addition, under

Section 43 of the Government Companies Law, the Board of Directors may suspend the Chief Executive

Officer if it has reason to suspect that he has committed a criminal offense that has caused the Company

damage, and the Board of Directors must suspend him if an indictment has been filed against him for an

offense that in the opinion of the Attorney General justifies his suspension.

In accordance with Sections 42(C) and 43(B) of the Government Companies Law, in cases in which the term of

office of the Chief Executive Officer has expired or if he has been suspended from his function, the Board of

Directors may appoint an acting Chief Executive Officer until a Chief Executive Officer is appointed in

accordance with Section 37 or until the end of the term of suspension of the Chief Executive Officer. In

accordance with the directive of the Attorney General, the appointment of an acting Chief Executive Officer

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requires the approval of the Companies Authority and the resolution of the Appointments Scrutiny

Committee that it fulfills the terms of competency required under the Government Companies Law.

22.5.2.12 Special functionaries in a government company

(A) Accountant

Sections 44-46 of the Government Companies Law regulate the issue of the appointment, fee, the duties

of reporting and substitution of an accountant in government companies. The resolution on a general

meeting of a government company with respect to the appointment of an accountant requires the

approval of the Companies Authority. The Rules for Government Companies (Appointment and Pay of

External Auditors) 1994 state rules with respect to the manners of appointment and cancellation thereof,

the time of service and the fee of an accountant, who is not an employee of the company, as relevant. In

accordance with the regulations set forth, committees have been appointed to recommend the

appointments and the fee to be paid.

The accountant of a government company is required, notwithstanding any other law, to provide the

Board of Directors, the Ministers and the Authority, upon their demand, information on the affairs of the

company, conduct special audits and give a report on their results.

(B) Internal Auditor

Sections 48-49A of the Government Companies Law regulate the appointment and powers of an Internal

Auditor in government companies. The Board of Directors of a government company shall appoint for the

Company an Internal Auditor, unless the Companies Authority has confirmed that the scope of operations

of the company or the nature thereof does not require the appointment of an Internal Auditor. The Board

of Directors shall establish the functions and authorities of the Internal Auditor, and he shall be subject to

the Chairman of the Board of Directors and the Chief Executive officer. The reports and proposals of the

Internal Auditor shall be submitted to the Board of Directors. With respect to the Internal Auditor and the

effect of the Internal Audit Law over the Company, see Section 22.6.7.

It is noted that on March 2, 2008, the Companies Authority published a circular titles “appointment of

Internal Auditor (“Authority Circular on Appointment of Internal Auditor”) whose aim is to prescribe

general rules with respect to the election of an Internal Auditor in a manner that will strengthen the

independence of the Internal Auditor in government companies and improve the level of the internal

audit in government companies. The Authority Circular on Appointment of Internal Auditor includes, inter

alia, provisions with respect to principles and the manner of appointment of the Internal Auditor,

instructions on the employment contract of the Internal Auditor, his term of employment and more. The

circular also states that the Internal Auditor shall not be employed in any function in the Company for a

period that is not less than a year after the date of the conclusion of his function as the Internal Auditor.

On December 12, 2010, the Companies Authority published a circular titled “appointment of Internal

Auditor and assessment of the quality of the internal audit in the Government Companies” (“the

Authority Circular on Appointment and Quality of the Internal Audit”) that includes instructions whose

purpose is, inter alia, reinforcement of the status of the Internal Auditor by way of reinforcement of his

independence from the government company audited by him and improvement of the quality of the

internal audit at the company.

(C) Legal Adviser

Section 47 of the Government Companies Law states that the appointment of an external legal adviser

for a government company shall require the approval of the Companies Authority. A member of the

Knesset shall not be a legal adviser to the company and a no legal adviser shall be a partner of a

partnership or a shareholder in a corporation that he is the legal adviser of The Government Companies

Rules (Appointment and Pay of Legal Advisers), 1992 prescribe rules with respect to the manners of

appointment and its cancellation, the term of office and fee of the legal adviser, who is not an employee

of the company, as relevant. In accordance with the regulations set forth, a committee operates whose

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function is to recommend to the Director General of the Companies Authority appointments and the fee

to be paid.

(D) Attorney of the State in the general meeting

In accordance with Section 50 of the Government Companies Law, the Ministers shall appoint the

Attorney of the State to participate and to vote in the general meeting of the company pursuant to the

shares that the state holds therein. A notice of the date of a general meeting shall be given to the

Companies Authority at least two weeks in advance, unless the Companies Authority has consented to a

shorter period. The Ministers are allowed, after consultation with the Companies Authority, to give the

said attorney instructions with respect to the manner of his voting in the general meeting.

22.5.2.13 Instructions with respect to the election of senior officers

The appointment of senior officers as per its definition in Section 32(A)(4) of the Government Companies Law,

shall be done in accordance with the provisions of the Government Companies Regulations (Rules for the

Election of Senior Officers) 2005. In accordance with the Regulations, the Board of Directors of a government

company must adopt a procedure with respect to the conditions of competency and the manner of election

of senior officers in the company, which will be made out in accordance with the provisions of the Regulations

and submit it for the approval of the Companies Authority.

22.5.2.14 Provisions with respect to the employment of relatives

The Government Companies Regulations (Rules on Employment of Relatives) 2005 (in this section: “the

Regulations”) prescribe rules and procedures with respect to the employment of relatives (as defined in the

Regulations) of workers employed in government companies.

In accordance with the Regulations, a government company shall not hire a person if a relative thereof works

in the same company in a function that is prescribed in the Regulations, unless the government company has

seen that he is the most suitable candidate for the position and the conditions as set forth in the Regulations

are fulfilled, including the selection of the candidate in a public, equal and competitive process and the Chief

Executive Officer and legal adviser of the Company have confirmed the propriety of the public proceeding and

the grounds for selection and reporting thereof have been given to the Board of Directors.

As a rule, despite that which has been set forth above, no employee shall be employed at a government

company if the employment may lead to subordination relations or employment relations between him and

the relative of that employee in the company which employment may cause concern of conflict of interests.

In a large government company, such as the Company, an exceptions committee in the company (as defined

in the Regulations) may give an argued permit for the employment of relatives who fulfill that which has been

set forth above, considering the factors set forth in the Regulations, as long as it is satisfied that this

employment does not infringe the ethics and propriety of the activity of the company and it is allowed to set

forth conditions for their employment or the employment of one of the employees to avoid subordination

relations, work relations and conflict of interests, without voiding the positions of the employees.

It has further been stated that the company must indicate in its financial statement to the Companies

Authority the number of relatives hired in the previous year and their functions, their relation to employees

and their function. In addition it must state the total number of relatives employed in the company.

In 2011, the Company hired 283 new employees of whom approximately 5.3% had relatives employed in the

Company. As of December 31, 2011, the Company has 3,255180

employees who are relatives, constituting

approximately 25% of the total number of employees at the Company.

As a government company, the Company is subject to instructions with respect to adequate representation

for various sectors among its employees, in accordance with the circumstances of the matter, such as, for

example, the representation of persons with handicaps in accordance with the Equal Rights for Persons with

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This figure is effectively “double”, i.e., a father and son are counted as two employees.

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Handicaps Law - 1998, the representation of women in accordance with the Equal Rights for Women Law

1951 (see details in Section 22.6.2) and the representation of a persons who were born, or who had at least

one parent born, in Ethiopia, or is a member of the Druze community in accordance with the Government

Companies Law.

22.5.2.15 Receipt of information from a government company

(A) Information to the Companies Authority

In accordance with Section 55 of the Government Companies Law, the Companies Authority is allowed,

for the purpose of the discharge of its duty, to demand of a government company or involved

company181

, and of a director on behalf of the state, of the Chief Executive Officer of a government

company, and through him, of any person who works at the Company or is employed in its ranks,

information and material on the matters of a government company, and is allowed to inspect records and

documents of such a company.

In accordance with the Government Company Regulations (Rules of Authorization of an Inspector by the

Authority), 2005, if the Companies Authority decides, for the purpose of discharge of its duty, to execute

an inspection, it is allowed to authorize an inspector to inspect the records and documents of the

Company, and demand of the Company, or of the persons enumerated in this section above, information

and material on the affairs of the Company. An inspector shall be of an appropriate profession, as

relevant, including an advocate, accountant, appraiser and economic consultant, in accordance with the

conditions prescribed in these regulations.

In accordance with the said Regulations, in 2008, an examiner was appointed for the Company by the

Companies Authority. See Section 1.C.2. B-F of the statement of the Board of Directors for December 31,

2011 for details.

In accordance with the said regulations, the Companies Authority has appointed an examiner on the issue

of the conduct of the Company in events related to the presentation of the fair market value of assets of

the IEC Pension Fund Company in accordance with the IFRS standards in the Financial Statements for

June 30, 2009. The examiner submitted his conclusions on March 28, 2012. In accordance with the

conclusions of the checker, it is not possible to determine who assumes responsibility for inactivity on the

issue of presentation of the assets of the IEC Pension Fund Company in October and November 2009.

(B) Information to the general public

The Freedom of Information Law 1998 (“the Freedom of Information Law”) applies to a public authority,

including a government company and a government subsidiary, except companies that have been

excluded from the effect of the Freedom of Information Law in full or in part, as determined by the

Minister of Justice with the approval of the Knesset Constitution, Law and Justice Committee. As of the

date of the Prospectus, the Company has not been fully or partially excluded from the effect of the

provisions of the Freedom of Information Law and therefore it does not apply to it.

The Freedom of Information Law states that any Israeli citizen or resident is granted a right to receive

information from a public authority, in accordance with the Freedom of Information Law. Upon the

application of the Freedom of Information Law to the Company, it has acted to implement it and adopt its

provisions. In addition, the Company has taken the following actions: appointment of unit referents,

publication on the Internet the manner of applying to the Company to receive information, mapping of

the types of information with respect to environmental protection that is in the possession of the

Company and apportionment of a steering committee to form the freedom of information policy at the

Company. In accordance with the provisions of the Freedom of Information Law, the CEO of the Company

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As long as more than one quarter (1/4) of the voting power in the general meeting or the right to appoint more than a quarter

(1/4) of its number of directors lies with the State.

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has appointed a “freedom of information officer”, who is responsible for implementing the provisions of

the Freedom of Information Law in the Company.

In accordance with the provisions of the Freedom of Information Law, the Company is allowed to reject a

request to receive information in certain circumstances, and not provide information when there is

concern that such information would harm the security of the state, its foreign relations or public

security, or the security or safety of a person, with respect to any information on a subject that the

Minister of Defense has prescribed in an order182

whose disclosure invades privacy (as per its definition in

the Privacy Protection Law 1981) and any information that must not be disclosed by law.

In addition, in accordance with the Freedom of Information Law, the Company is allowed not to disclose

information in certain cases, inter alia information that may disrupt its normative functioning,

information about policy in stages of formation or about details of negotiations with an entity or person

outside the Company, information about the internal management of the Company that has no bearing

on the public, information that is a commercial secret or a professional secret or that has economic value

whose publication may cause genuine damage to its value, and is allowed not to disclose information in

additional circumstances as prescribed in the Freedom of Information Law.

In September 2010 the Freedom of Information Regulations (Disclosure of Information on Environmental

Protection for Public Inspection) 2009 took effect, whereby it was prescribed that a public authority must

disclose for public inspection information that originates from a report or gathering of information with

respect to a substance, odor or radiation that has been measured or emitted into the air, into the soil,

into the sea or into water and that is of a type that may cause an environmental hazard, in ways and at

times that have been prescribed in these regulations. The Company is complying with the requirements

of these regulations.

22.6 Laws, regulations and other orders applying to the Company as a government company

22.6.1 The Budget Foundations Law - 1985

A government company is considered to be a “budgeted body” as this term is defined in the Budget

Foundations Law, and therefore a number of instructions apply to the Company, the main ones being as follows:

(A) In accordance with the provisions of Section 29 of the Budget Foundations Law, the Company cannot

consent to changes in wages, retirement or pension conditions, or other financial benefits that are related

to work, or enact such changes or benefits, other than in accordance with the agreement or custom with

respect to all civil servants or with the approval of the Minister of Finance.

(B) Notwithstanding that which has been set forth above in any law, any agreement or arrangement is void if it

contravenes the provisions of Section 29 of the Budget Foundations Law. If the Minister of Finance deems a

budgeted body to have failed to fulfill the provisions of Section 29 of the Budget Foundations Law, he is

allowed to deduct an amount that is equal to the amount that has been paid due to this from the amounts

that must be transferred to that body from the state budget by law, and he is allowed to terminate or

reduce any bonus or participation that the body would have received from the Government were it not for

the deviation, as long as the body is making payments in contravention of the provisions of this section.

(C) The Company as a budgeted body must provide the Director General of the Ministry of Finance, upon his

demand, any information that is needed for the purposes of tracking the execution of the Budget

Foundations Law or annual budget law.

(D) The Company as a budgeted body must deliver to the Commissioner of Wages and Employment

Agreements at the Ministry of Finance, once a year, information, at a time and in the manner prescribed in

the Regulations.

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To the best of the Company’s knowledge, as of the date of this Prospectus, no orders have been prescribed with respect to the

Company on this matter.

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In 2011, a disciplinary tribunal started to operate for the first time to try civil servants and employees of

budgeted and supported bodies. This tribunal was founded pursuant to the Budget Foundations Law. Among

other persons, an employee of a budgeted body who has committed disciplinary offenses in accordance with

this law and whoever at the time of the execution of the offenses was a Chief Executive Officer, Accountant,

Treasurer, Bookkeeper or officer of the budgeted body responsible for that field, may be tried before the

tribunal, if he has not proved one of the following: (1) the offense was committed without his knowledge; (2) he

took reasonable measures to ensure the prevention of the offense. See Note 19 to the Annual Financial

Statements and Note 4 to the Quarterly Financial Statements for a description of the breakdown of the

resolutions of the Commissioner of Wages pursuant to the Budget Foundations Law.

22.6.2 The Equal Rights for Women Law - 1951

In accordance with this law, adequate representation is to be given, in the circumstances of the matter, in a

public body that includes a government company and in the tender and appointment committees of a public

body, to the representation of women. The Company fulfills the provisions of the said law.

22.6.3 Resolution of conflicts between the Company and the Ordering Party

In accordance with Directive 6.1201 of the Attorney General, no civil action shall be filed by the State of Israel

against a government company until after receipt of the approval of the following: the Attorney General, the

State of Israel Attorney, the Assistant State Attorney or the Director of the Civil Department in the State of Israel

Attorney’s Office. Initially an attempt at conflict resolution shall be conducted by way of negotiation, mediation,

giving of an expert legal opinion or otherwise, and if the conflict is not resolved within a reasonable time, it will

be decided whether to refer it for arbitration or to approve the filing of an action.

Directive 6.1202 of the Attorney General indicates a course of action whereby litigation in Court must be

avoided to the extent possible for legal conflict resolution on civil affairs between a government company and

the State or a corporation founded by law or another government company, and a government company should

make every effort to resolve such a conflict other than by filing an action to the Court. In accordance with the

directive, a government company that has not succeeded in resolving the conflict in another way, and which

requests to file a suit, shall announce this to the Director General of the Government Companies Authority, who

will act to settle the conflict out of court in the ways set forth in the directive. To the extent that the conflict is

not settled in a reasonable time, the Director General of the Government Companies Authority shall refer the

conflict for handling by the Attorney General or the party authorized for that purpose. If the conflict is not

resolved within a reasonable time, the Attorney General shall express his opinion before the parties on how to

act subsequently.

22.6.4 Resolution of conflicts between government companies on infrastructure matters

Chapter H3 of the Government Companies Law, which applies to the Company as an infrastructure company

that is listed in the First Addendum, addresses the resolution of conflicts between government companies on

matters of infrastructure. The provisions of Chapter H3 state that in conflicts between government companies

on matters of infrastructure, including conflicts on coordination with respect to infrastructure works, the scope

of infrastructure works, the schedules for the execution of infrastructure works, the payment required for the

execution of infrastructure works, coordination with respect to passing through land held by an infrastructure

company and other conflicts that delay or could delay infrastructure works, a conflict resolution committee

(hereinafter: “Conflict Resolution Committee“) that will be established for this purpose will hand down a ruling,

the Conflict Resolution Committee having the exclusive authority to hear and rule on such a conflict, unless it

has decided not to rule on the conflict.

The Conflict Resolution Committee is allowed to present a compromise to which all parties to a conflict have

agreed the effect of a final decree. A final decree of the Conflict Resolution Committee may be appealed in the

Authority by a question of law only to the Court for Administrative Affairs. A final decree of the Conflict

Resolution Committee for which no leave to appeal has been filed within the time set for that purpose or for

which no leave to appeal has been received shall be considered as a final verdict of a court.

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As of the date of the Prospectus and to the best of the Company’s knowledge, no such Conflict Resolution

Committee has been founded.

22.6.5 The State Comptroller and the Public Complaints Commissioner

(A) The State Comptroller

The State Comptroller Law - 1958 [Consolidated Version] (hereinafter: the “State Comptroller Law”)

subjects any “audited entity” (as per its definition in the State Comptroller Law), and states, inter alia, that:

any government company is an audited body that will be subject to the scrutiny of the State Comptroller;

an audited body is subject to various instructions to serve documents and information and assumes a duty

to appoint a team to rectify the deficiencies and make resolutions found in an audit; by law, a person may

file a complaint to the Public Ombudsman against an audited body and the Ombudsman may, in the case of

finding the complaint to be justified, indicate the need to correct the deficiency and the way and time to do

so.

In the last four (4) years, the Comptroller has published five (5) audit reports that dealt with the Company.

A breakdown of the reports and the subjects that the Comptroller indicated are provided below:

(1) State Comptroller Report No. 58 B, dated May 2008, “Contracts for the purchase of services by the

Logistics and Properties Branch” – the report addresses the regulation arrangements that the Company

has over its transactions.

(2) State Comptroller Report No. 59 A, dated March 2009, “Contract of Israel Electric Corporation Ltd. with

a Construction Management Company” – the Prospectus covers a number of aspects in the transaction

of the Company with the company CPM Construction Management Ltd. (CPM), which was retained

mainly for the management of completion of the construction of the head office building in Haifa and

for the supervision thereof.

(3) State Comptroller Report No. 59 B, dated May 2009, “Preparation for Coping with a Shortage in

Electricity” – the Prospectus addresses the preparations of the parties charged with the development

of the Electricity Sector to prevent a shortage in electricity.

(4) State Comptroller Report No.60 B, dated May 2010, “Purchase of Consultation Services” – the

Prospectus addresses the transactions of the Company for the purchase of consultation services for the

units of the Director General.

(5) State Comptroller Report No.61 B, dated May 2010, with respect to encouragement wages at Israel

Electric Corporation. The Prospectus addresses actions for determining encouragement wage methods

in the Company and the payments for it.

The Company is operating to implement the audit reports and rectify the deficiencies found.

(B) The Public Complaints Commissioner

In accordance with the State Comptroller Law, the Public Complaints Commissioner is allowed to adjudicate

complaints against the Company in its capacity, as set forth, as an “audited body”, owing to an act or

default or delay in an action that directly harms the complainant himself, or that denies him directly a

benefit, when the complainant has received, to the satisfaction of the Public Complaints Commissioner, the

consent of that person to file a complaint on his matter. The findings of the Public Complaints

Commissioner with respect to the inquiry made and his recommendations to correct deficiencies are

forwarded to the audited body.

The public complaints commission in the Company is responsible for processing complaints and objections

of the customers of the Company and the contact with the State Comptroller on this matter. In 2011, the

Company received thousands of customer complaints and objections, most of which were on the issue

demands of customers for pecuniary compensation, charges in their accounts or orders and connections, of

which less than one percent arrived from the State Comptroller’s Office because of objections and

complaints on previous processing, of which about forty-four percent (44%) were found to be justified.

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22.6.6 Tender statutes

The Obligation for Tenders Law - 1992 (hereinafter: the “Obligation for Tenders Law”), states that the State of

Israel. any government corporation, religious council, healthcare organization and higher education institute,

shall not execute a contract for executing a business arrangement involving goods or land or for the execution

of work, or for the purchase of services, except in accordance with a public tender that gives any person an

equal opportunity to participate therein. On this matter, a “government corporation” has been defined as a

“government company, government subsidiary or a corporation established in the Law”.

The Obligation for Tenders Regulations, 1993 (“the Obligation for Tenders Regulations”) prescribe instructions

on tender proceedings and circumstances in which there is an exemption from conducting a tender.

Alongside the general provisions of the Obligation for Tenders Regulations, which apply to all entities to which

the Obligation for Tenders Law applies, Chapter E of the Obligation for Tenders Regulations has been

promulgated, this being a special chapter that addresses the contracts of a government company and a

government subsidiary. This chapter applies to government companies and government subsidiaries (in addition

to the general provisions) duties and instructions that are special to them.

In addition to that which has been set forth above, the Obligation for Tenders Regulations (Preference of Israeli

Products) 1995 and the Obligation for Tenders Regulations (Duty of Industrial Cooperation) 2007 apply to the

Company.

Effective from January 1, 1996, the Company has been operating, in addition to the Tenders Law and the

regulations promulgated thereby, also in accordance with the provisions of the Government Purchase

Agreement183

. The Obligation for Tenders Law, states that the regulations prescribed in accordance with the

Law shall apply to the extent that they do not contravene undertaking of the State within an international

treaty. The Mandatory Tender Regulations also supersede this instruction.

22.6.7 The internal audit Law

The Internal Audit Law 1992 (hereinafter: the “Internal Audit Law”) applies in accordance with to an audited

body as defined in Section 5(9) of the State Comptroller Law. Additional provisions in the Internal Audit Law

apply to the Company pursuant to the Companies Law.

In accordance with the Internal Audit Law, any public body is to have an internal audit conducted by an Internal

Auditor.

In accordance with the Government Companies Law, the Board of Directors of a government company must

appoint for the Company an Internal Auditor, unless the Companies Authority has confirmed that the scope or

character of the operations of the Company does not require the appointment of an Internal Auditor. The Board

of Directors shall establish the functions and authorities of the Internal Auditor. The Internal Auditor shall

answer to the Chairman of the Board of Directors and the Chief Executive Officer, and shall submit his reports

and suggestions to the Board of Directors. The Company has appointed an Internal Auditor. See Section 4.C of

the report of the Board of Directors.

22.6.8 As a government company, the Company has additional duties pursuant to other laws applying to public bodies,

such as the Freedom of Information Law (see details in Section 22.5.2.15), the Equal Rights for Persons with

Handicaps Law 1988, the Antitrust Law - 1988 (see Section 22.10 for details), the Law for Increased Enforcement

of Labor Laws 2011 and the addition of Chapter F1 to the Government Companies Law relating to adequate

representation of government company employees.

183

The Government Purchasing Agreement (GPA) regulates the access to government purchase tenders between signatory countries. The agreement took effect in January 1996. It is unique, for although it constitutes part of the World Trade Organization (WTO) agreements, it binds only signatory members (plurolateral agreement).

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22.7 Quality assurance and control

Regulation – all of the units of the Company are ISO 9001:2008 standard certified. The quality policy of the

Company states that the Company operates as a leading business entity whose purpose is to develop the

Electricity Sector in Israel and provide qualitative, readily available and competitive electricity, with emphasis on

environmental protection, occupational safety and health and a high level of service. In some of the units of the

Company, a combined management system is applied in accordance with the requirements of the standards

ISO9001 (quality management systems) and/or ISO14001 (environmental management systems) and/or

OSHAS18001 (occupational safety and health management systems) and/or SI 9301 (safety and quality

management systems of the land transport and traffic system).

In addition, the standard ISO/IEC 27001 (information security management systems) is applied in some units of

the Company (as a separate management system).

In addition to the certifications set forth above, some of the laboratories of the Company are certified for the

standard ISO/IEC 17025 (general requirements for competency of testing and calibration laboratories), and based

on principles as have been prescribed within such a policy. All of the certification activities for these standards are

voluntary and not required by law, except certification for ISO/IEC 17025, for which some of the laboratories of

the Company are required by law to be certified according to the requirements of this standard.

Quality control – within the organization, quality and quality assurance branch of the Company, there is a quality

control sector, whose functions are as follows: conducting quality control of products that are purchased by the

Company starting from the stage of preparation of quality requirements in the product specifications that are

attached to the purchase requirements during the manufacturing of the product until its receipt at the Company;

participation in dealing with non-conformances that are discovered in products that are manufactured for the

Company; participation in the processing of products in which a non-conformance is found during the warranty

period.

22.8 Planning and construction

The construction of all of the facilities of the Company is carried out in accordance with construction permits that

are issued pursuant to the provisions of the Planning and Construction Law, except the construction of overhead

electricity grid facilities as per its definition in the Planning and Construction Regulations (Regulation of

Transmission, Distribution and Supply of Electricity), 1998, which is carried out in accordance with the

authorizations given pursuant to these regulations.

If it is found that the Company has any works, which require such a permit, have not been performed as required

by law, the Company acts before the relevant authorities to receive permits for working by law. Working without a

permit exposes the Company to criminal proceedings against it and against executives therein, as well as a

demand for demolition of the illegal construction, in accordance with the Planning and Construction Law and the

proceedings thereby.

In recent years, the Company has not performed construction works without a permit or authorization and its

material activity is performed with a permit. These regulations are done for construction works that have been

conducted in the past, for which the Company cannot quantity the total works requiring arrangements. However,

the Company regulates from time to time items, buildings and facilities that have been erected and/or deployed

without a past permit.

In accordance with the provisions of the National Planning and Construction Council, for the purpose of

construction of 400 kV lines, national outline plans are required. The preparation of the outline plans, as well as

the procedural processes for their approval, are carried out in accordance with the provisions of the Planning and

Construction Law.

A dispute arose between the Company and the Ministry of the Interior with respect to the need for a detailed plan

for the construction of 161 kV lines. In view of this dispute, the Company filed in July 2008 a petition to the High

Court of Justice to have the internal directive of the Planning Administration declared void, along with the voiding

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of an amendment to the district outline plan of the Southern District, which effectively requires the construction

of 161 lines in within the Southern District of the Ministry of the Interior, subject to the approval of a plan.

In a preliminary answer to the petition, the State of Israel contended that there was no cause for intervention of

the Court, for the reason that there was no flaw in the integration of an instruction dealing with a demand for an

outline plan as a binding instruction in outline plans and for the reason that with regard to the directive of the

Planning Administration, this was an early petition. In October 2009, a hearing of the petition was held. The Court

suggested that the parties attempt to reach a compromise with respect to the appropriate planning outline for

constructing 161 kV lines. The parties held contacts resulting in a compromise proposal by the Ministries of the

Interior, Justice, Energy and Water and the Company, allowing, inter alia, the formation in the interim period of a

number of lines (as defined in the Compromise Agreement) through an authorization proceeding. Following the

achievement of the compromise, a consensual motion was filed to strike the petition and a resolution for striking

of the petition as requested was handed down on May 16, 2012.

In accordance with the Planning and Construction Law, a land rights holder is allowed to submit against the local

committee to whose jurisdiction an outline plan applies a claim for compensation for decrease in value of the land

as a result of the approval of the plan. For certain outline plans, the Company has undertaken to indemnify the

local committees in whose jurisdiction these plans apply to the full amounts that the committees would have to

pay to the affected landowners, subject to and in accordance with the provisions in the text of the indemnification

statement (except one plan in which the burden of compensation will be shared among the institutional bodies

involved in the plan). Appeals have been submitted against the local committees to the relevant appellate

committees that deal with decrease in value. In accordance with the provisions of the indemnification statements,

the Company was enrolled in the appeals as a party that might be harmed by their acceptance (see also Note

24B 8 to the Annual Financial Statements). In the statements of indemnification themselves, or in the

indemnification clauses in the plan, no amounts are indicated, but rather the indemnification is 100% or another

rate out of the amount of the claim (appeal) that has been filed against the local committee. The total claims are

stipulated in the Financial Statements and are updated from time to time. For their part in the claims, a decision

was given by a deciding appraiser, and on May 6, 2012, an agreement was signed between the institutional

entities that are involved in the plan, which is to regulate the distribution of payments until a decision as to the

manner of distribution between the parties.

In January 2011, the Company learned that the Ministry of the Interior, through a selected planning team, was

advancing National Outline Plan No. 40 that addresses exploitation of the underground space, which includes a

categorical provision whereby the electricity infrastructures would be underground, but the planning institute

would have discretion to determine that a specific infrastructure could be built in overhead form. In February

2011, the Company filed to the Ministry its initial position on the issue and asked for the subcommittee for

essential planning affairs of the National Council would not hold discussions of the Policy Document until the

Company submitted a professional document that would analyze the implications of the construction of electrical

facilities underground. In accordance with the above, the Company has conducted internal staff work, in which the

possible consequences of the plan were examined at the principle level, including economic, security and technical

/ statutory implementation aspects.

From March 2011 onward, the Ministry of Energy and Water and the Ministry of Finance forwarded their

qualifications with respect to the said plan.

In the Company, the notice of the Director of the Planning Administration at the Ministry of the Interior, dated

November 21, 2011, was received, whereby in view of a new policy that was being advanced in the planning

administration to conduct an overall, combined future national outline plan, NOP/40 would not be advanced in its

current format, to the best of the Company’s knowledge, as of the date of the Prospectus, the planning team and

planning administration are examining progress on the issue.

The Director of the Planning Administration further clarified that there was no intention of the future combined

plan impairing an approved plan, and it certainly would not pose difficulties for the planning and execution of

national infrastructures.

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22.9 Business licensing

22.9.1 In accordance with the Business Licensing Law, the Company is required to receive a business license for about

300 licensable items out of those stipulated in the Business Licensing Order, including, inter alia, power stations,

fuel stations, dining rooms and other, additional activities thereof. The operation of the sites of the Company

without a business license constitutes a violation of the Business Licensing Law and may lead to the termination

of the activity of the business. As of the date of the Prospectus, most generation units in the generation

segment themselves have business licenses, which are updated or renewed from time to time.

22.9.2 As of the date of the Prospectus, the Company has a license for about 65% of the said items only. The Company

is acting to regulate a business license for items that require a business license at the sites and facilities of the

Company, in accordance with the Business Licensing Law and pursuant to an internal procedure of the Company

on the issue, which activity integrates with the current activity in the execution of adjustments and

modifications within the fulfillment of requirements of competent agencies. Regulation of the issue of licensing

requires compliance with the requirements of the fire brigade, in accordance with the most current standards,

whose cost for regulation may reach approximately NIS forty (40) million for each of the sites (most of the works

with respect to firefighting). From time to time the Company receives warnings for activity without business

licensing and indictments have been filed against the Company and its employees. As of the date of the

Prospectus, two indictments are pending against the Company, another defendant in each indictment being a

division / district deputy manager. In addition there are about eight (8) warnings that are being dealt with by the

Company.

22.9.3 The Company has recently received a draft of overarching conditions for the granting of a business license for

gas turbine power stations, which was made out by the Ministry for Environmental Protection. The Company

estimates that based on the current wording of the draft (which is being discussed with the Ministry for

Environmental Protection), material consequences, economic and others, may apply to the activity of some of

the principal sites/ facilities of the Company.

See Sections 7.13, 8.9 and 9.11 with respect to environmental conditions within business licenses.

See Section 7.13.7 and 7.13.8 with respect to the duty to prepare plant files pursuant to the Business Licensing

Regulations – Hazardous plants - 1993.

22.10 Antitrust

Pursuant to his authority under the Antitrust Law 1988 (“the Antitrust Law”), on January 0, 1998, the Antitrust

Commissioner (“the Commissioner”) declared the Company to have a monopoly in the fields of electricity supply

(generation and sale of electricity), electricity transmission and distribution and provision of Backup Services for

electricity consumers and producers. The declaration of the Antitrust Commissioner is only declarative and

constitutes only prima facie evidence in any legal proceeding. The declaration itself does not serve to change the

status of the Company as a monopoly.

22.10.1 The statutory tools prescribed in the Antitrust Law grant the Commissioner, inter alia, the power to demand

that uniform contracts that the Company executes with customers and suppliers be submitted for approval in

accordance with Chapter C of the Uniform Contracts Law 1982, the right to intervene in the operations of the

Company that may harm the public or impair competition, by giving instructions to the Company on the steps

that it must take to prevent such harm. In addition, the law grants the Commissioner the authority to apply to

the Antitrust Tribunal (“the Tribunal”) with a request to separate the monopoly into two or more separate

business corporations.

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22.10.2 On May 4, 1999, the Company filed an appeal with the Tribunal against the decision of the Commissioner with

respect to the declaration, following which the Company reached (on March 19, 2001) an agreement with the

Commissioner, which received the validity of a verdict, as follows:

(A) The Company has a monopoly in the Electricity Sector, which includes, inter alia, the following components:

supply of electricity – generation and sale of electricity, transmission and distribution of electricity,

provision of Backup Services to electricity consumers and producers.

(B) The provisions of Chapter D to the Antitrust Law (on monopoly issues) apply to the Company as a monopoly

holder, both in the Electricity Sector altogether and with respect to each of its segments, in accordance with

that which has been set forth in Section A above.

Through to the date of publication of this Prospectus, the declaration of the Company as a monopoly had

no material effect over the activity, profitability or financial state of the Company. In view of the existing

level of control over the Company, on the part of the Electricity Authority and other authorities, and in view

of the Structural Changes that are required pursuant to the provisions of the Electricity Sector Law,

including the incorporation of generation units within separate subsidiaries to the extent that these are

applied (see Section 1.3), the Company cannot assess what the future implications of this declaration over

the operations of the Company, its profitability and financial status will be although this may have material

consequences

In addition to the foregoing, the Company is subject to the aggregate of the provisions of the Antitrust Law,

including with respect to binding arrangements and mergers. The Company is implementing an internal

enforcement plan on the issue of antitrust. The enforcement plan is intended to prevent in advance, to the

extent possible, a violation of the Antitrust Law, and minimize the damage of violations that have occurred.

In effect, a Corporation procedure has been disseminated, and is in effect as of the time of the Prospectus,

for prescribing principles and courses of action, including: responsibility, establishing the internal

enforcement officer as the supreme professional authority on antitrust issues, appointment of a national

internal enforcement team and unit internal enforcement teams, procedures and their approval, dealing

with cases of violations of law or fear of such violation, keeping of documents, contacts with outside

parties, instructing, auditing and reporting with respect to internal enforcement on antitrust. The

procedure imposes responsibility on each Vice President to fulfill the provisions of the Law and the

procedure in the units that answer to him directly and imposes responsibility on each branch / district

manager to fulfill the provisions of the Law and the procedure within his responsibilities.

(C) Consequences of the declaration for the Company as a monopoly over the purchase of electricity from

private electricity producers – In the old agreements of the Company with electricity producers, clauses

preventing a private electricity producer from selling electricity to others were omitted (following an

arrangement with the Antitrust Commissioner dated February 2001), and in new agreements these clauses

were not added.

22.11 The Regulation of Security in Public Bodies Law 1998

The Company is stated in the second addendum to the Regulation of Security in Public Bodies Law 1998 and is

therefore subject to this law, stating special provisions for security arrangements at the facility of the Company.

The law requires the Company to appoint a security commissioner and vital computer system commissioner,

grants the security commissioner various powers to perform security actions at the Company and requires the

Company to act in accordance with the directions of the police on matters of physical security and the directives

of the General Security Service on information security actions.

23. Material agreements

The agreements that have been set forth below are material agreements that are outside of the ordinary course

of business of the Company that are not elaborated in other sections in this chapter.

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23.1 Agreement for the construction of a desalination facility at the Orot Rabin site

On September 7, 2004, an agreement was signed between the State of Israel and the Company whereby the

Company would provide the State of Israel or a developer chosen on its par (H2ID Ltd.) the right to use land

covering an area of approximately 71,000 m2 on the premises of a power station in Hadera, for the purpose of

constructing a seawater desalination facility. The right of use of the land is to start at a time that is prescribed by

the Government (hereinafter: the “Effective Date”), and is given for a period of 24 years and 11 months. On

December 10, 2007, the Company announced that this day was “the Effective Date”.

In exchange for granting the right of use in accordance with that which has been set forth above, in April 2008, the

Company received an amount of approximately NIS 7.5 million on a one-time basis for covering the costs of

clearing structures that were on the ground that was handed over to the Concessionaire, and relocation thereof to

another site in the power station, and a one-time amount of approximately NIS 678 million (as at April 2008) for

coordination, planning and supervision activities. Starting 30 days after the Effective Date (in other words, from

January 9, 2008), the Company has been receiving an amount of NIS 240,000 (based on a dollar exchange rate of

NIS 4.517 per dollar, linked to the Base Index (the index for July 2004 of 100.6 points). For the services that the

Company would give to the operator from the date of production of desalinated water at the facility, the

Company would be entitled to payment of 0.24 cents for each cubic meter of desalinated water that the operator

would sell to the State of Israel (the facility is designed to supply approximately 127 million cubic meters of

desalinated water per year). The amount mentioned above is linked to the Consumer Price Index of July 2004. The

facility started its activity in late 2009.

The Agreement stated that neither party may claim at any stage in the future that the execution of the agreement

infringes upon contentions or rights asserted by either with respect to Section 62 of the Electricity Sector Law

concerning the “Property Settlement”. See Section 10.3.

23.2 See Section 8.2.1.2 in Chapter 8 of the Prospectus for a description of an agreement with the State for extending a

guarantee with respect to the issue pursuant to this Prospectus.

24. Legal proceedings

A breakdown of material legal proceedings184

that the Company is a party to, as of the time of the Prospectus:

24.1 Pending actions

24.1.1 Class actions

See Note 24 B-1 to the Annual Financial Statements and Note 8.C.1 to the Quarterly Financial Statements for

information on class actions.

24.1.2 Derived actions

See Note 24 B-4 to the Annual Financial Statements and Note 8.C.4 to the Quarterly Financial Statements for

information on derived actions.

24.1.2.1 Pending proceedings

Pending proceedings that are not stated in Note 24 to the Financial Statements, for which the Company made

a provision in the Financial Statements or for which it is the plaintiff in the proceeding, follow below.

(A) On October 20, 2010, the Company filed an action for declaratory relief against the Tel Aviv Municipal

Council with respect to land that is owned by the municipal council and leased by Israel Electric

Corporation (Civil Case (Tel Aviv District) 39131-10-10). The original lease period, which was for sixty (60)

years, ended on August 31, 2010, and the crux of the dispute is the conditions that were prescribed by

the municipal council in the “lessee guide” – for exercising the right to extend the lease period by forty

184

This section includes legal proceedings that are class actions and pecuniary actions in an amount in excess of NIS 100 million.

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nine (49) years more, and the matter of the terms of the additional lease period. Among other things, the

municipal council demands payment of 91% of the value of the land (including development) for exercise

of the option and extension of the lease period.

In view of that which has been set forth above, the Company filed a claim within which the Court was

requested: (1) to declare that the conditions for the extension of the lease period that were prescribed by

the municipal council to the lessee are depriving, unfair, illogical and contravene the original lease

contracts that were signed between the parties and the intent of the parties and are therefore void; (2)

to declare that according to the proper interpretation of the original lease contract that was signed

between the parties, the municipal council is not entitled to demand, for the extension of the lease

period for forty nine (49) years more, capitalized lease fees to a rate exceeding 13.65% of the land value

(not including development) or alternatively is not allowed to demand lease fees to a rate exceeding 4.3%

of the land value (not including development), for all 7 years in advance, as is common with respect to

Israel Land Administration land; (3) to declare that the lease conditions for the additional lease period,

which were prescribed by the Municipal Council in the new lease contracts that were attached to the

lessee guide are depriving, unreasonable, illogical and contravene the original lease contracts that were

signed between the parties and the intent of the parties, and are therefore void; (4) to award any other

relief that the Court considers to be just and correct in the circumstances of the matter.;

On December 24, 2010, the municipal council filed a statement of defense on its part, in which it denied

the contentions raised in the statement of claim and contended that the action must be dismissed. On

December 6, 2011, the municipal council sent the Company a proposal for an interim arrangement (“the

Municipal Council Interim Arrangement Proposal”), which, according to the proposal of the municipal

council, is to apply in the period from the date of signing the new lease contract until the date of receipt

of a final ruling in the dispute between the parties. The Company has rejected the content of the

proposal.

On January 24, 2012, a hearing was held in the presence of the parties. In view of the recommendation of

the Court, the parties consented to attempt to reach a consensual interim arrangement. An additional

pretrial hearing has been set for July 5, 2012.

(B) On October 17, 2007, the Company filed a petition in the District Court in Tel Aviv for the appointment of

an external arbitrator for adjudicating the disputes between the Company and IGL on all matters relating

to the agreement between the parties, which was signed on November 10, 2004 (Miscellaneous Civil

Petitions 20092/07). On August 29, 2008, the Attorney General announced the appointment of Dr. Udi

Nissan, then the Director General of the Companies Authority, to serve as an arbitrator in the dispute

between the parties on its behalf. Position papers on the part of the parties were filed to the arbitrator in

January 2009 and answer papers to the position papers were filed in August 2009.

In the position paper on the part of the State and IGL, various contentions and demands towards the

Company were raised. The contentions have not yet been quantified into exact amounts, but they may

reach tens of millions of dollars.

The main disputed questions are: (A) the status of the Company in the project and its degree of

responsibility; (B) repair of damage to the northern segment of the gas line; (C) deficiencies in the

execution of crossings at junction points; (D) rust and smart pig damage;(E) the depth of burial (F)

additional flaws and deficiencies that were discovered in the system; (G) responsibility for claims of third

parties – claim of trawl fishermen; (H) schedule.

Within the arbitration, the Company filed a claim against a State, whereby the State was required to

indemnify the Company for various amounts that it bore within the conduct of the project.

In accordance with a consensus that was achieved between the Company and IGL and the State, as of the

date of the Prospectus, contacts are ongoing between the professional elements of each of the parties,

with the goal of attempting to solve the disputes, in part or in full, between them.

See Section 13(G) of the notes to the Annual Financial Statements for further information on this matter.

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(C) On July 12, 2007, the Company filed an administrative petition to the District Court in Haifa, convening as

a court for administrative affairs, against municipal tax assessments that were issued to the Company in

the years 2004-2007, for approximately 1,000 transformation stations and 8 substations (Administrative

Petition (Haifa Administrative) 4239/07) as stipulated below:

With respect to the transformation stations –

(1) In 2004, a municipal tax assessment based on best judgment was issued, which was applied

retroactively for the period from 1997 in the total of NIS 93,187,516.

(2) In 2005, a municipal tax assessment was issued based on the roster of assets that was handed over

to the municipal council by the Company that was applied retroactively for the period from 1998 in

the total of NIS 29,476,572.

(3) In 2007 – municipal tax assessments were issued that were applied retroactively for a period from

2001. These are probably overlapping assessments, in view of the years and assets to which they

were applied. However, this was not stated explicitly at any stage by the municipal council.

With respect to the substations –

(1) In 2001 – a municipal tax assessment was issued for the Zamir substation, for a period from 2000 in

the total of NIS 1,446,458.

(2) In 2003 – three municipal tax assessments were issued for the Bikurim substation (approximately NIS

10,000), the Gan Yovel substation (approximately NIS 13,000) and the Pal Yam substation

(approximately NIS 910,000).

(3) In 2004 – a municipal tax assessment was issued for the Admiralty substation for the period from

2003, coming to a total of NIS 1,722,015.

(4) In 2005, a municipal tax assessment was issued to the Makah substation, retroactively for the period

from 2000, in the total of NIS 11,721,781.

In negotiations that were held between the parties, principles were formulated for a settlement

arrangement, which has not yet been completed.

The Company formed in the Annual and Quarterly Financial Statements a provision of approximately NIS

21 million for the municipal tax rates that are the object of the petition.

See Note 24 B.7 to the Annual Financial Statements for information on actions for municipal tax

payments.

(D) On December 24, 2000, District Outline Plan/3/6/A, dealing with route regulation was published for

validation, covering the route through which electricity lines, a railway and Highway 431 will jointly pass.

The infrastructure route is south of Rishon le Zion near an existing road. Within its instructions the plan

established a mechanism for dividing the burden of compensation that will be set (if set) for it. The

mechanism stated that out of the total compensation that is set, the local committee would bear 30%

while the rest of the compensation amounts (70%) would be borne by the three utility bodies (Public

Works Department, Israel Railways and the Company) in a division that will be determined by the

compensation committee headed by the Chief Government Appraiser or a person appointed thereby.

After the approval of the plan, many claims were filed with respect to it pursuant to Section 197 of the

Planning and Construction Law, and once these were rejected by the local committee, appeals were filed

to the Central District Appellate Committee. In accordance with the decision of the Appellate Committee,

the appeals were transferred for hearing before a deliberating appraiser, setting guiding principles for her

appraisal in the process. In May 2011 the final appraisals were received. The total compensation that the

decreeing appraiser awarded stands at approximately sixty two (62) million new Israeli shekels as of the

effective date. This amount also includes compensation for ground that was expropriated by PWD and

Israel Railways, and therefore the expropriation compensation is to be deducted for it (so that no double

compensation is given).

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PWD, Israel Railways and the Company negotiated a temporary outline for dividing the compensation

amount, in accordance with which: out of the total compensation, the amount due to be paid by the local

committee (30%) is to be subtracted. From the balance (NIS 43 million), the expropriation compensation

money that was paid to the appellants, standing at about NIS twenty nine (29) million, is to be

subtracted. The balance (approximately fourteen and a half million New Israeli Shekels) is to be paid by

the parties by equal distribution. The part of the Company, at this stage, stands at approximately NIS 4.8

million as of the effective date, these being approximately NIS nine (9) million in current values.

Some of the appellants filed against the decrees of the deliberating appraiser to the Central District

Appellant Committee, and as of the time of the Prospectus, a first hearing on their matter has been held.

In view of this, these amounts may change.

See Note 24 to the Annual Financial Statements for further information on the matter of pending

proceedings.

24.1.3 Concluded actions

(A) On February 23, 2011, the Company received a best judgment municipal tax assessment for the Rothenberg

Power Station in Ashkelon, with respect to the years 2004-2011, in the total of NIS 566,370,018, after the

municipal council had increased the assessment from NIS 43,239,136 to NIS 90,279,624 per year. In

addition, the Company was charged retroactive municipal tax payment for the years 2004-2010 coming to a

total of NIS 519,329,530, including a charge for interest and linkage differentials, which came to a total of

NIS 215,050,601.

Therefore, on November 15, 2011, the Company filed an administrative petition to the District Court in

Be’er Sheva, convening as a court for administrative affairs (Administrative Petition (Be’er Sheva

Administrative 28176-11-11) and a filing before the Municipal Tax Administration, within which it

contended, inter alia, that the retroactive assessment contravened the law, was without authority and was

void. It was contended that the assessment contravened a compromise agreement of 2002 and that the

contentions of the municipal council with respect to the significant construction additions in the property

were unfounded.

On December 18, 2011, a preliminary discussion was held in which the agreements of the parties were

given the validity of a decision, whereby: (A) The municipal tax and petition would be struck; (B) the

Company would pay NIS 4.5 million (constituting an adjunct to the annual assessment payment prior to the

issue of the best judgment assessment) and the attachments imposed by the municipal council would be

cancelled. (C) The parties will start negotiations to settle the disputes. If and do the extent that the

negotiations fail, the municipal council will be entitled to issue new assessments, and the Company shall be

allowed to take legal proceedings. See Section 24 of the notes to the Financial Statements for further

information on the matter of this proceeding.

See Note 24 to the Annual Financial Statements for further information on the matter of pending

proceedings.

25. Insurance

25.1 General

Based, inter alia, on the risk management policy, as these risks have been identified in the risk review that the

Company carried out in 2010, the Company is deciding what the risks worth insuring against are. Thus, the

Company is purchasing insurance policies such as insurance for property, liabilities, construction, liability of officer

holders, vehicle insurance and maritime insurance, which are supposed to provide an appropriate solution to

damages that may be sustained by the Company, its employees and other third parties may sustain. It must be

noted that the insurance policies usually make an exclusion for damages that originate from acts of terrorism and

war. Some of the damages are supposed to be covered by way of a special fund that the State of Israel makes

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available for the purpose of compensation for damages that result from acts of terrorism and war, and which is

subject to the Property Tax and Compensation Fund Law.

A dispute exists between the Company and the property tax authorities with regard to the essential eligibility of

the Company, as a government company, to payment of damages that directly result from acts of war. In an

appeal that the Company filed against Property Tax following a decision of Property Tax authorities not to

compensate it for direct damage that it sustained during the Second Lebanon War, on June 23, 2011, a decision of

the Property Tax Appellate Committee was handed down, in which it was established that the Company was

entitled to compensation from the property tax authorities for direct damages that it sustained during the Second

Lebanon War. The decision of the appellate committee is final and may not be appealed, because the appeal time

has expired. The decision related only to the question of basic eligibility, meaning that no amount of the

compensation has been prescribed. Negotiations are underway as of the time of the Prospectus between the

Company and the Property Tax authorities with respect to the amount of the damage, and to the extent that the

negotiations end successfully, the Company may return to the Appellate Committee.

To the best of the Company’s knowledge, the Minister of Finance appointed in 2011 a team that was requested,

inter alia, to reexamine the eligibility of private entities, including government companies, to compensation for

damage from war and acts of terrorism, and the team may recommend legislative amendments on this subject.

25.1.1 The principal insured risks

The principal insured risks are as follows: physical damage to property, loss of revenue and increased fuel

expenses, natural damages and liabilities towards third parties and towards employees.

25.1.2 The Company purchases insurance policies as prescribed in the electricity license. In addition, the Company

purchases additional insurance policies with the goal of providing adequate, broader coverage for the risks to

which it is exposed, in accordance with the decision of the competent organs in the Company, after consultation

with professional parties in the Company and insurance consultants outside it. The insurance policies that are

purchased by the Company are as follows:

(A) An “all risks insurance policy for the coverage of damages to the property of the Company (except the

electricity grid), including coverage of loss of revenue and increased fuel expenses. The limit of the coverage

within the framework of this policy is $ 1 billion.

(B) A liability insurance policy that includes coverage of general third party liability, product liability,

professional liability, liability for accidental pollution damages, liability for electromagnetic radiation and

employers’ liability. The limit of coverage within the framework of this policy is $ 100 million.

(C) An all risks insurance construction policy for the coverage of damage during the course of the construction

of power stations and other major projects. The limit of coverage within the framework of these policies is

the value of the projects. In this context, insurances for construction of power stations, construction of

office buildings, the project for laying the offshore gas pipeline and other projects may be mentioned.

(D) An officers’ liability insurance policy that covers the liability of the office holders of the Company. The limit

of coverage is $300 million.

(E) Third party maritime liability insurance that covers the maritime operations of the Company (such as: the

loading / discharging of fuel, towing of ships carrying coal and more). The limit of liability within the

framework of this policy is $50 million.

(F) Mandatory and third party insurance for the fleet of vehicles of the Company.

(G) Cargo insurance for sea, air and ground transport.

(H) Insurance for the watercraft of the Company.

(I) Additional insurance in accordance with the needs of the Company.

The Company estimates that the purchased insurance policies as set forth provide adequate insurance

coverage.

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26. Objectives and business strategy

26.1 Vision

26.1.1 General:

The Company is aiming at continuing to be the leading business company in Israel in the field of electricity

generation and supply, adapting its business activity to the varying market conditions and economic, social and

technological transformations in Israel and in the world, while adapting the procurement and operations of the

Company to these transformations while developing additional areas of engagement and breaking into new,

international markets.

For this purpose:

(A) The Company will develop and supply products and services that answer the needs of its customers – with

dignity, fairness, reliability and transparency towards customers, employees, suppliers and shareholders;

(B) The Company will provide optimal service, while ensuring reliability, quality and safety;

(C) The Company aims for excellence, innovation and maximum managerial and technological efficiency;

(D) The Company recognizes its employees as a key asset of the Company and supports their advancement,

while aiming to instill a sense of pride and belonging and encouraging commitment and creativity;

All of these are done while upholding the law and the principles of good governance, aiming for sustainable

development and social and environmental development.

26.1.2 The main values of the Company

The Company puts the customer at the center of its affairs, but its employees are its most important asset, and

it operates based on a business view, emphasizing quality and reliability in its actions, and sensitivity to the

community and environmental protection.

26.1.3 Key goals:

(A) Achievement of financial strength, adequate profitability and maintaining a stable cash flow.

(B) Reduction of the Financial Leverage relative to the leverage recognized in the electricity charge rate and

achievement of a return on equity capital ratio as recognized in the electricity charge rate.

(C) Supply of electricity at a high level of availability and reliability.

(D) Achievement of a high quality of service while adhering to the treaty between the Company and its

customers and improving the quality of supply.

(E) Meeting of schedules, giving instructing and professional consultation to customers and flexibility in

complying with the needs of the public.

(F) Expansion of activity of business enterprise, development of new markets and spheres of operation in Israel

and overseas and using existing platforms to increase the revenue of the Company.

(G) Dealing with the human resource while increasing the professional standard of the employees of the

Company through increasing their academic level, constant instructing, motivation, sharing and

encouragement for taking initiative and for excellence and development and empowerment of managers.

(H) Demonstration of national and community responsibility while taking actions to protect the environment,

devotion to public safety, implementation of technological progress and assistance in the shaping of the

energy policy in the State of Israel and in the Middle East.

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26.1.4 The goals will be achieved through:

26.1.4.1 Development

(A) Increase in the generation capacity of the Company is subject to the implementation of an optimal

reliability criterion, to the effect of a balance occurring between the cost of unsupplied energy and the

cost of an addition in generation measures.

(B) Optimal integration of natural gas production assets for reducing the use of expensive fuels and

reduction of pollutant emissions into the environment.

(C) Design and development of the transmission and transformation systems at standards that ensure the

transmission of the energy generated using the production assets to consumption centers at the required

level of reliability and quality, while maintaining the survivability of the system.

(D) Development of the distribution system as an answer to the increase in the number of consumers, for the

increase of demand from existing consumers and for achieving the level of reliability and quality of

electricity that is required, while minimizing costs.

(E) Planning and execution of emission reduction projects at power stations and making other investments in

the environmental protection field.

(F) Development of additional areas of engagement.

26.1.4.2 Operation

(A) Adoption of an environmental operation and development policy.

(B) Optimal operation of generation assets, while maintaining economic logic in the allocation resources, at a

high level of availability and reliability.

(C) Good availability and reliability.

(D) Implementation of an optimal operation and maintenance policy, which ensures the reliability of systems

during peak demands, and conducting renovations at the minimum possible cost, based on economic

viability considerations.

(E) Operation of the generation array using an optimal fuel mix.

26.1.4.3 Customers

(A) Development of new products and services for the customers.

(B) Provision of service with respect to the needs of the different market segments with emphasis on

strategic customers.

(C) Development of relations with the customers of the Company while implementing a customer relations

management approach.

26.1.4.4 Resource management

(A) Preservation, enhancement and development of the human resources through development of

professional and managerial promotion and training tracks.

(B) Conducting intelligent acquisitions of fuel in accordance with the operation requirements, with attention

to the quality and cost of fuels, environmental protection, reliability of electricity supply and

diversification of fuel sources.

(C) Finding of an overall, systemic solution for the charge rate outline, including improvement in the

interface with the Electricity Authority.

(D) Responsible financial management that will provide for achievement of adequate profitability,

maintaining of a stable cash flow, raising of capital raising for financing of the needs of the Company and

increasing the rating of the Company.

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(E) Consent, startup and implementation of all of the changes required, including structural changes in the

Electricity Sector, organizational changes and economization in the Company.

26.2 Objectives of the Company for 2012

(A) Tentative consent to the aggregate of structural and organizational changes in the Company. Conclusion of

detailed agreements and startup of the process, in the second half of the year. Finding of expression in the

future electricity charge rates, for the recognized costs of the Structural Change.

(B) Maintaining of good levels of availability and reliability of supply of electricity within a limited budgetary

facility.

(C) Coping with the expected shortage of natural gas and conducting of the bridging operations that are required

until gas from Tamar arrives.

(D) Implementation of an outline for improvement in the financial strength of the Company, including

improvement of the interface and improvement in the cooperation with the Electricity Authority.

(E) Fulfillment of the Development Plans of the Electricity Sector, with emphasis on an Emergency Plan in

transmission.

(F) Significant improvement in the availability of combined cycle power stations.

(G) Reduction of costs in the distribution system.

(H) Advancement of a smart grid project and completion of the pilot in Binyamina.

(I) Setup of the communications company and startup of the project.

(J) Expansion of the business development in Israel and abroad (increasing of order / project backlog by 30% in

comparison with 2011).

(K) Additional improvement of the human resource in the management chain, with emphasis on the

advancement of ladies.

26.3 Information on business enterprising

The business development and enterprise unit was set up in 1995 and it operates in fields that are contiguous with

the fields of activity of the Company that are not an inherent part of the activity of the Company as an essential

service supplier, in Israel and abroad, with the goal of the expansion of the areas of engagement of the Company

and making the best and most optimal use of the professional knowhow, the skilled human resources, the

byproducts, the infrastructures and the other resources that are in its possession. The activity of the unit, the

principles of its activity and its goals have been approved as necessary in discussions that have been held by the

Board of Directors or the committees of the Company. Most of the business development activity is currently

directed overseas, mainly to the countries of Southeast Asia, Africa, Eastern Europe and South America.

The Company is operating in the sphere of business enterprise, this being within the framework of the licenses of

the Company, while some of these operations, which require the approval of the Manager of the Electricity

Administration, are forwarded for approval on an ongoing basis. As of the date of the Prospectus, the unit is

operating in a number of main fields:

(A) Activity for the construction and the operation of power stations and other electricity facilities overseas that

is conducted by the Company as a provider of professional services. The Company is interested in acting in

this field as an enterprise company and in becoming the owner and in holding shares of companies abroad

that own electricity facilities. Toward this end, the Company is required to receive approval from agencies of

the State of Israel (approval of the Government and the Ministers of Energy and Water, the Minister of

Finance).

(B) Activity involving the sales of knowhow, consulting services and engineering services in Israel and abroad –

the sales forecast for 2012 amounts to approximately NIS 64 million.

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(C) The commercialization of the byproducts that are created as a result of the generation of electricity – such as

ash, coal, steam, various gases and so on. The sales forecast for 2012 amounts to approximately NIS 31

million.

(D) The sale of other services by the Company and the use of the infrastructures of the Company – the sales

forecast for 2012 amounts to approximately NIS 33 million (in current shekels).

The total sales forecast in the area of other business ventures for 2012 is estimated at approximately NIS 150

million (in current shekels).

That which has been set forth above constitutes forward viewing information, as per its definition in the Securities

Law, and is based on information that is in the possession of the Company as of the date of the Prospectus, as well

as forecasts that are based inter alia on past performance and reasonable estimates with respect to the magnitude

of the sales and the transactions that are anticipated for 2012, the materialization of which is contingent upon the

fulfillment of many conditions, some of which the Company has no control over. Examples of this would include

resolutions by the government and/or the regulatory authorities that would prevent the Company from carrying

out the execution of various projects in Israel and primarily overseas (including the sale of consulting and

engineering services in Israel and abroad), and as a result of this, the Company cannot be certain that its estimates

will materialize.

(E) The communications field

Another sphere of operations that the Company intends to enter into in the future is the area of

communications.

The Company has an advantage due to the existence of well developed communication infrastructure that has

been built by the Company as part of the system for the command and control of electricity generation and

transmission, and it is possible to make use of this for the purpose of the sale of services on a business basis.

This infrastructure manifests in a network of optic fibers over high and medium voltage lines. This system has

a surplus of capacity that are the result of technological developments. In addition, the Company has tens of

thousands of pylons that can serve as a foundation for the rapid laying of a fiber network and as a basis for a

wireless antenna system.

In the month of February 2010, the Minister of Communications granted the Company a trial license in the

area of the supply of communications infrastructure services on optic fibers for a period of a year. The trial

was conducted in Kiryat Shemona, with the participation of 150 households, and was a success. This license

has been extended for an additional period of one year until the end of March 2013

Establishment of a communications company

In July 2010, Government Resolution No. 2024 was issued185

with respect to the expansion of suppliers of

broadband infrastructure by the Company, by way of the founding of a communications company whose aim

is to make use of landline communications infrastructure over the electricity grid and the operation thereof,

for the purpose of the provision of telecommunications services as per its definition in the Communications

Law (Telecommunication and Services) 1982. The Company shall not hold more than 49% of the means of

control of the communications company and shall not control it.

See Note 1C 5 of the Quarterly Financial Statements for details.

In March 2011186

, Government Resolution No. 2949 regarding approval for Israel Electric Corporation to

establish, with another party, a company that will use landline communication infrastructure on the electricity

grid for providing telecommunication services. The resolution states the conditions under which the

185

Government Resolution No. 2024: Expansion of Broadband Infrastructure Providers by Israel Electric Corporation, dated July 15,

2010. 186

Government Resolution No. 2949: Approval for Israel Electric Corporation Ltd. to Establish, with Another Party, a Company That Will Use Landline Communication Infrastructure on the Electricity Grid to Provide Telecommunication Services, dated March 6, 2011.

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Government will approve the establishment by the Company, together with an additional party, of a company

for the provision of telecommunication services and the holding of shares and the means of control of that

company, subject the conditions that had been set forth within the framework of this resolution and in

Resolution No. 2024.

In accordance with the government resolutions that have been set forth and thereafter, in 2011 a joint

selection committee was established, half of which consists of representatives of the State of Israel and half

of which consists of representatives of the Company, for the purpose of the selection of the controlling

shareholder of the communication company that is to be formed. The selection proceeding is exempt from a

tender, in accordance with the Obligation for Tenders Regulations, 1993. The Company shall not invest in the

communications company, with the exception of investments that deal with the grant of a right of use of the

infrastructures that are held by the Company. The communications company shall enter into agreements with

the Company for the purpose of the construction and maintenance of communications infrastructure, for

giving a right of use of the infrastructures held by the Company, and will be allowed to work with the

Company to receive operation services of the optic fiber network held by the Company (the backbone

network). The communications company shall enter into agreements with the holders of other

communication licenses only, in an equal manner that is open to all license holders for the purpose of the

supply of telecommunications services, and it shall not do business directly with private consumers.

Notwithstanding that which has been set forth above, the Minister of Communication is allowed to approve

the communications company to transact with major business customers that comply with conditions that he

prescribes in the License for this purpose, for the purpose of providing relay services or other services if he

feels that this does not impair competition.

As of the date of the Prospectus, the selection committee has published the procedure documents for the

selection of the controlling shareholder in the communications company that will be established (“The

Selection Procedure” and “the Selection Proceeding”). The Selection Procedure is in accordance with which

the controlling shareholder and the schedule of the proceeding are published on the website of the Company.

The selection committee reserves the right to change the terms of the Selection Procedure (subject to the

resolutions of the Government set forth and the provisions of the law), and to terminate or to conclude it at

any time, without the publication of any additional notification, in the event that it should see fit to do so. The

committee exercised this power, made changes in the terms of the proceeding and announced this to the

contenders. The establishment of the communications company is subject, inter alia, to the consent of the

Antitrust Commissioner and the fulfillment of additional conditions that are prescribed in the Selection

Procedure. For the purpose of the operations of the communications company, it will be required, inter alia,

to obtain a license for the provision of domestic landline communications (infrastructure) services from the

Minister of Communications.

(F) Technology incubator - in 2008, the Company established a center for the promotion of innovative

technological ideas (technology incubator), for the purpose of the identification and promotion of innovative

ideas in the energy field (including environmentally friendly energy) that have potential for development and

business application. See Section 13.1.2 for details.

(G) The establishment of a subsidiary for business operations outside of the borders of the State of Israel - in

October 2011, the Board of Directors of the Company approved the establishment of a subsidiary, the

purpose of which was to carry out business activities outside of Israel (in other words, projects that involve

the construction and operation of power stations and other electricity facilities overseas, as well as other

business enterprises that are to be carried out overseas). The Company is interested in the establishment of

this company in Cyprus, on the basis of various business considerations. In addition, within the framework of

that resolution, the Board of Directors approved a financial framework for that activity in the scope of 100

million euro. The establishment of this subsidiary requires the receipt of approval in accordance with Section

11(A)(9) of the Government Companies Law.

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(H) Agreement with the Palestinian Energy Authority for building substations

In February 2012, the Company signed an agreement with the Palestinian Energy Authority for the Company

to build substations in the West Bank area (in Tarkumia, Jenin, Ramallah and Nablus) (in this section: “the

Substations”). In addition, for the purpose of transmission of electricity and subject to a financing agreement

between the Palestinian Authority and the European Investment Bank, the Company will build for the

substations 161 kilovolt high voltage lines. The transmission lines will be built within the development plan

and with the financing of the Company. In accordance with the agreement, the parties will negotiate a

commercial agreement for long term electricity supply no later than six (6) months after signing the

agreement or an additional period of six (6) months from this time or another time to which the parties will

agree but not later than six (6) months before the date of building each substation in accordance with the

agreement. As of the date of the prospectus, a team has been appointed for negotiating the commercial

agreement for the supply of electricity. To the extent that the parties do not sign a commercial agreement as

set forth, the Palestinian Energy Authority will pay the Company a charge rate for connection to the

transmission grid in accordance with the charge rate set by the Electricity Authority and will pay a high voltage

consumer charge rate for the electricity as set by the Electricity Authority.

In accordance with the agreement, the Company will plan, manufacture, test and complete the construction

of the Substations in exchange for payment of approximately 45 million euro. The Palestinian Energy

Authority will bear payments with respect to the receipt of permits and approvals for building the substations

and connecting them to the transmission lines. In the case of a default in payments, the Company is entitled

to arrears interest at the Euribor interest rate plus 1.5% each month for the period of the delay in payment,

until the date of repayment thereof. The Substations in Tarkumia, Jenin and Nablus are expected to be built

and connected to the transmission lines towards the end of 2014 (thirty (30) months after the date of receipt

of all of the approvals for building the substations as defined in the agreement). The schedule with respect to

the Substation in Ramallah will be coordinated between the parties after receipt of the confirmations that are

required in accordance with the agreement, insofar as these approvals are not received twelve (12) months

from the date of signing the agreement, the parties will be allowed to conclude the agreement with respect to

this Substation. The Company will not be responsible for a delay in the schedule that is caused due to a

judicial order that prohibits the use of the land in the Palestinian Authority or due to delays in the removal of

the electricity infrastructures in the Palestinian Authority by the Palestinians interrupting the construction of

the transmission lines. In certain cases that have been established in the agreement (such as “force majeure”

or violation of the agreement or changes in the Substations), the parties are allowed to extend the schedule

for the completion of the substations. The Palestinian Energy Authority has delivered to the Company a

security payment of 15% of the amount of the agreement for the Tarkumia, Jenin and Nablus Substations.

This security payment was transferred to the Company upon the receipt of the confirmations required with

respect to the Ramallah Substation. The security payment will be returned to the Palestinian Authority in

accordance with the milestones set in the agreement. The Company undertook to a warranty period for the

Substations for a period of twelve (12) months after the handover of the Substations, in accordance with the

conditions prescribed in the agreement. The Company will indemnify and absolve from liability the Palestinian

Energy Authority for damages or claims or proceedings or losses of any type or kind with respect to death or

injury to persons or damage to property that are caused with respect to the construction of the Substations as

a result of negligence of employees or agents of the Company. The Palestinian Energy Authority is allowed to

conclude the agreement, inter alia, in cases in which the Company becomes insolvent, endorses the

agreement in contravention of its conditions, or acts in a manner that in the discretion of the Palestinian

Energy Authority constitutes fraud with respect to the agreement or in the case of the Company not fulfilling

its commitments in accordance with the agreement. The Company is allowed to conclude the agreement,

inter alia, in the case of the Palestinian Energy Authority not fulfilling the payments thereby or if it is unable to

execute its commitments in accordance with the agreement for a reason that depends on the Palestinian

Energy Authority or if the Palestinian Energy Authority becomes insolvent. The law applying to the Agreement

is English law.

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27. Financial information with respect to geographic areas

The Company does not report in accordance with geographic areas.

28. Event or matter exceeding the ordinary business affairs of the Company

28.1 In 2011 and until the date of the prospectus, a number of events occurred in the business environment of the

Company, which caused a significant increase in the costs of fuels and led to a material cash flow burden for the

Company. The main ones are as follows:

28.1.1 As described in Section 7.10.9.2 (B), effective from February 2011 until the date of the Prospectus, a large

number of explosions have occurred in the natural gas pipeline from Egypt, which caused recurrent

disturbances in the supply of gas to the Company, to the point of complete termination of pumping of gas with

the notice of the Egyptian government gas companies (Egyptian Natural Gas Holding Company and Egyptian

General Petroleum Corporation) to EMG, which supplies the Company the natural gas from Egypt, of the

cancellation of the agreement with it unilaterally.

28.1.2 As described in Section 7.10.9, since October 2011, there has also been a significant gradual decrease in the

supply of gas from the Yam Tethys reserve due to its depletion, down to a fifth of the maximal contractual

quantity as of the date of the prospectus.

28.1.3 In October 2011, the Ministry of Energy and Water limited the consumption of natural gas from the Yam Tethys

deposit, in order to ensure that the gas remaining in the deposit would be exploited efficiently until the

expected time for operation of the Tamar gas deposit (in July 2013).

28.1.4 As a result of that which has been said forth and as an alternative to natural gas, the Company has had to

increase the use of diesel oil (rather than fuel oil), which is less pollutant but significantly more expensive than

fuel oil, in accordance with the Transverse Order of December 2010, which the Ministry for Environmental

Protection published, requiring the combustion of diesel before the combustion of fuel oil.

The events above had led to the Company being required to generate electricity using a much more expensive

fuel mix than planned. Although the costs of fuels are supposed to be covered in the charge rate, the time gap

between the date on which the Company bears expenses for the expensive fuel mix and the date on which the

electricity charge rate will be updated has led to gaps in the cash flows of the Company.

See the Immediate Reports of the Company for details on the effects of the events described above and the

cash flow burden for the Company in 2011187

.

28.2 In view of the events described above, the Company has applied to the government ministries and the regulators

that regulate its activity, requesting them to take steps that would help the Company address the cash flow needs.

As a result of this, the government agencies have carried out a number of actions:

28.2.1 In August 2011, the Minister of Finance signed the Customs Tariff and Exemptions and Purchase Tax for Goods

(Provisional Order No. 10), 2011 (hereinafter: the “Purchase Tax Order”), whereby effective from February 1,

2011, until December 31, 2011, the purchase tax for diesel imported from abroad would be 31% of the purchase

tax imposed on imported diesel prior to the said amendment, subject to the fulfillment of the conditions

enumerated in the Purchase Tax Order and stipulated in the Immediate Report of the Company of August 2,

2011 (Reference No. 2011-01-235884). In addition, with the approval of the Knesset Finance Committee, the

excise on diesel oil purchased in Israel has been reduced by an identical rate through to 2011. In January 2012,

the Knesset Finance Committee decided to extend the purchase tax reduction for diesel oil that is imported

from abroad, and set the reduction rate to 88% in January to April 2012, and to 69% for May-December 2012,

subject to reexamination and changes in the state of natural gas supply. On January 19, 2012, the Company

announced that the said reduction may have a material effect over its cash flow for 2012, coming to a total of

approximately NIS 4 billion. See the Immediate Report of the Company dated January 19, 2012 (Reference No.

187

Immediate Report of the Company of July 12, 2011 (Reference No. 2011-01-210297); Immediate Report of October 5, 2011

(Reference No. 2011-01-292275; Immediate Report of November 17, 2011 (Reference No. 2011-01-331101).

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2012-01-020109). The Knesset Finance Committee extended the period of validity of the 88% tax reduction

through to the end of December 2012. In addition, the excise on domestic diesel oil has been reduced at

identical rates for identical periods, within the Excise on Fuel Order (Exemption and restitution) (Provisional

Order No. 2), 2012 and with the approval of the Knesset Finance Committee.

28.2.2 In August 2011, approval was obtained from the Ministry for Environmental Protection to a change in the order

of operation of generation units using backup fuel, allowing for the operation of steam units at the Eshkol

power station with fuel oil, before running other generation units with diesel oil, until late 2011 or until the

repair of the fault in the supply of Egyptian gas, whichever the earlier. In August 2011, the Transverse Order was

amended in order to allow the company to use a cheaper fuel basket. See Section 7.13.2.3 for details. Due to

the continued shortage of natural gas and the application of the Company on the issue, in April 2012 the

Director General of the Ministry for Environmental Protection established a current procedure for use of backup

fuel at a time of a fault or shortage in the supply of natural gas to the electricity system.

28.2.3 In the framework of the Government Resolution dated May 13, 2012188

, the Government of Israel decided, inter

alia, to direct the Minister for Environmental Protection to act to remove the restrictions to the number of

hours set by his Ministry with respect to the operation of the various electricity generation units, including

Reading, using backup fuel during a shortage of natural gas in the period of preparation for a shortage (as

defined in the Government resolution dated June 1, 2012 to October 31, 2012), as long as the electricity

generation units act in accordance with the operation arrangement to be established by the Ministry for

Environmental Protection (after consulting the Ministry of Energy and Water) with the goal of minimizing the

exposure of the population to air pollution caused by increased use of backup fuel and removing the restrictions

to the permitted number of operation hours of backup units and diesel generators during a shortage. See

Section 6.8 for further information on the Government resolution dated May 13, 2012.

28.2.4 In August 2011, the Electricity Authority decided to update in an annual update the recognized costs for the

Company in the charge rate, including the costs that stem from electricity purchases from private producers and

from arrangements applying to it in the national economy, retroactively from April 1, 2011. The updates led to

an increase in average charge rate for the consumer at 9.89% relative to the previous charge rates that took

effect on March 22, 2011. For further information, see the Immediate Report of the Company dated August 9,

2011 (Reference No. 2011-01-236385) and Section 7.1.3.2. In October 2011, the Electricity Authority decided to

increase the electricity charge rate by an additional average rate of 4.72%. See Section 7.1.3.2 for further

details.

28.2.5 In November 2011, the Company received the approval of the Electricity Authority for the deferral of deposits

that it was required to make into the special purpose account for the Emergency Plan (Stage B) (“the Special

Purpose Emergency Plan Account”). As a condition to the deferral of the deposits, the Company was required

to raise money to a tune of at least NIS 1 billion through to December 15, 2011. This condition was fulfilled,

after the Company executed a loan agreement of NIS 1 billion with a banking corporation in Israel. In January

2012, the Electricity Authority approved for the Company the deferral of additional deposits into the Special

Purpose Emergency Plan Account (of NIS 167 million which was increased within the resolution of the Electricity

Authority of March 22, 2012, stated below, in the amount of approximately NIS 1 billion).

28.2.6 In January 2012, the Tax Authority decided to allow for the spread of the VAT periodical report payments by the

Company for January to April 2012 into a number of installments, subject to the payment for the reports ending

by the end of 2012. In addition, the Tax Authority has decided that the manner of payment of VAT for the

periodical reports for May 2012 onward would be examined by the Tax Authority when the time would come, in

accordance with the circumstances.

28.2.7 The Company applied to the Coal Corporation (its fully owned subsidiary), through which the Company

purchases coal for the purpose of generation of electricity, and concluded with it a deferral of payments for coal

that was delivered to the Company in November 2011, to a volume of approximately NIS 142 million. This

188

Resolution No. 4223 of the Government dated May 3, 2012, on “taking of steps for coping with the expected shortage in

electricity”.

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amount was repaid to the Coal Corporation in two (2) installments, in February 2012, its interest was repaid to

the Coal Corporation in one installment, in March 2012.

28.3 In addition to that which has been set forth above, in March, 2012, an outline of principles was formed with the

consent of the Company and the Ministry of Finance, for solving the cash flow problem of the Company until the

execution of an issue to the public of negotiable bonds that would be listed for trading on the Tel Aviv Stock

Exchange, as planned by the Company (hereinafter: the “Issue on the Stock Exchange”). The principles that were

formed are as follows:

(A) The Chairman of the Board of Directors is to act for the approval of a resolution in the Board of Directors,

whose aim is to transfer NIS 600 million, from the Trust Account, to the benefit of the Company Worker

Central Pension Fund, in accordance with the rate of deposits required for this fund. This is without any

additional conditions or commitments of the Company with respect to the balance of the amount that is in

the Trust Account. The State announced that the Board of Directors of the Company must make sure that any

resolution that is adopted on this subject will not infringe in any way on the resolutions of the Regulator Team

that has been appointed on the issue (see Section 22.4 on this matter) and that this will not pose absolute

facts that may affect the work of the Regulator Team in any way.

(B) The Company shall act to increase the cash flow to a volume of up to NIS 1 billion more.

(C) The Company shall act to raise money beyond that secured by the loan of the State within the issue on the

Stock Exchange, in order to allow the Company to recycle the debt required for the years 2012-2013 (except

for the purpose of solving the cash flow that stems from the fuel problem), at the timing that will be required

in accordance with the cash flow needs of the Company, and subject to the approval of the Board of

Directors.

(D) The Ministry of Finance shall act to extend a State guarantee to a volume of NIS 1.5 billion for a period of up

to 18 months, in accordance with the resolution of the Comptroller General, subject to the approval of the

Knesset Finance Committee. See Section 28.5 with respect to a private issue that the Company made of bonds

secured by State guarantee of NIS 1.5 billion.

(E) The Company shall apply to the Tax Authority with a request for spreading the payments of the tax

deductions that the Company must make during the calendar year.

(F) Subject to the execution of the steps set forth, the Electricity Authority shall act, subject to the approval of

the plenum of the Electricity Authority, to extend an amount of NIS 600 million out of the Special Purpose

Emergency Plan Account (which constitutes the existing surplus in the Special Purpose Account), alongside the

implementation of all of the steps set forth. Any solution that the Electricity Authority forms on this matter

must restore the Emergency Account in the month of December 2012 to its original state, without prejudice

to the Emergency Plan.

It was further noted that given the steps set forth, and unless there is an extreme change in the situation, it is

expected that the Company will have the sources required for its activity to be made available to it, including the

purchase of the fuel reserve that is required for the summer period, development of the transmission grid,

including connection of additional electricity producers, and execution of the resolutions of the Electricity

Authority with regard to the management of the shortage of electricity during the summer of 2013. All of the

parties shall act, each in its own field, in order to advance the solutions that have been laid down as soon as

possible.

28.4 In addition to and in accordance with that which has been set forth, and further to the document of principles for

public attention that the Electricity Authority published (hereinafter: the “Hearing Document”), on the subject of

a gradual increase of the electricity charge rates for 2012-2014, the Electricity Authority decided on March 22,

2012, inter alia, as follows:

28.4.1 The electricity charge rate shall increase by a gradual rate that will be spread over 2012-2014 (“the Period”) in

accordance with the average annual change rates in the costs of fuels of the Company, as follows:

In 2012 – an increase of 8.9%;

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28.4.2 The monthly deposits into the Special Purpose Emergency Plan Account, in the amount of NIS 167 million for

January – June 2012, shall be deferred. The Company shall resume these deposits into the Special Purpose

Account from August 2012 until January 2013. The total deferral in these deposits is in the amount of NIS 1

billion. In addition, the Electricity Authority shall act to form an outline for the release of an amount of up to NIS

600 million out of the existing balance of the amount in the Special Purpose Emergency Plan Account for the use

of the Company. This is subject to receipt of an undertaking and additional guarantees from the Company to the

satisfaction of the Electricity Authority, with respect to the sources for repayment of the money into the

Account at the rate, in the format and at the times that will be prescribed for this purpose by the professional

team in the Electricity Authority in accordance with the needs of development, as long as of the end of 2012,

the Emergency Plan will regain its monetary volume as it was prior to the execution of the cash flow bridging

elaborated in this section. The form of the guarantee and the securing of the sources for repayment of the

money into the Emergency Special Purpose Account shall be arranged with the Minister of Energy and Water.

28.4.3 A unique mechanism shall be determined for managing the amount of the recognized addition of fuels, relative

to the cost recognized in the last charge rate update (hereinafter: the “Fuel Cost Addition” and the “Special

Purpose Fuel Account”, respectively), as follows:

(A) From the date of execution of the issue in accordance with the government guarantee, as set forth in

Sections 28.4.5 and 28.4.3 (D), and the complementary government assistance that will be determined, by

no later than April 15, 2012, the Company shall open a separate, Special Purpose Fuel Account for the

purchase of the Fuel Cost Addition. The Company has dedicated an existing account for this purpose.

(B) Through to the date of issue on the Stock Exchange, the sources required for the purchase of fuels by the

Company shall be made available, in addition to immediate money raising with a State guarantee as

described in Section 28.4.3 (D).

(C) The Company shall deposit in the Special Purpose Fuel Account the following payments: debt raising money

that is secured by government guarantees, the Fuel Cost Addition in the charge rate, the amounts that were

supposed to be deposited in April and May 2012, in the Special Purpose Emergency Plan Financing Account

for the deposits.

(D) The Special Purpose Fuel Account shall be managed by the Company and audited by the Electricity

Authority, which will supervise the deposits made into the account and the release of money from it for the

purposes of financing the Fuel Cost Addition, In accordance with a reporting mechanism that the

professional team in the Electricity Authority will establish.

(E) Release of the money from the Special Purpose Account will be in accordance with the expenses recognized

by the Electricity Authority for fuel consumption, less the charge rate revenue collected from consumers for

the fuel component, without the Fuel Cost Addition at the time and mutatis mutandis or based on another

mechanism that will be established by the professional team at the Electricity Authority.

On June 17, 2012, the Company and the Electricity Authority reached agreements on the issue of the

management and supervision of the Special Purpose Fuel Account, as set forth in Section 7.1.3.2(A)(6).

28.4.4 The resolution of the Electricity Authority and the outline for spreading the rise in the charge rate are based on

the assumptions of the government assistance to the Company, as formed prior to January 26, 2012 (the

publication date of the Hearing Document), and recently, for complementary government support. This

government support was contingent upon conditions as stipulated below, particularly to the contribution of the

Company to taking economization steps, further raising of credit, execution of actions for the development of

the Electricity Sector, including the entry of private electricity producers and use, in accordance with the

measures available to it by law, of the Trust Account money. In view of the expected entry of private electricity

producers into the Electricity Sector from 2013, the Electricity Authority shall examine the need, if there is one,

for a charge rate mechanism that will make sure that electricity producers that enjoyed the charge rate spread

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and that would become within the spread period consumers of private electricity generation, would bear their

share for the spread of the charge rate during the period.

28.4.5 The assumptions of the government assistance are as follows:

(A) The Ministry of Finance increases the rate of discount in the tax exemption for the Company for the

purchase of diesel oil for electricity generation (excise) from 69% to 88%.

(B) VAT payments by the Company shall be spread into a number of installments during a calendar year. The

Company shall apply to the Tax Authority and request the spread of payments in accordance with its needs.

(C) The Ministry of Finance shall give a state guarantee to the issue on the Stock Exchange. The final guarantee

amount shall be determined by the Ministry of Finance, in accordance with the cumulative effect of the

Fuel Cost Addition for the period, over the cash flow of the Company, subject to the execution of the other

conditions to the resolution of the Electricity Authority. The amount for which a State Guarantee will be

given shall be fully linked to the changes in the actual cost of fuels through to the date of the Issue on the

Stock Exchange and the change in the fuel mix as determined by the Electricity Authority in arrangement

with the Ministry of Finance, prior to the issue on the Stock Exchange. The Guarantee shall only be given for

the purpose of assistance for the addition to the cost of fuels for the Period only, because in the view of the

Electricity Authority, this is not the optimum way for proper business conduct of the Company in the long

term. For the Guarantee, the State of Israel shall charge a commission that will be determined by the

Comptroller General at the Ministry of Finance and within the Issue on the Stock Exchange charges and

sureties will be determined for the refund of the bonds that will be issued, subject to all of the relevant

approvals. The giving of the guarantee is subject to the approval of the Finance Committee. The

consideration from the Issue on the Stock Exchange shall be deposited in a special purpose account for

purchasing fuel, under the conditions stipulated in Section 28.4.3.

(D) The Ministry of Finance shall give a State guarantee to Israel Electric Corporation for raising money

immediately during March-April, to a cumulative amount that shall not exceed NIS 1.5 billion. Due to the

Company having an acute cash flow problem before the conditions for execution of the issue on the Stock

Exchange have matured, a State guarantee shall be given for a non-public issue, to the magnitude as set

forth only, for short periods and as negotiated between the Government and the Company. The guarantee

amount that will be given in accordance with this section shall be offset from the amount of the guarantee

that will be calculated for the issue on the Stock Exchange.

(E) The payments of the Company to income tax in April – July shall be spread and deferred by the

Government.

(F) The validity of the Government Company Regulations (Rules for Preparing Financial Statements of Israel

Electric Corporation Ltd.) (Provisional Order), 2004, shall be extended until the end of 2014, so that for

periods effective from January 1, 2015, the Company shall be required to apply in full the international

accounting rules (IFRS). See Notes 2A and 3F to the Quarterly Financial Statements and Section 22.5.2.2(B)

for details on the extension of the validity of these regulations.

28.4.6 The Electricity Authority has elaborated in its resolution the conditions set forth by the relevant parties in the

Government as a condition to the government assistance as follows:

(A) Through to the effective date of the Government Guarantee, the Company shall raise, at least, the missing

financing sources (beyond the financing sources indicated above) that are required for its full activity, while

ensuring the receipt of the optimum credit and interest terms in accordance with the conditions of the

market and the credit rating of the Company.

(B) From the date of raising of the financing secured by Government Guarantee, the Company shall raise all of

the sources that are required for its activity, which does not stem from the needs of financing surplus fuel

costs.

(C) The Company shall submit a prospectus for the Issue on the Stock Exchange to the Securities Authority by

no later than May 2012 and shall make the issue on the Stock Exchange at the possible time, but by no later

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than July 1, 2012. The amount that will be raised in the issue on the Stock Exchange shall not be less than

the amount of the Government Guarantee. The Company shall act to raise capital in the issue on the Stock

Exchange, beyond the amount secured by the guarantee, as an answer to the needs of capital raising of the

Company beyond the surplus fuel costs. In response to the Company’s approach to the Electricity Authority

with a request to amend its decision in such a way that not carrying out the issue by the date which has

been set forth above will not adversely affect the Government assistance to the Company, on June 25,

2012, the Electricity Authority extended the deadline in accordance with that which has been set forth

above to the end of July 2012.

(D) Streamlining - the Company shall implement the steps for increasing efficiency that it has shown to the

government, which will lead to saving of not less than NIS 400 million per year.

(E) The Company is required in any case, immediately and unconditionally, to use the measures available to

it by law to release an amount of not less than NIS 600 million out of the trust account. In addition, the

Company is required to continue acting with respect to the Trust Account, including release of money

from it, to the extent required according to the position of the Regulator Team that has been appointed

on the issue as required by law. See Section 14.6.7 for details with respect to the trust account and the

proceedings in the Labor Court and the District Court on this matter.

(F) The Company shall apply during the period the Development Plan with respect to the transmission grid, for

the purpose of development of the sector and securing the entry of private electricity producers into the

Electricity Sector.

(G) The Company shall deposit money into the Special Purpose Fuel Account as set forth in the ruling. See

Section 28.4.3 for details.

The Company believes, inter alia in consideration of the letter dated May 28, 2012, from the Director General

of the Ministry of Finance to the Company on the implementation of the cash flow solution outline as set

forth below, it materially complies with the conditions above relating to actions and steps that must be taken

on its part.

28.5 As of the date of the Prospectus, the Company has started to act to execute the actions that are required of it as a

condition to increasing the charge rate and implementing the outline described in Section 28.3. The Company has

prepared in recent months, as part of this effort, to execute the issue in accordance with this Prospectus.

In addition, on March 29, 2012, the Audit Committee and the Board of Directors of the Company approved

preparations and execution of a private issue of non-negotiable bonds in Israel that would be secured by the

guarantee of the State (“the Private Issue") and preparations and execution of taking of a loan that is secured by a

State guarantee from banks in Israel and abroad (“the Loan”), including a transaction with the State by way of an

agreement for extending a guarantee to secure the Private Issue or the Loan, as relevant, in a total amount (for

the private issue and/or the loan together) that will not exceed NIS 1.5 billion, subject to the required regulatory

approvals. On April 5, 2012, the Company executed a private issue of bonds of the “electricity shekel 2013” series,

to a total amount of NIS 1.5 billion. For details, see Immediate Report of April 5, 2012 (Reference No.: 2012-01-

097548).

On May 29, 2012, the Control Board and the Board of Directors of the Company, pursuant to the provisions of

Section 275 of the Companies Law, and Regulation 6 (1) of the Companies Regulations (Concessions in

Transactions with Principals) - 2000, approved the Company’s engagement in an agreement for the provision of a

guarantee by the State to secure the bonds which the Company intends to issue pursuant to this Prospectus, in a

total amount of principal up to NIS 3 billion, in accordance with that which has been set forth in Section 8.2.1.2 of

Chapter 8.

On May 30, 2012, the approval of the Knesset Finance Committee was obtained for the provision of the guarantee

by the State in accordance with that which has been set forth above.

28.6 On May 24, 2012, a letter was received from the Office of the Comptroller General whereby the Comptroller

General will allow the Company to issue additional bonds in 2013 with a State guarantee for debt recycling with

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State guarantee to a volume of 3 billion New Israeli Shekels, which is intended to be repaid this year (this is

recycling of a debt for the bonds that were issued by private issue, in April 2012, as set forth in Note 7C 1 to the

Quarterly Financial Statements) and recycling of a debt for probable repayment of a series of bonds that is

expected to be issued pursuant to this Prospectus and is due to be repaid in 2013). The debt recycling shall be

done only to cover the surplus fuel cost of the Company. Such debt recycling will be subject to the receipt of all of

the required regulatory approvals.

28.7 On May 24, 2012, the Electricity Authority released NIS 600 million from the balance in the Special Purpose

Emergency Plan Account.

28.8 On May 28, 2012, a letter was received at the Company from the Director General of the Ministry of Finance on

the matter of implementation of the outline of the cash flow solution for the Company. Pursuant to this letter,

further to the discussions that were held between the Company and representatives of the Ministry of Finance on

the matter of the cash flow problem that the Company has in view of the severe crisis in the supply of natural gas,

the State again confirms that a guarantee or other financing solutions would be given for the cumulative cash flow

deficit of the Company which arises from the surplus fuel cost for the Company, and in accordance with the cash

flow needs resulting from the purchase of these fuels. In accordance with this principle, the Government will act

to extend a state guarantee of NIS 3 billion for raising bonds in a public issue by prospectus, subject to the

approval of the Knesset Finance Committee. It was further stated that in addition to that which has been set forth,

the Government would extend financing solutions in accordance with the principles of the outline above, to a

volume of NIS 1.1 billion, in accordance with the cash flow needs of the Company for financing the cost of the

surplus fuel purchase and taking into account the required safety net. It was also stated that the Company would

act to the best of its ability to extend additional financing sources with the current activity of the Company.

28.9 Prior to the adoption of the resolutions and taking of the steps above, the Company anticipated a cash flow deficit

in 2012 and 2013, of billions of shekels. Given all of the government steps that have been taken and that are

expected to be taken in the upcoming period, including the other financing solutions as well as the actions that

the Company has taken, such as executing the private issue and that the Company intends to take, including debt

raising through the issue on the Stock Exchange, additional raising operations for the recycling of the Company’s

debt, and the reduction of costs, the Company estimates that the cash flow deficit for 2012-2013 as it is expected

to be at the time of the Prospectus, may be bridged. In addition, the Company believes, upon the commencement

of the gas supply from the Tamar Reserve in 2013, a material decrease in the costs of fuels of the Company and a

stabilization in its cash flow state are expected.

That which has been set forth above with respect to the estimates of the Company on its ability to bridge the cash

flow deficit and the anticipated stabilization in its cash flow status, is forward looking information as this term is

defined in the Securities Law, which is based on the estimates of the Company in accordance with the data that it

has as of the date of the Prospectus, inter alia with respect to the quantity of natural gas that will be supplied to

the Company from the Yam Tethys reserve and the date of commencement of operation of the Tamar Gas reserve.

However, there is no certainty that the steps set forth above shall materialize or succeed, in part or in full, or that

there will be no further deterioration in the environmental conditions in which the Company operates (inter alia if

and to the extent that the amount of natural gas from the Yam Tethys reserve continues to decline or that the

Tamar gas reserve will not start to act at the scheduled time), in which case there is no certainty that the steps that

have been approved as of the time of this Prospectus will suffice to bridge the cash flow gap of the Company.

29. Discussion of risk factors

Risks constitute an integral part of the business environment and the work and business management processes in

the Company and are affected by external and internal factors, such as strategic risks, operational risks, financial

risks, and compliance and regulation risks. In accordance with the directives cited in the Companies Authority

Circular 2009/2 on the issue of risk management, the Company has started to execute a risk management process

at the company level.

As of the date of this Prospectus, the Company is at the stage of formation and preparation in risk management,

which includes, inter alia, the development of an “overreaching policy” for risk management at the Company

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aggregate level and a risk policy for 15 risks out of the risks identified in the risk review, including attention to the

following components: establishing the responsibility for risk ownership, identification, assessment, handling and

reporting its tracking, functions and responsibilities and so on.

The outline of the overreaching policy for risk management that has been prepared by the Company describes the

key processes that are required for risk management in the Company, which include the strategy and objectives,

method and work processes for identification, evaluation, reporting, monitoring and handling of risks, the

organizational structure supporting the management of risks and the responsibilities of the parties in the

Company.

The policy objectives for risk management are, inter alia:

(A) Minimization of losses that stem from materialization of risks to which the Company is exposed.

(B) Adjustment of the frameworks of authority and responsibility among employees of the Company.

(C) Holding of effective controls and actions for risk reduction.

(D) Creation of an infrastructure for ongoing evaluation of risk, including mechanisms for reporting loss events on an ongoing basis and use of these reports as a tool for monitoring risk level.

The table that appears below shows the risk factors of the Company, which have been rated, in accordance with

the estimate of the Company, by the degree of effect that they may have over the operations of the Company189

:

The risk factors of the Company are listed below:

Effect Classification of the risk factor in accordance with the

Government Companies Authority circular of June 11,

2009

High Medium Low

Significant effect on

the Company

Moderate effect on

the Company

Slight effect on the

Company

Macro risks

(1) Regulation X Compliance and regulation risks

(2) Security, geopolitical and economic situation in Israel

X Strategic risks

(3) Natural disasters (earthquake / flood) X Strategic risks

(4) Fires X Strategic risks

(5) Market risks X Financial risks

(6) Information and information security systems

X Operational risks

Industry risks

(1) Setting of electricity charge rates X Compliance and regulation risks

(2) Capital raising and financing X Financial risks

(3) Shortage in natural gas supply X Strategic risks

(4) The Electricity Sector Law and licenses of the Corporation

X Compliance and regulation risks

(5) Environmental protection X Operational risks

189

The degree of effect of the risk factors and the details of the risk factors provided below were examined by the Company without

taking into account protective actions that it is conducting to hedge the risks.

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Effect Classification of the risk factor in accordance with the

Government Companies Authority circular of June 11,

2009

High Medium Low

Significant effect on

the Company

Moderate effect on

the Company

Slight effect on the

Company

(6) Human capital X Operational risks

(7) Technical failures X Operational risks

(8) Suppliers X Operational risks

(9) Health and safety X Operational risks

(10) Project risks X Operational risks

Risks unique to the Company

(1) Liquidity risks X Financial risks

(2) Causes for calling for immediate repayment and cross violation clauses in existing financing agreements of the Company

X Financial risks

(3) Transition to reporting in accordance with the IFRS rules


(4) Submission of audited Financial Statements to profit centers


(5) Competition X Strategic risks

(6) Planning and execution of Development Plan in the generation, transmission and transformation and distribution systems

X Strategic risks

(7) Structural change X Strategic risks

(8) Asset arrangement X Strategic risks

(9) Raising capital X Financial risks

(10) Legal X Financial risks

(11) Credit risk X Financial risks

(12) Labor relations X Operational risks

(13) Liabilities for pension fund X Financial risks

(14) Planning, maintenance and reserve management

X Operational risks

(15) Failures in the transmission array X Operational risks

(16) Reputation risks X Strategic risks

29.1 Macroeconomic risks

29.1.1 Regulation

The activity of the Company depends to a great extent on regulation that applies to its activity, including the

provisions of the Electricity Sector Law and its regulations, pursuant to which licenses are issued for its activity,

the policy and resolutions of the Government (including resolutions of the Ministry of Energy and Water and the

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Ministry of Finance, and including provisions relating to the duty of the Company involving major investments in

infrastructure development), the resolutions of the Electricity Authority (including with respect to the electricity

charge rate that is set by the Electricity Authority and collected from the customers of the Company), the

provisions of the Government Companies Law and its regulations and the resolutions of the Government

Companies Authority (inter alia with respect to the conduct of the Company as a corporation, the manner of

adoption of resolutions by its organs, the manner of financial reporting appointment of directors and special

functionaries and more), the provisions of the Antitrust Law (inter alia pursuant to it being a monopoly), the

provisions of the Securities Law (pursuant to it being a monopoly) and regulation related to business licensing,

planning and construction and environmental protection (see Sections 7.13, 8.9, 9.11 and 21). See Section 22 for

restrictions and control over the activity of the Company.

Failure to comply with laws and regulations (existing or new) that apply to the Company may lead to the

cancellation or suspension of its licenses, imposition of heavy fines on the Company, the issue of personal

orders against senior executives in the Company, the filing of criminal indictments against some of them and

also severe damage to its image.

In addition, the costs involved in the compliance with the various provisions of the law that apply to the

Company are material costs. The Company cannot predict whether the various provisions of law that apply to it

will change in the future in a manner that may adversely affect the condition of the Company. The Company

cannot predict the costs that may be involved in the future in the compliance with the existing provisions of

regulation of the Company or compliance with laws, regulations and new rules that will be installed and that

may apply to it. The costs set forth may have an adverse effect over its business activity and the financial

outcomes, mainly if the costs of compliance or noncompliance with the broad regulation are not recognized in

full in the charge rate or if recognized, will not be recognized on time.

29.1.2 Security, geopolitical and economic situation in Israel and its surrounding area

The security, geopolitical and economic situation in the State of Israel and its surrounding area directly affects

the Company, whose assets and activity are located in the State of Israel in their entirety or nearly so.

Security events may impair the activity of the Company in each of its segments, including in electricity

generating and distribution facilities and the fuel transport and storage arrays. Harm to the facilities of the

Company would impair its generation capacity and might impair its ability to provide electricity continuously,

reliably and to a high level of quality to all of its customers. The Company estimates that its facilities may be an

objective for terrorist attacks or other security events.

The Company is the primary electricity supplier in the State of Israel and there is no alternative to the Company

with regard to the generation and supply of electricity. In the case of war events, the State has no backup to the

electricity grid of the Company and in effect the electricity grid in the State of Israel is isolated with regard to

the generation and supply of electricity, without an option of purchasing electricity and/or a backup from other

suppliers within or without Israel.

In addition, the various fuels that the Company uses in the electricity generation process and a major part of the

equipment for the various facilities of the Company are acquired directly or indirectly from sources outside of

Israel (except natural gas as set forth in Section 7.10.5). A material part of the fuel and the equipment are

acquired in contracts whose validity is limited. Due to the great dependence on foreign sources, the Company is

exposed to many risks, such as a delay in the supply of equipment or fuels that may result from political or

security instability, including in the case of a long war or closure of seaports or airports in its wake, boycott of

goods against Israel, strikes in ports and so on.

The disruptions in the supply of the various fuels that are used for the generation of electricity have adverse

consequences for the Company financially and image-wise.

See the risk factor “supply of natural gas” for details on the consequences of the political changes in Egypt over

the supply of gas from Egypt to Israel and on the financial state of the Company as a result.

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The insurance policies that are purchased by the Company usually exclude damages that originate from

terrorism and war. These damages are supposed to be covered by a special fund that the State of Israel extends

for compensation due to terrorist and wartime damages and that was established pursuant to the Property Tax

and Compensation Fund Law. However, there is a dispute between the Company and the property tax

authorities with respect to payment of war damages, and the issue is under adjudication. To the extent that it is

determined in the future that the Company is not entitled to payment from property tax with regard to the

payment of direct war damages, or if the amounts of the compensation that are set for the Company are lower

than those to which the Company is currently entitled in accordance with the provisions of the law or that it

expects to receive, this may have an adverse effect over the outcomes of the Company. See Section 25.1 for

details on the legal proceeding that is being conducted on this issue.

29.1.3 Natural disasters

The Company and its facilities are exposed to natural hazards such as floods, tsunamis, earthquakes and other

natural disasters that may affect its facilities and harm the Company and its business affairs, including for claims,

to the extent that they are filed against it for damages that will result from harm to its facilities and consumers.

The Company has a steering committee on the subject of earthquakes and tsunamis, under which a number of

sector subcommittees operate, which deal in the planning and execution of the preparations of the Company

for these events. The steering committee has established a multiannual work plan for coping with earthquakes,

based on information that has been gathered from countries of the world that are exposed to earthquake risks

based on events that have occurred in the past and the damages that have resulted from these events. In

addition, seismic studies have been conducted at some of the sites of the Company, within which weak points

and recommendations for reinforcements and reduction of damages have been identified, following which work

plans have been prepared for implementing the recommendations – whose implementation is in various stages

at the units of the Company. The steering committee also examined in 2011 the tsunami issue, reaching the

conclusion that in the absence of a national scenario and due to the low frequency of the risk, the Company is

making do at this stage with administrative preparations only.

It is noted that “all risks” insurance of the Company covers the risk that is involved in natural disasters, except

with respect to the electricity grid.

29.1.4 Fires

The facilities of the Company are exposed to fire risks that stem from the presence of flammable and toxic

substances. In view of the presence of fuels, work with naked flame, high temperatures and pressures, the

power stations have much greater fire risks than other facilities. The occurrence of a fire at a power station may

lead to direct damages as a result of the cessation of the activity of generation units and may cause indirect

damages as a result of the operation of the other stations using more expensive fuels. Fire events involve

cleaning, repair, replacement of facilities, disposal of waste and so on.

Direct and indirect fire damages are covered by “all risks” insurance that the Company purchases, but the

deductible is high and stands at $10 million. The Company operates an array for coping with fire risks, which

includes sophisticated fire detection and extinguishing systems that have been designed and installed in

accordance with the requirements of strict Israeli and international standards, the Fire Brigade and site

emergency teams, and conducts joint exercises with the firefighting services in order to examine the

cooperation and practice the operational abilities that are required for extinguishing major blazes. For the

prevention of fires, individual trees, forests and woods near strategic power lines are pruned and visually

inspected for the proximity to power lines, while making sure that the required pruning distances are

maintained. In addition, in the hazard reviews that are conducted by the engineers of the insurance companies

that cover the Company by way of “all risks” insurance, fire risks at the facilities for the Company are assessed,

among other things, and recommendations are received for their reduction and elimination.

In August 2011, an instruction of the chief fire commissioner was received for the power stations that included

fire safety requirements that the firefighting city unions in various areas around the country would demand of

the power stations for receiving a business license. There are parallel instructions for substations and fuel sites.

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29.1.5 Market risks

Because almost all of the revenues of the Company are quoted in NIS and approximately 49% and

approximately 52% of the long term financial liabilities of the Company, without permanent bonds and before

the execution of protective transactions, were, as of December 31, 2011 and March 31, 2012, respectively,

quoted in foreign currencies (mainly dollars, euro and Japanese yen)bond, the Company is exposed to changes

in the exchange rates of these currencies, to the effect that a devaluation in the exchange rates of the shekel

compared with the principal foreign currencies in which the liabilities of the Company are quoted may increase

the expenses of the Company (pension and others) and impair its outcomes.

However, most of these liabilities are covered in protective transactions that the Company makes from time to

time in accordance with its evaluations and through a hedging mechanism that is built into the electricity charge

rate. See Note 18 of the Annual Financial Statements for details on the currencies in which the liabilities of the

Company are quoted.

In addition, the Company has expenses that are linked to the Consumer Price Index. These expenses are

relatively stable, meaning that the pose for the Company a lower accounting exposure than the fluctuations in

the exchange rates, particularly in view of the index linkage mechanisms in the charge rate and the adaptation

of the financial statement to the Consumer Price Index. See Section B of the report of the Board of Directors

(see Section 32) for details on the currencies in which the liabilities of the Company are quoted. The Company

conducts from time to time and in accordance with its assessments currency protection transactions for

reducing its exposure to changes in the exchange rate. See Section B in the report of the Board of Directors for

December 31, 2011 (see Section 29.3 in this chapter) and Section B.3.G.2 for March 31, 2012 for details.

In addition, the Company is exposed to changes in the interest rates in the market, primarily relative to loans

that it has taken and that bear variable interest. The Company is exposed the difference between the

recognized interest (in foreign currency and in new shekels) for the loans underlying the charge rate, which

changes only once a year at the time of the annual update of the charge rate, and the actual rate of the

interests (in foreign currency and in new Israeli shekels), for its financial liabilities, and therefore the Company is

also exposed to changes in the interest rates prevailing in the market, primarily with respect to loans that it has

assumed that bear variable interest. In addition, an increase in the interest rates prevailing in the market may

significantly increase the cost of the loans that the Company is required to take in order to finance its operations

and Development Plan, and therefore these may adversely affect the outcomes and financial status of the

Company.

29.1.6 Information systems and information security

The Company relies on information systems in its activity. Faults in information systems and failures in

information security, including by hacking of the computer systems of the Company, may cause disruption and

damage to the information and regular operation of the systems that support the business activity of the

Company, the loss of business information and cause material costs for rehabilitation of the information

systems of the Company. In addition, deliberate damage to the information systems of the Company (by

inserting “malware”) may cause damage to the administrative network of the Company, a leak of information to

unauthorized parties and impairment of the integrity of the information that is in the possession of the

Company.

The Company is operating to prevent failures in the information systems, inter alia through backup and security

mechanisms and mechanisms for preventing failures in its computer systems, and by upgrading of the physical

infrastructure and the electricity system, and increasing the level of information security. The computer

equipment of the Company is still covered, like the rest of the operating property of the Company, by insurance

coverage against “all risks”, including loss of profits / increased fuel expenses following damage to the computer

equipment, but the deductible is high. The Company operates under regulation and supervision in the field of

information security for the critical systems in the Company. See Section 22.7 for details.

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29.2 Industry level risks

29.2.1 Setting of the electricity charge rate

The revenues of the Company are based on the electricity charge rate that the Company collects from

consumers. In accordance with the Electricity Sector Law, the electricity charge rates and manners of update

thereof are determined exclusively by the Electricity Authority. The financial status, revenues, profits and cash

flow of the Company are affected materially by the level of the electricity charge rates. As a rule, the charge rate

is determined in accordance with a mechanism of recognition of the costs that are required for fulfilling the

duties of the Company as an essential service supplier, such as: fuels, operation and maintenance costs and

capital costs (depreciation, financing and return on capital). See Section 7.1.3.2 for further information on the

manner of setting and updating the electricity charge.

In some cases, the Electricity Authority does not recognize within the charge rate all of the costs and the

expenses of the Company; in addition, although the charge rate includes an update mechanism that is intended

to compensate the Company for the gap between the dates on which it incurs the costs and the time at which

the charge rate is updated, this mechanism does not compensate in full, in the opinion of the Company, for the

cash flow gaps that it sustains when its actual costs are materially higher than expected.

In addition, as a result of the fact that in 2010 a new charge rate basis was set for the generation segment only,

new charge rates have not been set for the transmission and distribution segments since 2002, and the

Company has no ability to assess the time of setting the new charge rate bases for these segments or the

volumes of the property and costs that will be recognized for it, once recognized. These facts have a material

adverse effect over the financial status of the Company. See Section 8.1.3.2 for details on the resolution of the

Electricity Authority dated March 2012 with respect to recognition in an addition to the recognized cost of the

transmission and distribution segments for 2012.

See Section 7.1.3.2 for details on the applications of the Company to the Electricity Authority with respect to

various issues that re related to the electricity charge rate.

29.2.2 Raising of capital and financing

The Company has needs of financing and debt raising to very significant magnitudes, inter alia due to the need

to finance its development and investment plans (which are financed primarily through debt raising, and to a

lesser degree through the electricity charge rate), due to the need to recycle existing financial liabilities and

loans, and due to the need to finance in 2012 and 2013 the purchase of expensive fuels to large quantities

(diesel oil and fuel oil) as a solution to the temporary shortage in natural gas.

The debt raising by the Company is carried out through loans from Israeli and foreign financial institutes

(including loans with the guarantee of export credit agencies and guarantees of the State of Israel), as well as

private and public issues of debt in Israel and overseas alike.

The ability of the Company to raise the debt that it requires depends on many factors, including: the conditions

of the market in the capital markets in Israel and in the world, the interest rates, availability of credit from other

banks or lenders (including credit exposure restrictions for a single borrower of banks in Israel and restrictions

of exposure of financial institutes to a single issuer), the trust of investors in the Company, the credit rating of

the Company, the business success of the Company, the form and terms of the Structural Change in the

Electricity Sector, to the extent implemented, the financial performance of the Company (including its leverage),

the economic, security, legal and political conditions in Israel, the privatization policy of the Government and

the willingness of the Government to extend to the Company financing or other support. In addition, the ability

of the Company to raise debt for the purposes of financing its Development Plan and for the purpose of

recycling of its existing debt may be adversely affected by the raising of debt for financing the cash flow deficit

that stems from the use of fuels instead of natural gas. In addition, in accordance with that which has been set

forth above, the Board of Directors of the Company adopted in 2010 a resolution to reduce the debt to balance

ratio (“the Financial Leverage”) of the Company to 60% over a six year period (a debt decrease that comes to a

total of approximately NIS 9 billion through to 2016). This resolution may affect the ability of the Company to

raise debt in the future for the purpose of financing its Development Plan.

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In recent months, the international credit rating of the Company has been reduced and as at the date of

publication of the Prospectus it was added by the S&P rating agency to the CreditWatch Negative List (see

Section 1.5.3.1 (J) of Chapter 1 of the Prospectus for further details). On May 24, 2012, the Midroog rating

company left the rating for Series 22 and 2022 as it was, Aa3, and changed the rating outlook from stable to

negative. An additional down rating of the Company may have a material adverse effect on the market value of

the bonds of the Company, the existing financing sources and the availability or conditions of raising new debt,

and thus have a material adverse effect over its business affairs, the results of its operations and its financial

status.

Insofar as the Company will not be able to raise the full debt that it requires, this may have a material adverse

effect on its business affairs, the outcome of its operations and its financial status.

For the risk unique to the Company in the context of raising capital pursuant to the Prospectus in Israel, see

Section 29.3.9.

29.2.3 Shortage of natural gas

The increasing dependence of the Company on the generation of electricity using natural gas causes it risks both

as a result of the limited number of the natural gas suppliers and due to restrictions that are related to the

natural gas transmission system. Disruptions in the gas supply that stem from violations of the purchase

contracts by the gas suppliers have caused and still cause the Company to power its generation system using

more expensive and more pollutant alternative fuels, in order to satisfy its consumers’ demand for electricity. In

addition, disruptions in the gas conduction system whose repair may take a long time, are estimated to be of

low probability by the Company, but the expected financial damage from the materialization of these events

may be high, particularly if following the disruptions in the gas supply, the Company will not have sufficient

generation ability using alternative fuels in order to satisfy the demands for electricity.

As described in Section 7.10.9.2, from February 2011, a series of explosions occurred in the natural gas pipeline

from Egypt. These explosions have caused recurring disturbances in the supply of gas from Egypt, the absolute

stopping of the gas supply for long periods and uncertainty with respect to the future supply (full or partial) of

gas from Egypt to the Company. In April 2012, the Egyptian government gas companies EGAS and EGPC, which

are the natural gas suppliers to EMG, that they were unilaterally cancelling the agreement with it for the sale of

natural gas. The agreement between EMG and the Company has not been cancelled. In addition, and as

described in Section 7.10.9.2, from November 2011, a significant decrease has occurred in the rate of gas

extraction from the Yam Tethys reserve, which is the only natural gas reserve operating in Israel. After

December 31, 2011, the quantity of gas supplied to the Company from the Yam Tethys reserve decreased, with

the result that from mid-May 2010, the maximum hourly quantity supplied to the Company comes to about

one-fifth of the maximum contractual quantity.

In addition, insofar as the gas supply of the Tamar Partnership, on the scheduled date pursuant to the

agreement that was signed in March 2012 is delayed, whether as a result of failure to obtain approval pursuant

to the conditions included or as a result in the date of supply of gas, the Company will have to continue to

purchase expensive, pollutant fuels as set forth above.

In the absence of available supply of natural gas, the costs of fuels of the Company are significantly higher than

the recognized costs of fuels for the Company in the charge rate basis, although the Company believes that the

high costs of fuels will be covered in the end in the charge rate, the time gap between the date on which the

Company sustains the expenses for the purchase of the expensive fuels as set forth and the time at which the

charge rate is updated and the Company is compensated for these expenses, causes material impairment to the

cash flow of the Company.

29.2.4 The Electricity Sector Law and the licenses of the Company

The Company is subject, in accordance with that which has been set forth, to the provisions of the Electricity

Sector Law, pursuant to which it has been granted licenses for its activity. In addition, the Company is also

considered as an “essential service supplier” in accordance with the provisions of the Electricity Sector Law.

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Pursuant to the provisions of the Electricity Sector Law and the licenses that have been given to it, the Company

assumes various restrictions, which are extensively stipulated in Section 22.1.2. The costs of compliance with

the provisions of the Electricity Sector Law and the licenses that have been given to the Company pursuant to it

are material and have a material effect over the Company and its outcomes. Failure to comply with the

provisions of the licenses, including the terms of the law applying to the Company, may lead to various

sanctions against the Company and officers therein (including criminal sanctions), to the point of cancellation or

suspension of the licenses, and may also constitute a material violation of stipulations in some of the financing

agreements to which the Company is a party. As of the date of the Prospectus, besides that which has been

stated in Section 22.1.3.6, the Company is materially complying with the conditions of the licenses that the have

been given to it and the Company has not received any notice that it is not complying with any of the terms of

its licenses.

In the past, pursuant to the provisions of the Electricity Sector Law and the orders issued pursuant to it, the

licenses of the Company have been extended from time to time, for periods of up to one year each time. As

elaborated in Section 22.1.2, the licenses of the Company will remain in effect through to January 1, 2013, and

may be extended for one additional period that would not exceed a year, that is, at the latest until January 1,

2014. An additional extension shall involve a legislation change.

Based on past experience, the Company estimates that its licenses will be extended for additional periods,

through to the date of implementation of the Structural Change, but there is no certainty that these will be

extended and under what conditions or which licenses will be granted to it after the implementation to the

financial change, to the extent implemented. The abstention from extension of the licenses of the Company or

changes in the terms of the licenses or other provisions that are prescribed in the Electricity Sector Law may

have a material adverse effect over its business activity and financial results.

29.2.5 Environmental protection

The activities of the Company are subject to laws and regulations on environmental protection issues, which

relate to various issues, such as air pollution, soil and water pollution, prevention of noise, non-ionizing

radiation (electrical and magnetic fields), dealing with hazardous materials and more. In recent years, the

standards applying to the activity of the Company, the supervision of environmental protection and the

enforcement of environmental standards have intensified. This trend, in the assessment of the Company, is

expected to continue and even intensify in the upcoming years. Failure to comply with the provisions of the law

and regulations in the field of environmental protection may expose the Company and its directors to various

sanctions, including financial sanctions and criminal proceedings.

The Company is studying the consequences of the proposed laws and regulations in the environmental

protection field, is acting to prevent or minimize the environmental risks that may occur during its activity, is

preparing for economic, legal and operational consequences that stem from the laws and regulations, and is

allocating money in its budgets for the purpose of compliance with the laws and regulations in the field of

environmental protection that apply to it and that are expected to apply to it. However, there is no certainty

that the costs that will be demanded of the Company with respect to the laws and regulations existing and

expected in the field of environmental protection will not exceed the amounts that have been allocated by the

Company for these purposes; however, the Company estimates, as of the time of this Prospectus, and based on

the provisions of the Electricity Sector Law, that the material costs that will be imposed on it as a result of new

regulatory requirements shall be covered within the electricity charge rate.

See Sections 7.1.3, 8.9, 9.11 and 21 for details on environmental protection instructions that apply to the

Company and their consequences for it.

29.2.6 Human capital

The occupation profile of the Company covers a wide range of activities and skills, from engineering and

planning, through operation and maintenance of the electricity generation and transmission array, to

bookkeeping and additional occupations and services. Inability to attract and retain skilled, suitable personnel

may impede the operational and managerial ability of the Company, primarily in the following fields: (A)

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demand for engineers with specific specialties in the field of electricity, in view of the difficulty to find a suitable

alternative to the veteran engineer generation in the Company, inter alia due to a shortage in curricula in some

of the relevant fields of specialty in the engineering schools in Israel and due to the wage offered to novice

engineers within the employment via a collective agreement, which is lower than the market prices; (B) the

departure of temporary workers who have great knowledge and experience leaves knowledge gaps and forms a

need for training replacement workers.

The Company copes with this risk through the following activities: an instructing array that is responsible for the

preparation of annual and multiannual instructing plans in accordance with the work plans and unique needs of

the units; personnel turnover that occurs within approved personnel authorizations; encouragement of internal

mobilization and retraining purposes; short, medium and long term personnel planning; backup of employees in

critical key functions; engineer training programs (pooling) and coaching and accompaniment of young

engineers by experienced engineers; implementation in the Company of the “Atid Naor” (enlightened future)

program that helps quality students from peripheral regions, who are studying for undergraduate degrees in

certain subjects that are relevant to the activity of the Company; instructing programs for making good

knowledge gaps, management of a central pool of candidates in critical-vital functions, active participation in

job fairs for identifying candidates for recruitment and arrangements for specialized personnel retention in

required vocations, inter alia payment of a monthly bonus in accordance with the approval of the competent

authorities by awarding tenure. See Section 14.5.1 for details on the instructing array.

29.2.7 Technical failures

The reliability of existing equipment at power stations, substations and switching stations may have an effect

over the reliability of the entire station. In the case of a failure in equipment, the station may have limited

generation capacity, transmission ability and transformation ability, and worse more, depart from the

generation and/or transmission cycle. The repair of large scale faults involves very high direct and indirect costs

of equipment, spare parts, work of specialists, contractors and Corporation employees, alternative fuel costs

and additional costs that stem from losses in the extension of the transmission lines.

In recent years, a large number of combined cycles have been incorporated into the generation array of the

Company. Combined cycle stations feature higher, more rapid attribution compared with other generation

units, and therefore need frequent maintenance actions; their number of severe faults is higher and their

planned lifetime shorter. In addition, while the “all risks” insurance of the Company usually covers severe faults

in equipment, the deductible in this insurance is high, and the processing of insurance claims, which in many

cases reach legal proceedings, takes along time.

Correct operation, continuous monitoring of data, attention to predicted maintenance and scheduled

maintenance at the intervals recommended and the purchase of reliable equipment, which is based on

recognized technologies are, according to the estimate of the Company, the most effective measures for

reducing the risk for technical failures.

Further to the discussions that have been held at the Company with respect to its financial situation, the crisis in

the supply of natural gas and the expected shortage in the generation ability of the Company in the years 2012-

2013, the Company decided to defer the execution of renovations at the coal power stations and change the

combined cycle operation regimes due to powering them by fuels that are alternatives to natural gas. These

actions, while necessary according to the Company’s assessment of its situation, may affect the reliability of the

generation units of the Company and cause the Company material costs and expenses.

29.2.8 Suppliers

See Section 7.10 for details on the risk that stems from the fact that most of the fuel that is purchased by the

Company is imported from abroad and acquired via agreements of limited validity, particularly in wartime and

during other disruptions.

In addition, the manner of transport and storage of the equipment, raw materials, including fuels that are used

by the Company, is of great importance, and all of these may be impaired as a result of various factors, including

faults in transport, limited access to ports, natural hazards and so on. The Company stores the equipment in

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accordance with the instructions of suppliers in order to avoid the storage of equipment and/or hazardous

materials in an uncontrolled manner and in accordance with procedures.

29.2.9 Health and safety

The occupation and activities of the Company at its various sites expose its employees to various occupational

safety and health hazards for which the Company may be exposed to claims due to physical injury or other

damages. The Company takes all of the measures for reduction and elimination of these risks, in accordance

with legislative and regulatory acts applying to it, and it is forming and acting according to safety instructions

and procedures that reflect and are stricter than the requirements of the legislation and regulations on

occupational safety and health that apply to it, for the purpose of safeguarding the wellbeing and health of its

employees. However, the Company cannot prevent completely this risk. It is noted that the Company has

insurance coverage for employees and for third parties.

29.2.10 Project risks

The Company has established a special purpose entity for the management of complex engineering projects for

the purpose of construction and maintenance of components in the electricity chain. The success of projects is

measured in three main indices: fulfillment of the project, the project schedule and the quality of the project,

while most of the risk is in deviation from the schedules and the intended budget for the project, which may

cause non-recognition of the full costs of the Company for the units that are under construction within the

project and an increase in the costs of the Company due to the operation of units as a substitute for the units

whose construction is being delayed. The Company is performing a process of risk management in projects using

tools and various methodologies.

29.3 Risks that are unique to the Company

29.3.1 Liquidity risks

In accordance with that which has been described in Section 28, in 2011 to the period of the Prospectus, the

level of liquidity of the Company has been affected by a number of events and developments, which have

caused a significant increase in the costs of fuels of the Company, including also the protracted disruptions in

the supply of gas from Egypt until the complete shutdown thereof, with the unilateral cancellation of the

agreement with EMG by the government gas companies in Egypt, and the significant decrease in the quantity of

gas that is supplied to the Company from the Yam Tethys gas reserve.

Although government support has been provided to the Company following its applications in 2011, which

allowed it to bridge the cash flow gap in that year, the Company expects that the circumstances that led to the

increase in the costs of fuels that impaired the liquidity level of the Company in 2011, including disruptions in

the supply of natural gas and high prices of alternative fuels, will continue and possibly intensify in 2012, and

probably in 2013 as well. The Company estimates that the high costs of fuels will eventually be covered in the

charge rate, but the time gap between the date on which the Company sustains such expenses and the date at

which the charge rate is updated and the Company compensated for these expenses, causes an adverse effect

on the cash flow status of the Company. In view of that which has been set forth above, the Company again

applied to the Ministry of Finance and the regulatory parties controlling it, for their assistance in coping with its

cash flow status, using the measures detailed in Section 28.6. The Company estimates that if these actions are

implemented, they will allow it to satisfy its cash flow needs in 2012 and also in 2013, at which time the supply

of natural gas from the Tamar Reserve will start.

However, there is no certainty that the government assistance actions and the steps that the Company will take

will materialize or succeed in full or in part, or that there will be no further deterioration in the environmental

conditions in which the Company operates (inter alia if and to extent that the quantity of natural gas from the

Yam Tethys reserves continues to decrease or if the Tamar gas reserve does not start operating at the scheduled

time), in which case there is no certainty that the steps that have been approved for the date of the Prospectus

will suffice to bridge the cash flow gap of the Corporation. In addition, these aid actions are exceptional and

there is no certainly that these or other actions will be taken in the future in the case of lack of liquidity.

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29.2.3 Causes for calling for immediate repayment and cross violation clauses in existing financing agreements of the

Company

Some of the financing agreements that the Company has executed include a clause for calling for immediate

repayment in the case of a “material adverse change” (hereinafter: “MAC Stipulation”) as this event is defined

in any such agreement. The enactment of the stipulation is subject to a test of reasonableness in some cases, is

down to the discretion of the lender in some of them, and this discretion is also subject to reasonableness in

some of the agreements. The volume of the financing agreements that include a MAC Stipulation comes to a

total of approximately NIS 16,804 million and approximately NIS 17,188 million, for March 31, 2012 and for the

date of the Prospectus, respectively.

Some of the financing agreements that the Company has executed include clauses whereby if the Company

violates its undertakings towards a certain lender and that lender demands immediate payment as a result of

that violation, this will lead to “cross violation”, whereby another lender, whose contract has not been violated,

has a right to demand immediate repayment (cross acceleration). These loans total as on March 31, 2012 at

approximately NIS 19,635 million and as of the date of the Prospectus at a NIS 20,567 million.

In addition, in some of the financing agreements, the existence of the right of a certain lender to demand

immediate repayment of the debt (that is, even if it has not called the debt for immediate repayment) grants a

right to another lender, whose agreement has not been violated, to demand immediate repayment (cross

default). These loans total as of March 31, 2012 and as of the date of the Prospectus at approximately NIS

17,782 million and approximately NIS 18,646 million, respectively. In the case of one of these events

materializing, it may have negative effects over the business affairs, business outcomes and the financial states

of the Company.


29.3.3 Transition to reporting in accordance with the international financial reporting standards (IFRS)

As described in Notes 2.A to the Annual Financial Statements, from 2008, the Company has been implementing

in its Financial Statements the international standards in accordance with the Government Companies

Regulations (Rules for Preparing Financial Statements of Israel Electric Corporation Ltd.) (Provisional Order),

2004, including special exclusions that are included in these regulations with respect to the Company

(retroactive from January 1, 2007). In addition, the said regulations state that the Company shall apply the IFRS

rules fully for the reporting period after the end of the Transition Period that has been extended multiple times

and as of this Prospectus will end on December 31, 2014.

The transition to full reporting in accordance with the IFRS may have a very material effect over the Financial

Statements of the Company, mainly in view of the fact that the charge rate is calculated according to index

adjusted figures while the presentation in the Financial Statements will be carried out according to nominal data

– which fact may cause attrition in the profitability and in the equity capital and as a result an adverse effect for

the financing costs of the Company. In addition, the Company will not be able to recognize regulation assets or

liabilities and as a result is likely to sustain material losses in its Financial Statements. See Section A.1.D of the

statement of the Board of Directors for further details.

The Company has applied to the relevant authorities in order for an adjustment to be made to the charge rate,

so that it will be adapted to the transition of the Company to nominal reporting in accordance with the full

international standards. It is further noted that although the full transition to reporting in accordance with the

international standards may cause a very major adverse effect over the outcomes and the financial status of the

Company, this is not expected to have a direct effect over the current cash flow of the Company that is received

in the electricity charge rate.

See Section 22.5.2.2 on the position of the Companies Authority whereby on January 1, 2005, the Company

must implement fully the IFRS rules and the fact that it is examining, inter alia, with appropriate State entities,

the option for implementing its professional position with respect to the decrease in fixed asset cost in

accordance with the accounting standards within the Government Companies Regulations (Rules for Preparing

Financial Statements of Israel Electric Corporation Ltd.) 2004.

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29.3.4 Submission of audited Financial Statements to profit centers

The Company as an essential service supplier is required, in accordance with the Electricity Sector Law and the

regulations promulgated thereunder to submit Financial Statements in a form as prescribed by the Ministers. In

addition, the licenses of the Company state, inter alia, that it must submit Financial Statements separately for

each area, for each activity and for each profit center, and submit consolidated statements with respect to its

activities according to all of the licenses that are in its possession. The Company manages its activities as

separate profit centers but does not submit audited Financial Statements to profit centers as required in most

of its licenses and does not submit audited annual Financial Statements separately for each area, for each

activity, for each generation unit or power station.

Within the discussions with respect to the Structural Changes in the Electricity Sector, a possible outline has

been formed between the representatives of the Ministry of Finance, the Labor Federation, the labor union and

the management whereby the Company will act through profit centers that will provide for full transparency

and assignment of costs in a model that will be determined by the character of activity of the Company.

Therefore, the Company estimates that this issue is supposed to be regulated as part of the Structural Change.

However, as set forth in Section 1.3, there is no certainty as to whether the Structural Change will be applied in

accordance with the Outline of Understandings. However, in the opinion of the management and the board of

directors of the Company, as long as the issue of reporting by profit centers is not revolved, there is exposure in

the form of steps or proceedings that may be taken against the Company for failure to fulfill the provisions set

forth in its licenses.

29.3.5 Competition

As of the date of the Prospectus, the Company generates, transmits and distributes almost all of the electricity

consumption in the State of Israel. However, as described in Section 6.5, the Government of Israel and the

Electricity Authority take steps to encourage the entry of private electricity producers into the Electricity Sector,

and in recent years have adopted a list of resolutions whose aim is to increase the share of private electricity

producers in the Electricity Sector in Israel. The Company estimates that these resolutions are expected to

cause, in the medium term, a significant increase in the installed generation volume of private producers, which

may also exceed the objective that the Government of Israel has set, including generation using renewable

energy.

The Company estimates that the increase in the generation volume of private consumers may have an effect

over the activity of the Company in each of its activity segments, as stipulated in Section 7.4.4. In general, the

Company estimates that the expected increase in the volume of activity of private electricity producers involves

financial risks to the Company, as it creates uncertainty with respect to the volume of electricity that the

Company will be required to generate in the future and a risk of churn of consumers.

The increase in the generation capacity in the national economy, whether by private electricity producers or by

the Company, requires an enlargement of the distribution and transmission system, and accordingly, may cause

additional operational and financial risks to the Company. In addition, the charge rate mechanism as prescribed

by the Electricity Authority, which is used for setting the charge rates of the Company today, include only a

certain amount of consideration for the increase in the magnitude of electricity generated by private producers.

Upon the entry of private producers to significant volumes, the Electricity Authority established principles for

the recognition of costs for an essential service suppliers for agreements for purchasing electricity190

, but there

is no full certainty that the charge rates will be updated in accordance with the estimate of the Company, and to

the extent that they are not updated as above, this may lead to an adverse effect over the outcomes of the

Company.

190

Decision No. 0 of Meeting No. 369 dated April 23, 2012 on the matter of: “Principles for recognition of costs for an essential service

provider for agreements for the purchase of electricity”. Decision No. 1 of Meeting No. 304 dated September 13, 2010, on the matter of: “General principles for recognition of costs for an essential service provider for agreements for the purchase of electricity”.

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29.3.6 Planning and execution of the Development Plan in the generation, transmission, transformation and delivery

array

In accordance with the provisions of the Electricity Sector Law and its regulations its licenses, and as an

“essential service supplier”, the Company is required to submit for the approval of the Minister a Development

Plan for the purpose of its activity and to fulfill them and their conditions. The failure of the Company to comply

with the Development Plan may expose the Company to criminal sanctions and lead to the cancellation of some

or all of the licenses that have been issued to it.

The future needs of the Electricity Sector in Israel may change in accordance with a great number of

parameters, including future demand for electricity, climatic changes, developments of technologies and

generation measures, different fuels that will be supplied to the Company, the geopolitical situation and the

entry of private energy producers to the Electricity Sector. Accordingly, the Company is required to predict

future parameters at the time of execution of the Development Plan. To the extent that in actual fact, the

parameters for prediction behave in a manner that differs materially from the manner in which they are

predicted by the Company, the Development Plans of the Company may fail to match completely the needs of

the Electricity Sector and impair the ability of the Company to supply the needs of the Electricity Sector,

resulting from which they may impair the Company and its results and its ability to fulfill its undertakings as an

“essential service supplier”.

The execution of the Development Plan and the construction of new facilities by the Company require the

Company to receive a large number of approvals, including construction permits, business licenses,

environmental approvals and additional approvals – whose receipt is uncertain, and to the extent that they are

received, there is no certainty that they will be received in time and without delays. In addition, there is no

certainty that the Company will succeed in meeting the schedule or budget that have been prescribed for the

execution of the Development Plan.

The execution of the Development Plan requires material capital investments, as stipulated in Sections 7.7.6 and

7.7.7. In the past, and the Company expects this to be the case in the future too, the Development Plans were

financed, partly or fully, by taking loans from domestic and foreign financial institutions and from raising of debt

in public or private issues, in Israel or overseas. Accordingly, to the extent that the Company is unable to raise

debt from external sources for the purpose of executing the Development Plan, there is no certainty with

respect to its ability to execute the Development Plan.

29.3.7 Structural change

As described in Section 1.3.1, the purpose of the Electricity Sector Law is to regulate the activity in the Electricity

Sector to the benefit of the public, while forming conditions for competition in the Electricity Sector in Israel.

Section 1.3 above shows an outline for structural change in the Electricity Sector, which is reflected by the

provisions of the Electricity Sector Law, Government resolutions with respect to the implementation of the

reform in the Electricity Sector were presented, and an Outline of Understandings that was formed in 2010

between the Company, the representatives of the Ministry of Finance, the Labor Federation and the labor union

of the Company with respect to a structural change in the Company was presented. As has been elaborated in

Section 1.3, this outline has not yet been examined or approved by the competent government agencies and

does not correspond with the provisions of the Electricity Sector Law.

As of the date of the Prospectus, the Company generates, transmits, distributes and supplies almost all of the

electricity that is consumer in the Israeli economy, and therefore a structural change in the electricity sector in

accordance with the Electricity Sector Law may weaken the monopolistic status of the Company in the

electricity sector in one or more of these activities.

If the provisions of the Electricity Sector Law are not changed (including the need to implement the Outline of

Understandings) and/or the agreements required for the implementation of the Outline of Understandings are

not received, then it is possible that the Company will have to implement the Structural Change as it is laid

down in the Electricity Sector Law, whether in the way in which the Company understands that the Electricity

Sector Law can be implemented, as set forth in Section 1.3.2.5, or in another outline.

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As of the date of the Prospectus, there is no certainty with respect to the final format of the Structural Change,

its time of implementation or its consequences for the Company, its business affairs or outcomes.

29.3.8 Asset arrangement

As described in Section 15.3, Section 62 of the Electricity Sector Law sets forth various provisions with respect to

certain rights and assets which were held by the Company upon the expiry of the franchises which were granted

to it by virtue of the Electricity Franchises Ordinance, with respect to part of which an arrangement is to be

made between the State and the Company which shall govern the purchase thereof from the State according to

the value of the assets on the date of conferral of the rights and the assets. As at the date of the Prospectus, no

provisions have been established in the matter.

As described in Section 15.3, in February 2000, the Company received a letter from the Deputy Commissioner of

Budgets in the Ministry of Finance, in which he states that within the framework of the Government team which

has been appointed to handle the subject, the State has formulated an opinion, which includes an economic and

accounting opinion and a legal opinion on behalf of the State (which were attached to his letter to the

Company) with respect to the asset arrangement. The opinion by the State further stated that part of the assets

were in the possession of the State on the date on which the Electricity Sector Law took effect, with all of the

implications which result therefrom. The letter stated that according to the content of the opinion by the State,

it appears that the implementation of the asset arrangement pursuant to the Electricity Sector Law may have a

material effect on the Company.

In the estimation of the Company, based on the opinion of its legal advisors, the asset arrangement should not

have had and does not have a material effect on the Company or on its monetary results or on its financial

situation. At the same time, this point is open to determination by the Ministers. To the best of the Company's

knowledge, as at the date of the Prospectus, the Ministers have not yet formulated any decisions whatsoever

on the subject of the assets. Accordingly, the Company has no possibility of estimating what the actual bottom

line will be with respect to the asset arrangement, which opinion will be adopted – the opinion by the State or

another interpretation, what the implications of the asset arrangement will be (if any) for the Company, which

assets will be included in the asset arrangement, and which method will be used for calculating the value of the

assets; furthermore, it is not in any way certain that the implementation of the asset arrangement, should it be

implemented, and the manner and method in which it will be implemented, will not have a material effect on

the Company's business, the results of its activity or its financial situation. Because the asset arrangement is

subject, inter alia, to determination by the Ministers, it is possible that the Company will eventually be required

to pay material amounts with respect to the assets to which it will apply. In addition, with respect to part of the

assets, there is no certainty as to which monetary or other arrangement shall apply with respect thereto, or if

they will remain in the possession of the Company or will be returned to the State. The Company further

estimates that this subject will be arranged within the framework of the discussions with respect to the

Structural Change. See Section 15.3 for details on the Asset Arrangement. See Section 1.3 for details on the

Structural Change.

29.3.9 Raising capital

In the matter of the Company’s ability to carry out an issue to the public in Israel which is not backed in its

entirety by a State Guarantee, see the notice by the staff of the Israel Securities Authority to the Company,

pursuant to which, insofar as the Company intends to issue Bonds which are not secured in their entirety by

means of a Guarantee by the State of Israel, as long as uncertainties exist in the context of the effects of the

Asset Arrangement and the Structural Change on the Company, the Company shall be required to provide

greater detail in its description of the economic exposures with respect to the implications of these subjects for

the Company, in a manner which satisfies the staff of the Israel Securities Authority with respect to the format

of the disclosure. For details with respect to the Asset Arrangement, see Sections 15.3 and 29.3.8; for details

with respect to the Structural Change, see Sections 1.3 and 29.3.7.

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29.3.10 Legal

As of the time of this Prospectus, seven petitions (two of which are being heard consolidated) are pending

against the Company for recognition of actions as class actions in the total of approximately NIS 20.06 billion,

and additional claims are pending, as stipulated in Section 24 above in Note 24 to the Financial Statements.

Based on the expert opinion of its legal counsel, the Company has no made out for these class actions any

provision in the Financial Statements, but to the extent that these petitions are accepted in part or in full, this

may have a material adverse effect over the Company.

29.3.11 Credit risks

The Company provides its customers credit and as a result of this, the Company is exposed to a risk of monetary

loss as a result of insolvency or a decrease in the credit quality of debtors or parties to contracts. The Company

is acting on the issue of collection enforcement using “red light” information191

with respect to deterioration in

the business status of its strategic customers192

, which is received on a regular basis from the business

information companies and is transferred to the districts of the Company.

29.3.12 Labor relations

The labor relations in the Company are based mainly on the principles that are prescribed in the labor laws. The

labor rules and the procedures promulgated thereunder constitute the main normative source with regard to

hiring at the Company, termination of employment, employment conditions and labor relations. The labor rules,

whose legal status is a bilateral collective arrangement, are valid until December 31, 2015.

The Company acts to maintain good labor relations, while holding an ongoing dialog with the labor union and

observing the implementation of the set of employment agreements at the Company. A change or failure in the

field of labor relations, including due to relevant directions or decisions of regulators, including the

Commissioner of Rages, may be expressed in a labor dispute, which may lead to employee sanctions to the

point of a long, all-out strike. Although in the past no material impairment in the supply of electricity has

resulted, in the future, all out or protracted sanctions or strikes may impair the regular supply of electricity to

the customers of the Company, the revenues, business outcomes, image and reputation of the Company.

The Company is holding a dialog with the New General Labor Federation and with the authorities of the State in

for changes in the labor relations in the Company, including within the Structural Change, organizational

changes and cost saving plans will be conducted with the consent and approval of the relevant entities. To the

extent that these changes are implemented without the consent of the labor union, this may lead to a labor

dispute, which may affect the Company and its activity.

The Company estimates that the cost of retirement of employees, whether within the implementation of the

Structural Change, to the extent implemented, or within the implementation of the multi-year plan for

organizational change and cost saving, which the Board of Directors has decided to have executed in any case,

may be material.

29.3.13 Liabilities for pension fund

The deposits into the pension fund of the Company, for first generation and second generation employees who

are insured by budgetary pension, are based on a forecast of the expected cash flows in the future and a

number of actuarial assumptions (the pension of third generation employees is an accumulating pension). There

is a risk that the actual pension liabilities of the Company will differ from those that are predicted by it, based on

which the Company is making the deposits into the pension fund; therefore, to the extent that the deposits and

their proceeds do not cover the liabilities, the Company may be required to make additional deposits for the

191

Red light [information] – the Company receives credit information – such as warnings about strategic customers on various

financial issues, including bankruptcy and blocked accounts – on businesses, companies and entities from the information company BDI (Business Data Israel).

192 The Company defines a strategic customer as a customer that has a site that consumes more than 1 million kWh per year or a

customer that has a number of sites that in total consume more than 5 million kWh per year.

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pension period, to amounts that may be material for the Company. In addition, the actuarial model for the

calculation of the deposits into the pension fund may change in the future, inter alia in accordance with changes

in the life expectancy, on regulatory issues and in the economic climate and changes in the actuarial model as

set forth above may require the Company to make additional deposits, to significant amounts, into the pension

fund.

In addition, the investment policy of the pension fund, of money that is deposited in it by the Company, as well

as differences between the lifetime and return of Government bonds in which most of the assets of the pension

fund are invested and the lifetime and return of linked Government bonds by which the pension liabilities of the

Company are calculated, may lead to the total assets of the fund being lower than the liabilities of the fund to

the pensioners of the Company, in which case the Company will be required to make good the gap between the

assets and the liabilities of the fund, to amounts that may be significant.

29.3.14 Planning of maintenance and reserve management

In view of the fact that the Electricity Sector in the State of Israel is an isolated one (see Section 29.1.2) and the

fact that the level of electricity reserves of the Company and the State is not high, there is a risk of shortage in

generation ability, mainly during times of peak demand as a result of extreme weather that is not forecast,

primarily when some of the generation units of the Company fail, are down for renovation or maintenance and

are unavailable. On the other hand, abstention from the shutdown of the generation units of the Company for

maintenance and renovation, due to fear with respect to the electricity reserve, may impair the reliability of the

generation array of the Company.

The Company operates to minimize the damage as a result of these risks using a specialized procedure for the

shutdown of units for renovations and formation of an annual work plan for renovations of units. This plan takes

into account on the one hand the unavailability of units during the scheduled renovation downtime and on the

other hand the predicted consumption and required reserve.

The various events that have occurred recently, which are detailed in Section 28.3, have led to a significant

decrease in the generation reserves of the Company, and may impede the satisfaction of all amends for

electricity from the Company in 2012.

The checks of the Company, as at the date of the Prospectus, reveal that in the 2012 summer months the

available generation ability of the Company, considering an expected fault rate of 5%, is expected to exceed the

peak demands for electricity by approximately one% (1%) only and that if it is not possible to supply gas at all

and/or in the case of a fault in one of the generation units of the Company (beyond the expected fault rate of

5% as set forth) and/or if extreme weather conditions occur that lead to an increase in the demand for

electricity relative to the expected peak demands, the available generation capacity of the Company may be

lower than the peak demands for electricity, in which case the Company will not be able to satisfy all of the

demand for electricity in the peak hours, and it will have to make scheduled power cuts for consumers, and in

extreme cases for several hours as well.

See Section 6.8 for details on steps that the Company has taken to cope with the difficulty in meeting the peak

demands during the summer of 2012.

The failure to fulfill the full demand for electricity may, in circumstances in which the non-fulfillment of these

demands may be attributed to failure of the Company to fulfill its commitments in accordance with its licenses

or provisions of law, constitute a violation of these commitments and adversely affect the Company, its

outcomes and public image.

29.3.15 Failures in the transmission array

Natural disasters, fires near lines, security events, human errors, disruptions and breaches in information

systems and loss of measures of remote command and control may obstruct the transmission array of the

Company. Failures in the transmission system may sometimes cause chain reactions that will incapacitate power

stations from regular operation and develop into blackout events, which are not expected to cause the

Company material losses but may harm its image.

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29.3.16 Risks to reputation

The image surveys that have been conducted over the years indicate that the image of the Company in the

public mind is perceived as medium to low. The low image may intensify, according to the estimate of the

Company, mainly in circumstances of a crisis in the national economy or protest against the cost of living in the

State of Israel, of the kind that has occurred since the summer of 2011 and that was directed against the

increase in the fuel and electricity prices in Israel. To help consumers, the Electricity Authority updated in its

resolution dated March 2012 the electricity charge rate by a three year mechanism for 2012-2014, spreading

the cost of the fuels in a mechanism that would allow for checking of the increase in the charge rate for the

public. The charge rate spread has relieved the cash flow burden sustained by the Company, to a certain extent,

because of the need to purchase alternative and more expensive fuels due to the lack of Egyptian gas and the

significant reduction in the natural gas supply from the Yam Tethys partnership, but has not prevented the cash

flow difficulty of the Company, alongside the excepted difficulties of the Company to satisfy all of the demand

for electricity in the upcoming summer. All of these scenarios may further endanger the reputation of the

Company and intensify the public’s attitudes towards it.

30. Additional details in accordance with circular 2011-5-1 of the Government Companies Authority

30.1 Money that the Company has received from the State

See Section 8.2.1.3 in Chapter 8 of the Prospectus for details on the loans that the Company has received from the

state.

30.2 Disclosure with respect to held corporations

Details with respect to held corporations follow:

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Name of the Company

Country and place of incorporation

Rights of the Company in the Company (including means and control, asset rights, rights to distribution of profits and details, to the best of the Company’s knowledge, with respect to other holders of the held corporation and their rights)

Names of the officers and other representatives who are serving or have served on behalf of the Company in the Company in 2011 and the compensation from the held corporation for this service

Material agreements between the Company and the held corporation, including guarantees to third parties for securing the liabilities of the Company

Dates of general meetings during the period of the Prospectus, the issues discussed in them and the resolutions adopted, manner of voting by the Company and the party that decided as to the manner of voting

Jordan Properties Company Ltd.

Israel Fully owned (99.98%) subsidiary193

. The Company holds 100% of the rights that are attached to the shares, including rights to receive a dividend, voting rights and the right to appoint functionaries and directors by the Company, subject to the provisions of the Government Companies Law.

Adv. Dudu Yahav, the legal adviser and secretary of the Company, serves as the legal adviser and secretary of the held corporation. He receives no additional compensation for this service

194.

None. No general meetings were held during 2011.

Migrashei Hakablanim Ltd.

Israel A fully owned (100%) subsidiary195

. The Company is held at 100% of rights attached to shares, including rights to receive a dividend, voting rights and the right to appoint functionaries and directors by the Company, subject to the provisions of the Government Companies Law.

Adv. Dudu Yahav, the legal adviser and secretary of the Company, serves as the legal adviser and secretary of the held corporation. He receives no additional compensation for this service as stated

196.

There is no material agreement for the Company. Migrashei Hakablanim Ltd. has a right of lease from the Tel Aviv Municipal Council for a plot in Anielewicz Street, on which there is an office building that is being used by the Company. In exchange for a right of use of the property, the Corporation bears all of the costs related to the maintenance of the property, including taxes and fees.

No general meetings were held during 2011.

193

66 ordinary A shares are held by officers in trust for the Company, and an additional ordinary A share is held by the trustees of the estate of Pinchas Rothenberg. 194

As of the date of the Prospectus, the Company is working on obtaining approval to appoint directors on the part of the held company. 195

630 deferred shares are held by officers in trust for the Company. 196

As of the date of the Prospectus, the Company is working to obtain approval for the appointment of directors on its part in the held company.

F-258

Name of the Company






The National Coal Supply Company Ltd.

Israel Fully (100%) owned subsidiary. The Company holds 100% of the rights attached to shares, including rights to receive a dividend, voting rights and the right to appoint functionaries and directors by the Company, subject to the provisions of the Government Companies Law. Out of the nine members of the Board of Directors, six are representatives of the Company and three of the State.

Yaakov Hain, the Assistant CEO and Acting Director of the Production and Transmission Division, serves as the chairman of the Board of Directors of the held company. He does not receive additional compensation for this service. Besides this, directors from among the employees of the Company serve in the Coal Corporation, including: Shakib Gadban, Tali Danieli, Efraim Osher and Galit Globus. They receive no additional compensation for this service. In addition, from January 2012, Adv. Shai Almalh, an employee of the Company, has been serving as a legal adviser of the held company. Before this time, Adv. David Shawinsky served as a legal adviser. The employees did not receive and are not receiving additional compensation for this service.

The Company purchases all of the coal that it requires through the National Coal Supply Company Ltd., in accordance with an agreement that was signed between the parties in July 2004 for the purchase of coal and its supply to the power stations of the company consuming coal. See Section 7.10.6 for details on the agreement.

June 12, 2012 – ordinary general annual meeting – approval of the Financial Statements as at December 31, 2011, approval of the distribution of a dividend, approval of appointment of the Haikin, Cohen, Rubin & Co. offices as the auditing accountant of the company starting on January 1, 2012. December 13, 2011 – ordinary general annual meeting – approval of appointment of the Haikin, Cohen, Rubin and Co. offices as the auditing accountant of the Company. June 15, 2011 – ordinary annual general meeting – approval of Financial Statements for December 31, 2010; approval of distribution of dividend; approval of appointment of the Horowitz, Idan, Sabo, Tevet, Cohen, Tabach office as the auditing accountant of the Company from January 1, 2011.

F-259

Name of the Company






The Advanced Studies Fund of Israel Electric Corporation Ltd., Employees Ltd.

Israel The Company holds 50% of the management shares and the rights to appoint directors, without rights for participation in profits. 50% remain held as follows: the Mutual Help Society of Israel Electric Corporation Employees in the Southern Region (Final Holder) (25%), the Society of Israel Electric Corporation Workers in the Northern Region (RA) (Final Holder) 16.667%) and the Savings and Mutual Help Fund of Israel Electric Corporation Workers in Jerusalem Ltd. (Final Holder) (8.333%)

Besides this, in the Coal Corporation directors from serve among the employees of the Company serving for it: Dvir Yosef (pensioner), Eckstein Menashe, Waldman Mordechai Alexander Zayad and Israel Movshovitz. They receive no compensation for this service. Adv. Iris Joachims, an employee of the Company, serves as a legal adviser of the held company. she does not receive additional compensation for this service. Gur Achiezra, an employee of the Company, serves as the Internal Auditor of the held company. He does not receive additional compensation for this service.

None No general meetings were held during 2011

F-260

Name of the Company






The Energy Resource Development Company Ltd.

Israel The Company holds 40.00% of the shares and capital rights and 30.77% of the rights to appoint directors. The remainder of the rights are held equally by Israel Chemicals Ltd. and Refineries Ltd. The State of Israel holds one foundation share, which grants it certain rights of management and appointment of directors

To the best of the Company’s knowledge and as of the date of the Prospectus, the company is inactive.

To the best of the Company’s knowledge and as of the date of the Prospectus, the company is inactive. During 2001, the activity of ERD was discontinued due to a decision of the shareholders to stop the transfer of money for its activity. In this context, an agreement was signed between the shareholders, defining the form of termination of the service of ERD and the sale of its assets.

No general meetings were held during 2011.

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31. Details with respect to subsidiaries and related companies of the Company

31.1 The details on subsidiaries and related companies of the Company for March 31, 2012 are as follows197

:

Name of subsidiary /

affiliated company

Share class

Number of shares held

and their par value

Holding rate of the Company (%) Thousands NIS

In security

In capital

In voting

In authority to appoint directors

Adjusted cost

Adjusted balance

sheet value

Subsidiaries

1) Jordan Properties Ltd.

Deferred 300,000

of NIS 0.0005 each

100.00 12.00 73.17 73.17

Ordinary A 110,000 *

of NIS 0.0001 each

99.98 87.99 26.82 26.82 - -

2) Migrashei

Hakablanim Ltd.

Senior 2,000 630** 100.00

100.00 100.00

76.05 23.95

100.00

100.00 0.00

100.00

100.00 0.00

100.00 - -

Deferred of NIS 0.0001

each

3) National Coal

Supply Company Ltd.

Ordinary A

909,999 of NIS 1 each

100.00 100.00 100.00 100.00 55,000198

55,000199

4) The Study Fund of Israel Electric Corporation Ltd. *** Workers

Management A 12

of NIS 1 each 50.00 50.00 50.00 50.00 - -

Affiliated company

The Energy

Resources

Development

Company Ltd.

Ordinary

3,467,790

of NIS 0.1

each

49.99 49.99 49.99 30.77 - -

* Of which 66 shares are held by officers in trust for the Company. ** Held by officers in trust for the Company. *** The Company holds 50% of the management shares and rights to appoint directors, without rights to share profits.

For further details see the section “Investments in held companies” in the Annual Financial Statements and see

Notes 1I and 2E and note 13 in the Annual Financial Statements relating to “investments in held and included

companies” and “related parties and stakeholders”, respectively.

197

Subsidiaries and related companies are not traded on the Stock Exchange. 198

NIS 47,537 thousand as of December 31, 2011 and NIS 55,000 thousand as of December 31, 2011, adjusted to the March 2012

index. 199

NIS 47,537 thousand as of December 31, 2011 and NIS 55,000 thousand as of December 31, 2011, adjusted to the March 2012

index.

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31.2 The Company has no balance of loans or guarantees that it extended to the held companies listed in the table above.

For details on the names of the holders, to the best of the Company’s knowledge and its directors, on the date of

the prospectus, in more than twenty-five percent (25%) of the issued capital stuck or voting right or the authority

to appoint directors in a subsidiary of the Company and in its related company, see Section 30.

31.3 A general description of the main occupations and details of the profit (loss) of subsidiaries and related

companies (in NIS million) follows:

Name of the company

Main occupation of the company

in the years 2010 and 2011 and up to the

date of the Prospectus

Results of activity of the held companies as included in their Financial Statements





Profit (loss)

before tax

Profit (loss)

after tax

Profit (loss)

before tax

Profit (loss)

after tax

Profit (loss)

before tax

Profit (loss)

after tax

Profit (loss)

before tax

Profit (loss)

after tax

Subsidiaries

1) Jordan Properties Ltd.

Inactive -- -- -- -- -- -- -- --

2) Migrashei Hakablanim Ltd.

Inactive -- -- -- -- -- -- -- --

3) National Coal Supply Company Ltd.

Coal supply 4 3 6 5 25 19 27 21

4) The Study Fund of Israel Electric Corporation Ltd. *** Workers

Study fund -- -- -- -- (19.6) (19.6) 46.6 46.6

Affiliated company The Energy Resources Development Company Ltd.

Inactive -- -- -- -- -- -- -- --

31.4 Details on a dividend, interest and management fees that the Company received or is entitled to receive from

subsidiaries and related companies (in NIS million) follow:

Name of the Company

January to March 2012 For year ended on

December 31, 2011 For year ended on

December 31, 2010

Div

ide

nd

Inte

rest

Man

age

me

nt

fee

s

Div

ide

nd

Inte

rest

Man

age

me

nt

fee

s

Div

ide

nd

Inte

rest

Man

age

me

nt

fee

s

National Coal Supply Company

Ltd. -- -- -- 12 -- -- 13 -- --

263F-

32 The Report of the Board of Directors for the Year ended on December 31, 2011. The Board of Directors of the Israel Electric Corporation (the “Company") hereby presents the Directors’ Report on the status of the corporation's affairs for the year ending December 31, 2011 ("The Report Period" or "The Report Year"), according to the directives of the Securities Regulations (Periodic and Immediate Reports) – 1970 ("The Securities Regulations") and the provisions of circulars of the Government Companies Authority, including the "Financial Statements 2011‐5‐1" circular ("Financial Statements Circular"). a. Explanations of the Board of Directors on the Business Condition of the Corporation 1. Brief Description of the Company and its Business Environment a) General The Company acts as one combined and coordinated system that deals in supplying electricity to

consumers, starting from the electricity generation stage through transmission, distribution and supply of and commerce in electricity, all in accordance with licenses granted to each type of activity, which are effective on the prospectus date up to January 1, 2013. The Company also deals in the construction of the infrastructure required for these activities. Company operations include three main fields: Generation, transmission and transformation of electricity and its distribution. The Company provides electricity to most of the State’s consumers of electricity, and customer distribution is such that it is not dependent on any of them. The Company is owned by the State of Israel which holds about 99.85% of its share capital, therefore the Company and its operations are subject, inter alia, to the directives of the Government Companies Law – 1975 (the “Government Companies Law”). As of March 5, 1996, the Company has operated according to the Electricity Sector Law – 1996 (the “Electricity Sector Law”) and its regulations. The Electricity Sector Law replaced the Electricity Concessions Order and the Public Utilities Authority ‐ Electricity (the “Electricity Authority") was founded according to this ordinance. The duties of the Electricity Authority are, among others, to set electricity rates and define rate update processes, to award licenses and to supervise fulfillment of instructions specified in the licenses. For additional details on the Electricity Sector Law, see sections 3.1 and 22 of Chapter 6 in the prospectus.

b. Condensed Review of the Changes In the Business Environment 1) Events during the report period which led to a considerable cash flow load on the Company and actions and steps taken to resolve it: a. Several events, which occurred during the report period in the business environment of the Company,

caused a considerable increase in the fuel costs and led to a material cash flow burden on the Company. The main events are: (1) From February 2011, to the date of this report, a series of explosions occurred in the natural gas

pipeline from Egypt. These explosions caused repeated disruptions in the gas supply from Egypt, up to a complete stop of the gas supply for prolonged periods, which actually stopped natural gas supply from Egypt for about two thirds of 2011 and let to uncertainty regarding future gas supply (full or partial) from Egypt to the Company.

(2) According to notices received from the natural gas reserve partnership of the "Yam Thetis" project, the capacity to extract gas from this reserve decreased considerably during October, December 2011, February and May 2012, and commencing from the date of the notices, the natural gas supply will decrease to one fifth of the maximum contractual quantity.

(3) In October 2011, the Ministry of Energy and Water limited the consumption of natural gas from the Yam Thetis reserve, to ensure that the remaining gas in the reserve will be used efficiently until the date on which the "Tamar" gas reserve is expected to become operational (July 2013).

(4) As a result of the aforesaid and as an alternative to natural gas, the Company had to increase the use of diesel oil (and not crude), which causes less pollution than crude, but is a significantly more expensive fuel than crude, according to the lateral order of December 2010, published by the Ministry of Environmental Protection, requiring the use of diesel oil before using crude.

The aforementioned events required the Company to generate electricity using a fuels mix that is considerably costlier than planned. Although fuels costs will eventually be covered by the rate, the time gap between the date on which the Company incurs the said expenses of the expensive fuels mix and the update date of the electricity rate causes gaps in the Company's cash flows.

For details on the effect of the aforementioned events and the cash flows burden of the Company in the report period, see the Immediate Reports of the Company1

1 Immediate Report of the Company on July 12, 2011 (Ref. No. 2011‐01‐210279); Immediate Report on October 5, 2011 (Ref. No. 2011‐01‐292275; Immediate Report on November 17, 2011 (Ref. No. 2011‐01‐3311‐1).

264F-

b. In light of the aforementioned events, the Company addressed the Government Ministries and the regulators that regulate its activity requesting them to take steps to address it's the cash flow needs. As a result, several steps were taken in recent months by Government entities. The cumulative effect of these steps helped the Company to bridge the gaps in its cash flows in 2011: (1) In August, 2011, the Minister of Finance signed a Customs Tariff, Exemptions and Purchase Tax

on Goods Order (Temporary Order No. 10) – 2011 ("Purchase Tax Order"). The order stipulates that, starting from February 1, 2011 and up to December 31, 2011, purchase tax on imported diesel oil will be 31% of the amount of the purchase tax applied to imported diesel oil on the eve of the said amendment, subject to fulfilling the conditions detailed in the Purchase Tax Order, detailed in the immediate report of the Company on August 8, 2011 (Ref. No, 2011‐01‐235884). In addition, the excise tax was reduced at an identical rate, up to the end of 2011, with the approval of the Finance Committee of the Knesset. The Company estimates the discount deriving from diesel oil purchases in 2011 at approximately NIS 1.5 billion.

(2) In August, 2011, the Company received the approval of the Ministry of Environmental Protection for changing the operational order of the generation systems with backup fuel, which enables the operation of steam units in the Eshkol power station with crude, prior to operating other generation units with diesel oil, up to the end of 2011 or until the failure in the supply of the Egyptian gas is corrected, whichever is earliest. From January 2012 and up to April 2012, additional approvals were received from the Ministry of Environmental Protection on this subject. See details in section d 2 – Events after the Statement of Financial Position Date.

(3) In August, 2011, the Electricity Authority decided to update the recognized costs to the Company in the annual update, and also update recognized costs of the Company arising from buying electricity from private producers and the regulations applied to the purchase by the economy, retroactively from April 1, 2011. This update increased the average consumer rate by 9.89%, compared to the previous rates which became effective on March 22, 2011. See details in the immediate report of the Company on August 9, 2011 (Ref. No. 2011‐01‐236385) and section 7.1.3.2 in Chapter 6 of the prospectus.

(4) In November, 2011, the Company received the approval of the Electricity Authority to delay the Company's obligation to deposit funds in the dedicated account for the emergency plan (phase B) ("The Dedicated Account for the Emergency Plan"). The postponement was subjected to capital raising by the Company in a total amount of NIS 1 billion up to December 15, 2011. This condition was fulfilled, after the Company entered into a loan agreement on December 15, 2011, in the amount of NIS 1 billion with an Israeli banking corporation.

(5) In October, 2011, the Electricity Authority decided to update the electricity rate again, at an average rate of 4.72%. See details in section 7.1.3.2 in Chapter 6 of the prospectus.

(6) The Company applied to the National Coal Supply Corporation Ltd., (the “Coal Company”) (its fully held subsidiary), through which the Company buys coal for electricity generation purposes and concluded to postpone payments of approximately NIS 142 million, with respect to the coal that was supplied to the Company in November 2011. This amount was repaid to the Coal Company in two equal payments in February, where the interest was paid in one payment, in March 2012.

c. These steps helped to increase the cash flows of the Company significantly in 2011 and solved the cash flow squeeze of the Company in that year. However, these steps were a temporary solution, and in some cases, only a partial solution when considering 2012, mainly due to the continued disruptions in the natural gas supply from Egypt and the added significant decrease in gas supply from the Yam Thetis reserve, which decreased to about one fifth of the maximum contractual quantity from May.

d. Consequently, the Company applied again to the Ministry of Finance, requesting its support in contending with the cash flow condition of the Company. Accordingly, a possible outline of assistance to the Company was discussed for contending with the cash flow shortage which it experiences due to the natural gas crisis, while gradually increasing the electricity rates.

According to the aforementioned outline, the Government acted after the report date, to assist the cash flow condition of the Company. See details of the aforesaid actions and of other events which occurred after the report date that impacted the cash flow condition of the Company in the disclosure in section d 2 in this report.

265F-

2) Tamar Agreement In December 2011 and in February 2012, the Company's Board of Directors approved the terms of the

agreement with the partnerships in the "Tamar" natural gas field ("Tamar Field" and "Tamar Partnership", respectively) on the purchase of natural gas from the Tamar Partnership ("Tamar Agreement"), subject to certain conditions. The "Tamar" agreement was entered on March 14, 2012 and is subject to the approval of the Electricity Authority, the Anti Trust Limitations Commissioner, the Government Companies Authority and, if required, the Government. For details of the conditions of the "Tamar" agreement and the status of the approvals it requires, see section 7.10.9 in Chapter 6 of the prospectus and Note 24 to the Annual Financial Statements.

The Company's Board of Directors attributes high importance to the Tamar Agreement mainly due to the current shortage in natural gas and its implications on the electricity generation costs and consequently the cash flows of the Company. The Company's management expects that the delivery of natural gas from Tamar field, expected to start in 2013, will increase the use of natural gas by the Company and reduce the fuel costs incurred by the Company.

For details of the decision of the Electricity Authority on the principles for recognition of costs due to agreements for the purchase of natural gas and the decision of the Anti‐Trust Commissioners on exempting the Company from obtaining an approval for a restriction agreement, see section d 2g.

3) Entering Special Collective Salary Agreements On January 31, 2011, two special collective salary agreements were entered into between the

Company and the national employees organization and the Histadrut, with the approval of the authorized parties: One agreement granted a salary supplement to the employees, at the approximate rate of 5.75%, paid in three stages up to January 2012 and the second binds the change in the pension update mechanism of those insured in the budgetary pension arrangement to linkage to the CPI. For more details, see section 10.6.7.4 in chapter 6 of the prospectus and also Note 19f to the annual Financial Statements.

4) Construction of Three Steam Additions On March 17, 2011, the Board of Directors approved actions of the Management of the Company for

constructing three steam additions to the new power stations in Hagit, Eshkol and Ramat Hovav under stage B of the emergency plan. For more details, see Note 11 j2 to the Annual Financial Statements.

5) Effect of the Financial Crisis in the Euro Bloc on the Company The financial crisis that spread during 2011 to many countries in the Euro Bloc, that affected the

international credit rating of leading countries in the Euro Bloc, including France, Spain, Italy, Ireland and Greece, and caused political changes in several countries because of their financial condition.

The Company's Management examined the current effect of the financial crisis in the Euro Bloc on different aspects of its activity and found that it is expressed by: ‐ Fewer banks willing to grant a loan to the Company. ‐ The term of the financial offers of the banks is shorter. ‐ Fund raising costs through banks increased and the banks reserve the right to change costs in the

event of fluctuations in the financial markets.

The Company's liabilities in Euro amount to approximately NIS 2.7 billion. These transactions are hedged within the actions taken to hedge exchange rate risks and interest risks.

Therefore, this crisis did not have a negative effect on the activity of the Company in 2011. See more details on the changes in the business environment of the Company in Note 1 f to the Annual

Financial Statements.

c. Targets and Strategy ‐ For details of the targets and strategy, see section 26 in Chapter 6 of the

prospectus. Details of the Financial Goals of the Company are presented below:.

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(1) Reduction of the financial leverage in the Company relative to the leverage recognized in the electricity

rate The financial leverage ratio, recognized by the Electricity Authority in the rate (normative leverage ratio) (for financing assets, without assets under construction), between the equity and the external capital of 1:2 (for rate purposes, the Electricity Authority regards the deferred taxes as being part of equity in the transmission and distribution segments). The ratio that is reflected in the Financial Statements, as of December 31, 2011, is 1:2.30. The distribution of the cumulative dividends from the Company's earnings for the years 2004 – 2009, in the amount of NIS 3.85 billion, may change this ratio to 1:2.84. See details of dividends distribution in the Company in section 4 of Chapter 6 of the prospectus.

(2) Attaining The Rate of Return on Equity as Recognized in the Electricity Rate: The annual rate of return on equity, as recognized in the rate by the Electricity Authority (normative

rate of return) is 9.5% gross for the generation segment, 5.5% net for the transmission segment and 6.2% net for the high and low voltage distribution segments. The annual rate of return on equity, as on December 31, 2011, amounts in annual terms to 9.32% for the generation segment, a negative return of 1.81% for the transmission segment and a negative return of 8.42% for the high and low voltage distribution segment (this is in accordance with the Company's Financial Statements according to the generation, transmission and distribution operating segments, see Note 36 to the Annual Financial Statements).

(3) Recognition of costs of the restructuring in future electricity rates.

Under the Government Companies Regulations (Principles for Preparing Financial Statements of the Israel Electric Corporation Ltd.) (Temporary Order) 2004 ("Government Companies Regulations for Preparing Financial Statements"), the Company is required to assess and present the estimated impact of the implementation of the financial reporting rules in its Financial Statements as compared with International Financial Reporting Standards as follows: Transition to IFRS on January 1, 2007

December 31 2011 2010 2009 NIS in millions Impact on shareholders’ equity –

Equity under the Regulations ‐ as reported in the Financial Statements as of December 31, 2011 17,265

18,050

18,048

Impact of writing‐off regulatory liabilities/assets 453 3,861 3,701Impacts deriving from fixed assets* (6,090) (5,633) (6,164)Tax effect** 1,270 304 428Equity resulting from implementation of IFRS 12,898 16,582 16,013 Impact on net income – Net income (loss) prepared under the Regulations ‐as reported in the Financial Statements as of December 31, 2011

(785)

2

1,424 Differences in reported, adjusted depreciation 571 464 396Impact of writing‐off regulatory liabilities/assets (3,408) 160 2,215Erosion of liabilities – mainly the gap between real interest and nominal interest (1,165)

(1,015)

(1,473)

Cancelling the deduction for FAS 90 (126) 953 ‐Others 263 129 ‐Tax effect** 966 (124) (205

Net income (loss) according to IFRS (3,684) 569 2,357

* Impacts deriving from fixed assets: linkage to CPI, cancelled provision for assets impairment, gaps in capitalization of financing costs and other effects.

** Tax effect: was in 2011 – 25%, in 2010 – 18%, in 2009 – 18%.

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The quantitative data presented above represent an assessment and estimate only, and particular caution should be taken in reference to this data, since the Company maintains its reporting systems according to the Government Companies Regulations for preparing financial statements.

e. Electricity Rate Mechanism 1) For details on the electricity rate, see sections 7.1.3.2 and 8.1.3 in chapter 6 of the prospectus and also

Note 3 to the Annual Financial Statements. For the purpose of setting the rates, the Electricity Authority shall perform cost control actions for the

vital service provider license holder. The Electricity Authority is entitled not to take into account, for setting rates, expenses, in part or in full, which in its opinion are not required for fulfillment of the duties of the vital service provider license holder.

In the opinion of the Company, the decisions of the Electricity Authority on the rate do not provide full and adequate coverage for its costs. In the Company’s opinion, the lack of recognition by the Electricity Authority of costs incurred by the Company, arising from different subjects, as detailed below, in the rate, cause a significant decrease in the Company's revenues, estimated at billions NIS. The Electricity Authority is of the opinion, as presented to the Company, that the electricity rate is not obliged to recognize all the costs of the Company according to its actual costs, if in the opinion of the Electricity Authority these are not required to fulfill the Company's duties as a vital service provider.

The Company addressed the Electricity Authority several times, presenting lists detailing the disputed

subjects, including data and explanations of the non‐recognized costs and requested coverage for these costs.

The subjects on which the Company addressed the Electricity Authority also include the following: objections of the Company to the process of determining the new generation rate (which, as aforementioned, in the opinion of the Electricity Authority reflects the costs required for this segment), including non‐recognition of the fixed assets construction costs, the mechanism for decreasing recognized cost to be applied to the Company in the events that it will fail to meet the normative timetables for operating generation units; reduction coefficients rate; the fuels basket (including issues of gas incentive calculation, delays in converting power stations to natural gas and calculation of the demand forecast); exogenous expenses; financing costs; electricity consumption in Company facilities; operation date of Alon Tavor CCGT; recognition of pension liabilities; delays in the updates of rate bases of the distribution and transmission segments and more. The aforesaid non‐recognition of Company costs in the rate caused and will cause a material decrease in the revenues of the Company and to non‐recognition of part of its assets, which leads to losses and to substantial erosion in the Company’s shareholders’ equity.

The Electricity Authority reached a decision on the majority of the subjects, and did not decide at all on the remaining subjects. Decisions made by the Electricity Authority oblige the Company, unless the Electricity Authority will modify its decision. As mentioned, the Company believes that the decisions of the Electricity Authority do not provide full coverage for its costs and it continues to address the Electricity Authority on these subjects, aiming to receive coverage for these costs in the rate. There is no certainty that the position of the Company will be accepted and the extent of the effect of the decisions of the Electricity Authority, in the event that the decisions will be modified, on the Company and its financial results is uncertain.

For details, see Note 3, sections c – e in the Annual Financial Statements.

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(2) Comparison between the Rate and the Expenses of the Company for the Period January – December 2011, In Million NIS, at December 2011 prices

Income of the Company without return on equity according to the formula of the rate

Expenses of the Company according to financial Statements*

Gap

Fuel and electricity purchases 13,576 13,105 471

Operation 3,675 4,236 ‐561

Depreciation and amortization 3,720 4,285 ‐565

Financing expenses 1,935 2,185 ‐250

Expenses with respect to pensioners 24 146 ‐122

Miscellaneous and differences 129 ‐132 261

Total 23,059 23,824 ‐766

Return on equity approved by the Electricity Authority 1,215

Actual income before income taxes and provision with respect to non‐recognition of fixed assets construction costs 449

* After performing required classification actions for the adjustment of the rate formula. In addition, the data is after the effect of regulatory assets/liabilities. See further details in Note 20 to the Annual Financial Statements and also in the Consolidated Statement of Operations and Comprehensive Income for 2011.

Notes: 1. For the transmission and distribution segments, the Electricity Authority applies reduction coefficients

on all components of the income and does not specify the specific component by which the Company should become more efficient.

It was assumed for the calculation that the reduction coefficient is at an equal rate for all income components in these segments. However, it is not certain that the Electricity Authority interprets in a similar way to the Company (equal rate) the application of the reduction coefficients for all components of the recognized costs.

2. The Electricity Authority recognized some of the expense items for the determined rate, without adhering to the classifications specified in the Financial Statements. Adjustments were made in this table for both the revenues and expenses of the items which the Electricity Authority recognized in a different classification than that recorded in the Financial Statements, to obtain an adequate comparison between the income and expenses of the Company.

The Main Explanations for the Gaps according to Components are detailed below: 1. Fuel The gaps in fuel are due to the following:

1.1 A gap in quantities deriving from the normative recognition of the Electricity Authority, which differs from the actual performance of the Company.

1.2 A gap in the recognized prices of fuels, which may derive, inter alia, from recognition of marginal fuels prices, while fuels costs are recorded in the expense column at average costs.

1.3 Refunds granted to the Company by the Electricity Authority with respect to the year 2010, for diesel oil consumed by the Company for purposes other than energy generation.

2. Operation Gaps in the operation component derive mainly from non‐recognition of the full renovation costs of

power stations and the fact that the rates base for the transmission and distribution segments was not updated.

3. Depreciation The gaps in the depreciation component derive mainly from the prolonged delay in updating the rates

base for the transmission and distribution segments, amounting to hundreds of millions of NIS each year.

In addition there are other non‐recognized items, such as non‐recognition of the full depreciation expenses with respect to spare parts inventory and joint assets in the generation segment, non‐recognition of conversion to gas costs, etc.

4. Financing Costs The gap in the financing costs derives mainly from non‐recognition of part of the Company's fixed

assets costs, used to determine the financing costs in the rate.

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Comparison between the Rate and the Expenses of the Company for the Period January – December 2010, In Million NIS, at December 2011 prices

Income of the Company without return on equity according to the formula of the rate

Expenses of the Company according to Financial Statements*

Gap

Fuel and electricity purchases 9,722 9,264 458

Operation 3,558 3,564 ‐6

Depreciation and amortization 3,631 4,280 ‐649

Financing expenses 1,839 1,707 132

Expenses with respect to pensioners 28 ‐19 47

Miscellaneous and differences ‐375 ‐134 ‐241

Total 18,403 18,662 ‐259

Return on equity approved by the Electricity Authority 1,216

Actual income before income taxes and provision with respect to non‐recognition of fixed assets construction costs 957

* After performing required classification actions for the adjustment of the rate formula. In addition, the

data are after the effect of regulatory assets/liabilities. See further details in Note 20 to the Annual Financial Statements and also in the Consolidated Statement of Operations and Comprehensive Income for 2011.

Notes:

1. For the transmission and distribution segments, the Electricity Authority applies reduction coefficients on all components of the income and does not specify the specific component in which the Company should become more efficient.

It was assumed for the calculation that the reduction coefficient is at an equal rate for all income components in these segments. However, it is not certain that the Electricity Authority interprets in a similar way to the Company (equal rate) the application of the reduction coefficients for all components of the recognized costs.

2. The Electricity Authority recognized some of the expense items for the determined rate, without adhering to the classifications specified in the Financial Statements. Adjustments were made in this table for both the revenues and expenses of the items which the Electricity Authority recognized in a different classification than that recorded in the Financial Statements, to obtain an adequate comparison between the income and expenses of the Company.

The Main Explanations for the Gaps according to Components are detailed below: 1. Fuel The gaps in fuel are due to the following:

1.1 A gap in quantities deriving from the normative recognition of the Electricity Authority, which differs from the actual performance of the Company.

1.2 A gap in the recognized prices of fuels, which may derive, inter alia, from recognition of marginal fuels prices, while fuels costs are recorded in the expense column at average costs.

1.3 Payments made by the Company in previous years, expected to be grossed up in the compensation component with respect to the delay in the update for 2009 component.

2 Depreciation The gaps in the depreciation component derive mainly from the prolonged delay in updating the rates

base for the transmission and distribution segments, amounting to hundreds of millions of NIS each year.

In addition there are other non‐recognized items, such as non‐recognition of the full depreciation expenses with respect to spare parts inventory and joint assets in the generation segment, non‐recognition of conversion to gas costs, etc.

3. Expenses with respect to Pensioners The surplus recognition derives from income recorded with respect to pensioners in the statement of

operations and comprehensive income, arising mainly from capitalizing interest with respect to the surplus of fund over reserve.

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f) Comparison between the Budget of the Company and the Actual Expenses in 2010 and 2011:

The Company's Budget and its Detailed Expenses in 2011 (in Million NIS)

In Current Prices

Budget Target Budget Actual Expense

Difference Comments

Current operation and maintenance budget

Electricity Generation system 1,806 1,840 34 This change derives mainly from performing maintenance works at a higher than scheduled scope at Hagit, Haifa, Orot Rabin and Rutenberg sites. In addition payment of past debts of municipal taxes to Ashkelon Municipality.

Transmission lines grid and sub‐stations system 333 320 (13) Performance of sub‐stations and switching maintenance works and maintenance of 161 KV and 400 KV lines at a lower than scheduled scope.

Distribution system (High voltage and low voltage grid) 1,277 1,256 (21) Performance of maintenance work in the low and high voltage grids and commercial actions at a lower than scheduled scope.

Administration and joint expenses 704 626 (78) Low performance in advertising, surveys and consultants, different tests and research and provision for legal claims.

R&D projects and KRT 23 16 (7)

Reserve 25 (25)

Total operating budget 4,168 4,058 (110)

Development Budget

Investments in the electricity generation system 2,155 1,832 (323) The main non‐performance in emergency projects phase B, CCGT units in Haifa, gas supply to existing generation units, investment in operational power stations works and reduction of PM and SCR emissions at Orot Rabin and Rutenberg. Non‐utilization of the full budget for equipment, construction, activating and unforeseen events due to delays and changes in work plans and on the other hand payment for equipment acquisition in the project for installing sulfur removal devices at Orot Rabin, budgeted for 2012.

Investments in the transmission grids and sub‐stations 618 543 (76) Scope of works for construction of high voltage lines, sub‐stations and expanding sub‐stations and switching is lower than scheduled, due to changes in the work plans. On the other hand, works for construction of ultra‐high voltage lines are at a higher than scheduled scope.

Investments in the distribution system (high & law voltage grids)

1,188 1,188 0

Different purchases and investments 616 543 (73) Lower than scheduled scope, mainly in investment in computerizing, inventory purchases, special projects and load control.

Reserve 3 (3)

Total Development Budget 4,580 4,106 (474)

Fuel Budget

Crude 384 658 274 Significant increase in diesel oil and crude consumption, at the expense of the decrease in natural gas,

Coal 6,245 6,405 160

Diesel oil 1,626 2,991 1,365Increase in diesel oil and coal prices, partially offset by a minor decrease in crude and gas prices

Natural gas 3,007 2,719 (288)

Total Fuel Budget 11,262 12,773 1,511

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The Company's Budget and its Detailed Expenses in 2010 (in Million NIS)

In Current Prices

Budget Target Budget Actual Expense

Difference Comments

Current operating and maintenance budget

Electricity Generation system 1,786 1,580 (206) The non‐performance is mainly due to renovation works at Haifa, Eshkol, Hagit and Ramat Hovav sites and a refund with respect to insurance payments on past damages at Gezer and Hagit.

Transmission lines grid and sub‐stations system 307 280 (26)

Performance of sub‐stations and switching maintenance works and maintenance of 161 KV and 400 KV lines at a lower than scheduled scope.

Distribution system (High voltage and low voltage grid) 1,219 1,149 (70)

Lower than scheduled performance mainly in payment of collection commissions, municipal tax, commercial actions and grids maintenances in the districts.

Administration and joint expenses671 607 (64)

Lower than scheduled technological planning and development, advertising and mass communication, training and provision for legal claims.

R&D projects and KRT 19 8 (11)

Reserve 23 (23)

Total operating budget 4,025 3,625 (400)

Development Budget

Investments in the electricity generation system 2,470 1,774 (696) The main non‐performance in emergency projects phase A, CCGT units in Haifa, steam addition at Tzafit, gas supply to existing generation units and reduction of SCR emissions at Orot Rabin and Rutenberg. Non‐utilization of the full budget for equipment, construction, activating and unforeseen events due to delays and changes in work plans.

Investments in the transmission grids and sub‐stations 663 505 (157) Scope of works for construction of high and ultra‐high voltage lines, sub‐stations and expanding sub‐stations and switching is lower than scheduled, due to changes in the work plans.

Investments in the distribution system (high & law voltage grids)

1,199 1,088 (111) Scope of construction of high voltage and low voltage grid, meters purchasing and installation and purchase of end units and installation in the control and command over the grid project is lower than planned.

Different purchases and investments 616 521 (95) Lower than planned performance, mainly in buying land, load control, accommodation development, purchasing low voltage equipment and special projects.

Reserve 40 (40)

Total Development Budget 4,987 3,888 (1,099)

Fuel Budget

Crude 242 235 (7) Increased consumption of diesel oil and gas due to increased generation, according to increased demand and demand loads. Coal 4,820 4,574 (246)

Diesel oil 609 1,138 529 On the other hand, decrease in fuels prices, accompanying expenses, insurance costs, compared to the forecast.

Natural gas 2,791 2,920 129

Total Fuel Budget 8,462 8,866 404

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g) Performance Criteria of the Company's Fulfillment of Strategy and Objectives The Company uses performance criteria and quantitative indicators that enable the Management to

estimate fulfillment of strategy and objectives by the Company. 15 criteria were defined for this purpose at the Company's level, in areas of productivity and efficiency, profitability, customer service, quality and reliability, safety and environmental protection.

Annual goals are set for each of the aforementioned criteria, where units of the Company review the results of meeting the objective and analyze performance over a time axis, every quarter. The performance criteria are presented to the Company's Board of Directors once a year, during the discussions of the budget and are distributed to the directors every quarter.

Analysis of selected performance criteria for the years 2009‐2011 is presented below: Area Criteria Performance

2009 Goal 2009

Performance 2010

Goal 2010

Performance 2011

Goal 2011

Productivity and efficiency

Sales per employee in operational activity (in million kWh) 6.47 6.20 6.93 6.29 6.93 7.03

Operational costs per kWh Generation (agorot) (**) 3.84 4.06 3.72 4.33 3.94 3.95

Transmission (agorot) (**) 0.77 0.80 0.72 0.85 0.79 0.81

Distribution (agorot) (**) 2.80 3.12 2.74 3.07 2.77 2.88

Equivalent operational availability (%) 86.3 88.3 87.5 90.3 84.9 85.5

Profitability & financial strength

Cash balance (in Billion NIS at period end) 3.2 N/A 3.7 N/A 1.85 1.00

Return on equity (%) 7.9 6.5 0 6.5 )4.5 ( 6.8

Customer Service Fulfilling criteria (%) 98.3 97 96.9 98 97.3 97

Satisfied customers (%) 81.7 87 84.1 86 84.7 86

Product quality and reliability

Non‐supply to customer minutes Disruptions (minutes) 87 94 114 94 98.5 94

Scheduled (minutes) 34.5 43 31.0 43 33.9 43

Recovery of supply to customer duration (minutes) 35.8 37 36.5 37 37.6 37

Safety Number of accidents per 100,000 work hours 0.68 Min(*) 0.85 Min(*) 0.62 Min(*)

Environmental protection

SO2 emissions (gram/kWh) 1.6 1.7 1.5 1.7 1.6 1.7

NOX emissions (gram/ kWh) 1.7 1.8 1.6 1.8 1.7 1.8

(*) Mean that the Management set for itself the performance criteria of the number of accidents as a

possible minimum. (**) Average operation and maintenance costs in agorot per kWh without fuels. Explanations of the Change in the Results of the Criteria between 2009 – 2011 are as follows:

Sales per employee in Operational activity – in 2010, the percentage of employees out of the total Company employees employed in operational activity (compared to development activity) decreased, thanks to improved productivity.

Operational Costs per kWh (in the three segments) – the increase in generation of electricity in 2010 exceeded the forecast, therefore, generation costs per kWh decreased. Generation of electricity in 2011 was lower than the forecast.

Cash Balance – increased in 2010 due to financial activity and decreased in 2011 due to increased fuels costs.

Work Accidents – minor accidents during 2009 – 2011 and random change in number.

Emissions – changes over the years according to the gas/ diesel oil used. Explanations of non‐fulfillment of criteria objectives in 2009 – 2011:

Sales per employee in operational activity – the goal for 2011 (i.e., sales of operational activity divided over the number of employees) was higher than the previous year, due to forecasts for severe winter and summer. The actual winter and summer were moderate (a difference of 1.4% which is not a material deviation), which reduced the sales and therefore the goal was not achieved.

Equivalent Operational Availability – the ceased supply of gas led to increased use of diesel oil in the generation units and also low reliability, due to the change in the operational regimen of the generation units when operated with diesel oil, compared to operating with gas. The improvement in 2010 compared to 2009 is due to a relative increase in the use of gas (increased use of diesel oil still led to failure to achieve the goal). Worse results in 2011 due to reduced use of gas compared to 2010 and as mentioned, increased use of diesel oil.

Return on Equity – Revenue of the Company derived from the rate do not cover the expenses of the Company with the addition required for the return on equity.

Fulfillment of Criteria – in recent years, including 2011, this criteria was fulfilled on the average. 2010 was exceptional (heat wave, storms and the fire on Mount Carmel), which caused a slight deviation from the objective.

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Satisfied Customers – The goal was intentionally set at a high level, to which the Company should aspire. However, performance shows a trend of improvement over the years.

Minutes of non‐supply to the customer ‐ the objective of this criterion did not change for many years and is set at 137 minutes, according to a professional formula of the national grid. 2010 was characterized by stormy weather, heat wave, storms and the fire on Mount Carmel, causing the number of non‐supply minutes to exceed the objective.

Work Accidents – minor accidents during 2009 – 2011 and random change in number. 2. Financial Condition

Data of the Company's financial condition on December 31, 2011 and December 31, 2010 are as follows:

December 31 2011 2010 Increase

(decrease) Percent

% Note No.

CURRENT ASSETS Cash and cash equivalents .............................. 1,152 3,278 (2,126) (65)% a2a1Short term investments .................................. 741 539 202 37% a2a2Trade receivables for sales of electricity ........... 3,864 3,211 653 20% a2a3Other current assets ....................................... 625 301 324 108% a2a4Inventory‐ fuel ............................................... 1,987 1,808 179 10% a2a5Inventory‐ stores ............................................ 124 154 (30) (19)% Regulatory assets, net .................................... 2,449 ‐ 2,449 100% a2a6 10,942 9,291 1,651 18% NON‐CURRENT ASSETS Long‐term receivables ................................... 1,987 1,209 778 64% Assets with respect to benefits after employment termination:

Excess pension plan assets over pension liability ..................................................................... 5,701 5,276

425

8% a2b

Funds in trust ................................................ 2,047 1,980 67 3% 7,748 7,256 492 7% Fixed assets, net Fixed assets in use, net ................................... 56,370 57,621 (1,251) (2)% Fixed assets under construction ...................... 4,769 4,665 104 2% 61,139 62,286 (1,147) (2)% a2c

Intangible assets, net ..................................... 847 846 1 0 82,663 80,888 1,775 2%

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December 31 2011 2010 Increase

(decrease) Percent

% Comment

No. CURRENT LIABILITIES Credit from banks and other credit providers ....... 4,602 4,998 (396) (8)% a2Trade payables ................................................... 2,024 1,259 765 61% d2Other current liabilities ........................................ 1,559 1,333 226 17% 2d2 Regulatory liabilities, net ..................................... ‐ 2,824 (2,824) 4% Customer advances, net of work in progress ......... 399 397 2 1% Provisions ........................................................... 788 754 34 5% 9,372 11,565 (2,193) (19)% NON CURRENT LIABILITIES a2e Debentures ......................................................... 31,284 29,424 1,861 6% Liabilities to banks ............................................... 5,042 4,849 193 4% Liabilities with respect to other benefits after employment termination ..................................... 2,642 2,602 40

2%

Regulatory liabilities, net ..................................... 2,786 1,547 1,239 80% Provision for refunding amounts arising from restatement of the Financial Statements ............... 2,257 2,150 107

5%

Deferred taxes, net ............................................. 5,491 4,142 1,273 33% a2fDebentures to the State of Israel .......................... 2,453 2,444 9 ‐ Liabilities to the State of Israel ............................. 3,686 3,730 (44) (1)% Other liabilities ................................................... 385 385 ‐ ‐ 56,026 51,273 4,753 9% SHAREHOLDERS’ EQUITY a2g Share capital ....................................................... 1,099 1,099 ‐ ‐ Capital reserves .................................................. 996 996 ‐ ‐ Retained earnings ............................................... 15,170 15,955 (785) (5)% 17,625 18,050 (785) (6)% 82,663 80,888 1,775

The following are explanations of the financial data of the Company, as detailed in the tables above, in the report year, compared to the previous year at the Company level and according to activity segments (for details on the segments reporting of the Company, see Note 34 to the Annual Financial Statements. a. Current Assets

1. Cash and Cash Equivalent For details of the decrease in cash and cash equivalent, see the disclosure on the Liquidity of the

Company in section a 6 above.

2. Short Term Investments The increase in short term investments arises from deposits in a special account with respect to

financing stage B of the emergency plan. See details in Note 11 j 2 to the Annual Financial Statements.

3. Trade receivables for sales of electricity The increase in the balance of trade receivables derives from increased electricity consumption in

2011, in the transitory season (November—December), compared to 2010.

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4. Other Current Assets The increase in the balance of other current assets in long term debts derives mainly from

increased balances arising from swap transactions following the depreciation and reduced interest curves, compared to the balances in the previous year.

5. Inventory ‐ Fuels For details on the increase in fuels inventory, see section a 3 (c) (3) (Fuels Costs) below. 6. Regulatory Assets / Liabilities

a. Background. For details on regulatory assets/ liabilities, see Note 20 to the Financial Statements as of December 31, 2011. The Company applies the accounting principles of the US Financial Accounting Standards Board (FASB) as listed in "RE6" which permit, under certain conditions, an accounting treatment other than by that acceptable with regard to the timing of expense/income attribution to operations, all for the purpose of reflecting and creating proper matching between expenses and income incurred by the Company on the dates when they are recognized for purposes of the electricity rates. One of the conditions for applying these standards states that regulated rates are built in a way that covers the specific costs (including the required return on capital) related to the delivery of the regulated service or product (see also Note 2 a 2 to the Annual Financial Statements). Fulfillment of FAS 71 Directives Under the financial reporting principles applied to the Company in accordance with the Government Companies Regulations for preparing financial statements, the Company applies the Standards of the Financial Accounting Standards Board in the U.S.A., included under ASC 980 – "Regulated Actions" ("RE6"), which deal with the effects of certain types of regulation on the accounting policies implemented by the Company. RE 6 applies to a company with regulated activities, when all three conditions listed below are met: (1) Rates of regulated products or services provided to customers are either established by an

independent third party regulator or by a committee so empowered, or are subject to authorization by a third party independent regulator or by a supervising organization, authorized by a law or an agreement to establish rates that oblige the consumers.

(2) The regulated rates are so constructed as to cover the specific costs of the entity associated with the provision of the regulated product or service.

(3) In view of the demand for the regulated product or service and also of the level of competition, it would be reasonable to assume that the rates established so as to cover the costs are chargeable and collectible.

The Company implements the directives of the standard applied to regulated companies since it meets the aforementioned three cumulative conditions: (1) Regulation of rates – electricity rates are determined by the Electricity Authority, established

in accordance with the Electricity Sector Law 1996, which is a separate, independent entity. (2) Specific coverage of costs ‐ regulated rates are designed to cover the specific costs of the

Company associated with the provision of the regulated products or services. From March 4, 1996, the activity of the Electricity Sector has been regulated under the Electricity Sector Law and its regulations and the Company operates pursuant to them. According to section 31 of the law, the Electricity Authority will determine the electricity rates in accordance with the following rules:

(a) The charge rates shall be determined based on the principle of cost, considering, inter

alia, the type and standard of services. Each price shall reflect the cost of the particular service without any price decreasing at the expense of increasing another.

(b) With respect to the cost, an adequate return on capital rate shall be taken into account, considering the rights and duties of a vital service provider license holder. The law does not define what an adequate return on capital rate is.

(c) For the purpose of setting the charge rates, the Electricity Authority shall perform cost control actions for the vital service provider license holder. The Electricity Authority is entitled not to take into account, for setting charge rates, expenses, in part or in full,

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which in its opinion are not required for fulfillment of the duties of the vital service provider license holder.

In accordance with these principles, the electricity charge rate is supposed to cover all of the costs sustained by the Company from the operation of its assets and required to fulfill its duties (except costs which are not required to fulfill the Company's duties as a vital service supplier). Costs required for fulfilling the duties of the Company as a vital service supplier consist mainly of costs of fuel, costs of operations and maintenance and costs of capital (depreciation, financing and return on capital). Accordingly, the structure of the electricity rates reflects the price of electricity in accordance with the processes of the electricity chain: generation, transmission, distribution, high voltage, distribution low voltage, connection and services. The rates of the transmission and distribution segments are based on historical costs of the Company as recorded in the Company's books, with certain adjustments, which are recognized pursuant to a costs audit, conducted by the Electricity Authority. In February 2010, the Electricity Authority published its decision on updating the new rate base for the generation segment, for 2010 – 2014. The recognized costs under this rate are based on normative costs, determined pursuant to a costs audit of Company costs as recorded in the Company's books over the years, conducted by the Electricity Authority. According to RE 6, this criteria was applied on the basis of the substance of the regulations/ regulation and not on the basis of their format. The rate for the generation segment does not provide an immediate full coverage to all the costs of the Company, but is based on historical costs of the Company. Therefore, the Company estimates that this rate will provide full coverage of the costs in the long term. In addition, according to the decision of the Electricity Authority that in the event that costs incurred for units under construction are excessive in the opinion of the Company and are not included in the normative cost base, the Company is entitled to request that the Electricity Authority recognize the excessive costs, after the commissioning of the unit. Moreover, since the Electricity Sector Law is designed, as mentioned, to provide long term full coverage of the costs required by a "vital service supplier" to fulfill its duties, the Company expects that the rate will be updated to provide full coverage of all its costs, required to fulfill its duties as a vital service supplier. As specified in section 2(c) above, the electricity rate should cover all the costs incurred by the Company which are required to fulfill its duties as a vital service supplier, according to a cost audit, conducted by the Electricity Authority in accordance with the directives of the Electricity Sector law. Based on past experience, work principles of the Electricity Authority and the directives of the law, the Company's Management assumes that the bases of the rate will be updated over time. Pursuant to understanding the way in which the Electricity Authority determined rates in the recent past, the Company assumes that the future rate bases will also include normative components. These normative components are currently determined and will probably be determined in future on the basis of costs of the Company in the past or the economical environment in which it operates. The Company believes that the normative components will be structured in a way that will allow the Company to gain profit from some of them by performance that exceeds the norms and will earn less or incur a loss from costs that are higher than the rate coverage, for some components. The policy of the Company in recent years is to decrease actions and investments that do not have full costs coverage in the rate from the Electricity Authority, for the purpose of meeting the rate outline. Therefore, the Company estimates that after the update of the rates bases, it is anticipated that full coverage will be provided to all investment and operation costs incurred by the Company, in each of the segments, starting from the update date of the rate base for this segment. However, the Company estimates that certain events may prevent it from meeting the rate outline during a certain period, while in other periods it will meet the rate outline in a way that will yield a higher than required gain. On the average, and in view of the aforesaid, the Company expects that it will meet the rate outline in a way that will allow full costs coverage for its investment and operation costs.

Chargeable and collectible rates from consumers – this criterion requires consideration of expected changes in demand levels or competition during the coverage period of the capitalized costs. At present the electricity generation sector in Israel is characterized by an especially low competition level. In practice, the Company generates the major share of electricity in Israel and only private electricity producers are its competitors, who at this stage generate electricity in immaterial volumes. Moreover, the Company assumes that the Electricity Authority will determine a rate for backup services which the Company is required to provide to the private producers under the

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Electricity Sector Law. The backup rate is intended to compensate the vital service supplier for the decreased demand (also deriving from entry of competitors), which turns part of his generation means into a reserve for the segment. This backup rate will compensate the Company with respect to a decrease in its income from sale of electricity, at least partially. Since the Company acted according to the guidelines of the regulators who are authorized to act on the development of the electricity sector, it believes that all the costs required to construct assets after the costs audit of the Electricity Authority, will be recognized under the rate. This can be deduced from the current rate for the generation segment, which recognizes a specific list of power stations (based on the development plan of the Company) and the costs which will be recognized with respect to these units. The Company estimated that even if sales of electricity from these power stations will decrease due to entry of private producers to the electricity sector and prioritizing them, it will not affect the recognition of construction costs of power stations, the construction of which was approved by the Minister of Energy and Water. Therefore, the Company estimates that the Electricity Authority will recognize its full costs required to fulfill its duties as an essential service supplier in the next rates base. RE 6 provides examples of conditions under which this standard will not apply to the Company:

1. Termination of the regulation; 2. A change in the basis for determining the rate by the regulator from the cost principle to

another basis; 3. Intensified competition, in a way that will limit the ability of the entity to sell services and

products at rates which will cover its costs; 4. The rate determined by the regulator will limit full coverage of the costs of the entity, where

the entity cannot appeal the decision of the regulator or chooses to refrain from appealing. The aforementioned conditions do not reflect the current condition of the electricity sector. The electricity sector in Israel is currently subject to regulation that determines the electricity rates and also determines, as mentioned, that the rates will be determined according to the principle of cost, which states that the electricity rate should cover all the costs incurred by the Company arising from the operation of its assets and requirements to fulfill its duties as a vital service supplier. Based on the aforesaid, the Company is of the opinion that it meets the conditions for applying FAS 71. The Company examines the condition of the Israeli electricity sector and the decisions of the regulator periodically to determine if it continues to meet the conditions for applying RE 6.

b. Details of the amounts of the regulatory Assets (Liabilities), net (see Note 20 to the Financial Statements)

December 31 2011 2010 Difference NIS in millions

With respect to the erosion of the Company's liabilities in foreign currency, passed on to the electricity consumers (1,456) (2,443) 987With respect to the gap between dates for actual updating rates and the theoretical rate and others 399 *732 (333)With respect to social rate 105 109 (4)With respect to accounts settlement with private producers and load management arrangements 558 362 196With respect to provision for fines ‐ Electricity Authority (20) ‐ (20)With respect to consecutive non‐update of the fuel component in the rate 2,031 *(2,622) 4,653With respect to consumers participation in financing construction of assets unattributed as yet to construction cost ‐ (539) 539With respect to consumers participation in financing emergency plan stage B (2,060) ‐ (2,060)With respect to coal price differences 106 30 76Total (337) (4,371) 4,034

(*) Reclassified

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Detailed current assets according to electricity chain segments: ‐ Generation Segment ‐ Current assets for the generation segment as of December 30, 2011 amounted to approximately NIS 7,685 million, deriving mainly from trade receivables due to the sale of electricity amounting to approximately NIS 3,168 million (this section is attributed to segments according to the ratio of revenues). Fuel inventory (fully attributed to the generation segment) amounting to approximately NIS 1,987 million and from a balance of cash and cash equivalents of approximately NIS 522 million.

‐ Transmission segment ‐ current assets amounted to approximately NIS 1,070 million, deriving mainly from trade receivables due from the sale of electricity and from the balance of the cash and cash equivalents.

‐ For the distribution segment approximately NIS 2,187 million, deriving mainly from trade receivables due to electricity sales and from balances of cash and cash equivalents

b) Non‐Current Assets

a. The Company holds funds to cover its pension‐related liabilities in a central provident fund for pension, the balance of which is approximately NIS 21,250 thousand as of December 31, 2011, compared to NIS 21,033 thousand in the corresponding period last year. For details, see Note 19 to the Annual Financial Statements.

b. The Company holds amounts in a trust account with respect to additional pension liabilities (non‐

budgetary components), which are not permitted to be deposited in the Central Pension Fund, the balance of which as of December 31, 2011 is approximately NIS 2,047 million compared to NIS 1,980 million as at the end of the same period last year.

The Non‐Current Assets according to the Electricity Segments:

‐ The generation segment – NIS 1,540 million ‐ The transmission segment – NIS 175 million ‐ The distribution segment – NIS 272 million.

c) Investments in Fixed Assets The sum total of investments in fixed assets for the reporting period amounted to approximately NIS

3,823 million, net, after offsetting consumer participation, collected in the past, amounting to approximately NIS 552 million, compared to approximately NIS 4,100 million for the same period last year, after offsetting consumers participation amounting to NIS 605 million, a decrease of approximately NIS 276 million, a rate of approximately 6.74%.

Company investments in Fixed Assets in the Reporting Period were as follows:

In power stations, combined cycle gas turbines and buildings a total of approximately NIS 1,661 million, in sub‐stations and high voltage lines a sum of approximately NIS 388 million, in grids a sum of approximately NIS 741 million net, investments in ultra high voltage lines a sum of approximately NIS 47 million, investments in vehicles and mobile mechanical equipment of approximately NIS 146 million, investments in computers and office equipment inventory of approximately NIS 60 million, investments in telecommunications a total sum of approximately NIS 49 million, investments in meters in a sum of approximately NIS 52 million, in other investments a sum of approximately NIS 448 million as well as an increase in long term storage capacity in a total of approximately NIS 830 million.

The decreased investments in assets derives mainly from a provision with respect to a commitment to disassemble and renovate in the amount of NIS 160 million and revenues with respect to high voltage works at the expense of others, received in 2011.

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Detailed investments in fixed assets according to electricity chain segments:

‐ Fixed assets for the generation segment as of December 31, 2011 amounted to approximately NIS 28,613 million.

‐ For the transmission segment, fixed assets amounted to approximately NIS 14,095 million and for the distribution segment approximately NIS 18,432 million.

‐ Direct assets were attributed to the appropriate segments; joint assets (some 3.1% of the Company’s assets) were divided according to a distribution key that the Company assesses to be a reasonable estimate for attributing these assets. During the period covered by the report, the Company invested a total of approximately NIS 1,468 million, approximately NIS 435 million and approximately NIS 793 million in direct assets in the generation, transmission and distribution elements, respectively. In addition, a sum of approximately NIS 1,127 million was invested in joint property.

d) Current Liabilities

1. Credit from banks and other credit providers The decrease in credit from banks and other credit providers derives mainly from a decrease in

maturities of swap and forward contracts.

2. Trade payables The increase in trade payables arises mainly from an increase in liabilities to suppliers with respect

to higher fuels costs. 3. Other current liabilities The increase in the balance of other current liabilities derives mainly from the increased balance

of interest payable for capital raising by the Company in 2011. See details in section a 2 e below. Detailed Current Liabilities according to Electricity Chain Segments are as follows:

‐ Generation segment NIS 5,310 million‐ Transmission segment NIS 1,453 million‐ NIS 2,609 million

The amounts are derived mainly from obligations to banking corporations and credit providers, liabilities to suppliers and service providers.

e) Non‐Current Liabilities On December 31, 2011, the Company had non‐current net liabilities equaling approximately NIS

56,026 million, compared to NIS 51,273 million as of December 31, 2010. The long term liabilities of the Company include debentures, long term liabilities to banking corporations and others equaling approximately NIS 40,397 million as detailed below: 1) Loans, Debentures and Liabilities to Banking Corporations NIS 19,929 million in foreign currency, NIS 19,367 million index linked, NIS 934 million unlinked and hedge agreements (foreign currency – swap and forward contracts) amounting to approximately NIS 167 million. Of the Company’s foreign currency liabilities listed above: NIS 14,123 million in USD, NIS 2,136 million in Euros and NIS 3,670 million in Japanese Yen.

The Company also has debentures owed to the State of Israel equaling approximately to NIS 2,453 million.

The increase in total non‐current liabilities of the Company as of December 31, 2011, compared to December 31, 2010 derives mainly from issuing debentures in Israel, in a total amount of NIS 4 billion, a loan from Bank Hapoalim in the amount of NIS 1 billion and classifying a regulatory liability with respect to non‐update of the fuel component in the rate with respect to 2009 in the amount of NIS 2 billion as a long term regulatory liability (a loan for financing phase B of the emergency plan), according to the decision of the Electricity Authority on March 7, 2011 (see Not 20j to the Annual Financial Statements).

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The Electricity Authority decided to transfer the real exposure to the currencies basket, amounting to approximately NIS 6.2 billion, out of the liabilities of the Company, to the electricity consumers and to the creation of a regulatory liability with respect to the financing its liabilities. The Company is exposed to real changes in currency rates for its liabilities except when such exposure is transferred to the consumers as above and when they are used for construction with financial expenses being capitalized to fixed assets. So as to minimize this exposure, the Company has entered into the following hedge transactions: a) Currency Swap Transactions

Purchase of: In Millions of NISU.S. Dollar 8,755 Euro 1,725 Yen 3,237 Linked NIS 84Pounds Sterling 241 14,042 In Return for:Linked NIS 11,666 NIS 802 Euro 222 Pounds Sterling 244 U.S. Dollar 252 13,186

As a result, as of the statement of financial position date, the Company had long term debit

balances for these transactions, amounting to approximately NIS 856 million (before current maturities equaling NIS 124 million) The Swap transactions include hedge transactions on equipment purchasing. The balance of these transactions on the statement of financial position date is NIS 40 million.

b) Forward contracts:

Euro – NIS contracts ‐ a volume of NIS 148 million. Dollar – NIS contracts ‐ a volume of NIS 106 million. NIS – Euro contracts ‐ a volume of NIS 173 million. The Company does not have long term balances with respect to the aforementioned forward contracts.

c) Interest Rate Swap contracts:

The Company enters into interest rate swap contracts (IRS) in which it exchanges variable interest with fixed interest, as follows: Euro contracts in the amount of NIS 1,481 million. Dollar contracts in the amount of NIS 573 million. The Company has long term credit balances as on the statement of financial position date for these transactions, amounting to NIS 13 million (before current maturities equaling NIS 3 million)

Distribution of Company Non‐Current Liabilities – Loans, Debentures and Liabilities to Banking

Corporations and Others according to Electricity Chain Segments As of December 31, 2011: ‐ Generation Segment ‐ these liabilities amounted to approximately NIS 26,704 million. ‐ Transmission Segment ‐ these liabilities amounted to approximately NIS 9,504 million. ‐ Distribution Segment ‐ these liabilities amounted to approximately NIS 14,327 million. Long term loans and debentures were mainly attributed to the segments according to the distribution ratio of fixed assets and according to the manner of financing the Company’s assets according to the rate principles.

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2) Liabilities with respect to Employee‐Employer Relations The liability with respect to non‐pension components to those entitled to pension under the

budgetary pension arrangement and to those entitled to cumulative pension for different groups of employees, according to their entitlements, e.g., discounted electricity, gifts and different bonuses, amounts to NIS 2,642 million in 2011, compared to NIS 2,602 million in 2010.

Company Liabilities with respect to Employee‐Employer Relations according to Electricity Chain Segments are as follows: ‐ Generation Segment ‐ Liabilities deriving from other severance benefits were attributed to

segments according to current salary ratios in operations and as of December 31, 2011 totaled approximately NIS 1,401 million for the generation segment,

‐ Transmission Segment – the said liabilities amounted on December 31, 2011 to approximately NIS 204 million for the transmission segment.

‐ Distribution Segment – the said liabilities amounted on December 31, 2011 to approximately NIS 1,037 million for the distribution segment.

3) Provisions for Refunding Sums with respect to Restatement of the Financial Statements

The Financial Statements include provisions amounting to NIS 2,257 million for 2011, with respect to refunding sums to consumers arising from the restatement of the financial statements (in the report of June 2009) regarding the difference between calculations (mainly due to the change in the actuarial liability) which served as the basis used to determine the rate in the past and the updated calculations. At the same time, the Company has claims against the Electricity Authority, stating that the current rate coverage for pension liabilities is lower than that required to cover these liabilities and the Company has addressed the Electricity Authority with a demand to receive enough coverage for the aforementioned liabilities. Therefore, it is too early to estimate whether these provisions will have an eventual effect on the cash flow of the Company.

Distribution of the Provisions for Refunding Sums with respect to Restatement of the Financial Statements according to the Segments of the Electricity Chain: ‐ Generation Segment ‐ NIS 1,023 million. ‐ Transmission Segment ‐ NIS 513 million. ‐ Distribution Segment ‐ NIS 721 million.

f) Deferred Taxes On December 6, 2011, the Law on Changing the Tax Burden (Legislative Amendments) – 2011, ("2011 Amendment ") was published in the Official Gazette, and cancelled the gradual decrease of the corporate tax rate, prescribed under the Economic Efficiency Law (amendments of legislation for implementation of the economic plan for 2009 and 2010) – 2009 ("Economic Efficiency Law") and determined the increase in the corporate tax rate to 25%, starting from 2012 onwards. The 2011 Amendment caused an increase in the deferred taxes liability of the Company as of December 31, 2011 of approximately NIS 1,206 million charged against expenses in the statement of operations and comprehensive income.

See more details of reasons for the change in the balance of the deferred taxes in Note 22 to the Annual Financial Statements.

f) Shareholders’ Equity The shareholders’ equity as of December 31, 2011 amounted to approximately NIS 17,265 million

compared to NIS 18,050 million as of December 31, 2010, a decrease of NIS 785 million. Rate of equity to gross total assets as of:

December 31, 2011 December 31, 2010

21% 22%

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g) Financial Ratios

December 31, 2011

December 31, 2010

NIS in millions

Ratio between current assets and current liabilities (current ratio) 116.75% 80.34%

Ratio between current assets, net of inventory, and current liabilities (quick ratio)

94.23% 63.37%

The Financial Ratios of the Company according to the Electricity Chain Segments are as follows:

December 31, 2011

December 31, 2010

NIS in millions

Ratio between current assets and current liabilities (current ratio)

Generation Segment 144.7% 101.43%

Transmission Segment 73.58% 72.54%

Distribution Segment 83.83% 50.76%

Ratio between current assets, net of inventory, and current liabilities (quick ratio)

Generation Segment 107.17% 71.15%

Transmission Segment 69.29% 65.24%

Distribution Segment 81.78% 47.73%

3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding Period in the Previous Year a) Statements of Operation and Comprehensive Income in Millions NIS for the Year Ended On:

31/12/11 % 31/12/10 % Change Change % NoteNo.

NIS in millions Revenues 24,532 ‐ 19,843 ‐ 4,689 24% a3b

Cost of operating the electricity system 20,034 82% 16,689 84% 3,345 20% a3c Profit from operating the electricity system 4,498 18% 3,154 16% 1,344 43%

Sales and marketing expenses 879 4% 790 4% 89 11%

Administrative and general expenses 714 3% 671 3% 43 6%

Expenses (income) from liabilities to pensioners, net 146 1% (19) ‐ 165 a3d

Income from current operations 2,759 11% 1,712 9% 1,047 61%

Financial expenses (income), net 2,185 9% 1,707 9% 478 28% a3e

Income before tax 574 2% 5 ‐ 569

Income taxes 1,359 6% 3 ‐ 1,356 a3f

Net income (loss) (785) (3%) 2 ‐ (787)

b) Revenues

Net revenues from the sale of electricity for the reporting period from the sale of 53,062 million kWh amounted to approximately NIS 24,273 million, compared to approximately NIS 19,619 million from the sale of 52,037 million kWh for the same period the previous year. This consists of an approximately NIS 4,654 million increase in revenues, an increase of approximately 23.72%. The peak of electricity demand of the economy for the reporting period was in July 2011, reaching 11,130 megawatts (including 10,450 megawatts produced by the Company, about 524 megawatts produced by private producers and independent producers), and approximately 156 megawatts arising from reduced demand, through other agreements, where the available standard capacity of the Company then was 11,230 megawatts, compared to the peak electricity demand of the Company in August 2010 of 11,530 megawatts, including 10,950 megawatts produced by the Company's units,

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about 380 megawatts produced by private producers and independent producers and about 200 megawatts arising from reduced demand through other agreements, where the available standard capacity of the Company then was 11,520 megawatts. The change in revenues noted above derives from two reasons, which are: - An increase of approximately NIS 4,268 million as a result of a real increase in average income per kWh (an increase of approximately 21.75% compared to a decrease of approximately 5.67% for the same period the previous year). - An increase of approximately NIS 386 million as a result of an increase in consumption (an increase of approximately 1,025 million kWh, which constitutes an increase of approximately 1.97% compared to a decrease of approximately 6.31% for the same period the previous year). Seasonality affected by weather ‐ during the winter and summer seasons, the average electricity consumption is higher than that in the transitional seasons, and is often characterized by peak demand due to extreme cold or hot conditions. Electricity rates for consumers paying by load and time (LTR), which represent some 60% of KWh consumed, are higher on average in winter and summer than in the transitional seasons.

Details of Company Revenues according to Electricity Chain Segments:

‐ Generation Segment – Net revenue deriving from sales of electricity in the generation segment in the cumulative period amounted to approximately NIS 19,904 million compared to approximately NIS 15,096 millions in the same period last year, an increase in revenue of approximately NIS 4,808 million. The change in revenue derives from two main factors: An increase of approximately NIS 4,511 million deriving from a real increase of the electricity rate and also from an increased consumption of approximately 1,025 million kWh, a rate of 1.97%, constituting an increase of approximately NIS 297 million.

‐ Transmission Segment – Net revenue deriving from sales of electricity for the transmission period in the cumulative period amounted to approximately NIS 1,792 million compared to approximately NIS 1,768 millions in the same period last year, an increase in revenue of approximately NIS 24 million.

‐ Distribution Segment – Net revenue deriving from sales of electricity for the distribution segment in the cumulative period amounted to approximately NIS 2,577 million compared to approximately NIS 2,755 millions in the same period last year, a decrease in revenue of approximately NIS 178 million.

c) Operating Costs of the Electricity System

Operating costs of the electricity system in the reporting period amounted to approximately NIS 20,034 million, compared to approximately NIS 16,689 million in the same period last year. An increase of approximately NIS 3,345 million, derived mainly from the consumption of more expensive fuels, as detailed below.

(1) Depreciation and Amortization (a) Depreciation and amortization expenses for the reporting period equaled approximately NIS

4,451 million, compared to a total of approximately NIS 4,284 million for the same period the previous year, which constitutes an increase of approximately NIS 167 million.

(b) A decreased provision with respect to non‐recognition of fixed assets construction costs in the rate of approximately NIS 125 million for the period, compared to a provision of approximately NIS 953 million in the same period in the previous year, a change of approximately NIS 1,078 million, arising from the fact that the provision in 2010 is a cumulative provision created due to the new rate base.

Detailed Depreciation and Amortization Expenses according to Electricity Chain Segments:

‐ Generation ‐ amounted to approximately NIS 2,283 million, compared to NIS 3,203 million for the same period the previous year, an approximate NIS 920 million decrease. The decrease in the depreciation expenses is due to cancellation of part of the provision with respect to non‐recognition of fixed assets construction costs in the generation segment of approximately NIS 125 million for the cumulative period, compared to a provision of approximately NIS 953 million for the same period in the previous year.

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‐ Transmission ‐ amounted to NIS 889 million, compared to NIS 877 million for the same period the previous year, an approximate NIS 12 million increase.

‐ Distribution ‐ amounted to approximately NIS 1,154 million, compared to approximately NIS 1,157 million for the same period the previous year, an approximate NIS 3 million decrease.

(2) Fuel Cost The cost of fuel consumed (without the salary component) in the reporting period amounted to a

sum of approximately NIS 12,707 million, and a sum of approximately NIS 12,845 million (including the salary component) compared to approximately NIS 8,981 million (without the salary component) and a sum of approximately NIS 9,115 million (including the salary component) for the same period the previous year. An increase of approximately NIS 3,726 million (without the salary component) and of approximately NIS 3,730 million (with the salary component), which constitutes an increase of approximately 41.48% (without the salary component) and approximately 40.92% (with the salary component), is largely explained as follows:

Detailed Changes in Million NIS

Fuel Type Changed Consumption Change in Prices Total Note

Crude 250 169 419 (c)

Coal 162 1,600 1,762 (d)

Diesel oil 2,275 )450( 1,825 (a)

Natural gas (421) 145 (276) (b)

Total 2,266 1,464 3,730

(a) The increase in the cost of diesel fuel is due to the increased quantity of consumed diesel oil

of approximately NIS 2,275 million, arising from the lateral order of the Ministry of Environmental Protection, requiring the use of diesel fuel before crude and a decrease in the diesel fuel consumption cost due to a real price decrease amounting to approximately NIS 450 million (a decrease of approximately 12.98% in the average cost per ton compared to the same period the previous year), as a result of the reduced purchase tax on diesel. The net effect amounts to NIS 1,825 million.

(b) Increased cost of consumed natural gas of NIS 145 million, a decrease in the quantity of natural gas consumed of approximately NIS 421 million, (an increase of approximately 5.62% in the average cost per ton compared to the same period the previous year).

(c) An increase in the cost of crude consumed, arising from a real price increase, amounting to approximately NIS 169 million (an increase of approximately 34.85% in the average cost per ton compared to the same period the previous year) and an increase in the quantity of crude consumption of approximately NIS 250 million.

(d) An increase in the cost of coal consumption due to a real price increase amounting to approximately NIS 1,600 million (an increase of approximately 33.03% in the average cost per ton compared to the same period the previous year) compared to the increased amount of coal consumed equaling NIS 162 million.

Detailed Consumed Quantities are as follows:

Consumed Quantities

Fuel Type For the Three Months ended on December 31, 2011

For the Three Months ended on December 31, 2010

Increase (decrease) Tons

Change Rate in %

Crude (Ton) 245,280 118,523 126,757 106.95

Coal (Standard Ton)* 12,742,237 12,315,676 426,561 3.46

Diesel oil (Ton) 637,999 219,141 418,858 191.14

Natural gas (Ton) 2,810,122 3,267,650 (457,528) (14.00)

* Standard Ton: top calorie value – calculated according to 6,240 calories per ton.

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The change in the fuels mix in the reporting period was mainly influenced by exogenous factors: 1. Decrease in the quantity of gas consumed (see section 1 b1 above), due to the shortage in

natural gas caused by disruptions in the gas supply from Egypt and depletion of the natural gas reserve of Yam Thetis, resulting in the use of a more expensive fuels mix.

2. Increased cost of coal – the price increase is due to an increase of the import tax on coal ("Purchase Tax"), according to a decision of the Government on July 15, 2010, from NIS 10 per ton in 2010 to NIS 45 per ton in 2011.

d. Sales and Marketing Expenses Sales and marketing expenses in the reporting period amounted to approximately NIS 879 million,

compared to NIS 790 million in the same period of the previous year. The increase derives mainly from a capital loss with respect to deduction of meters of approximately NIS 19 million and from an increase in the provision for contingent claims of approximately NIS 9 million. Sales and marketing expenses are attributed in total to the distribution segment.

e. Administrative and General Expenses Administrative and general expenses, presented in the statement of operations and comprehensive

income in the reporting period, amounted to NIS 714 million, compared to NIS 671 million in the same period of the previous year, a net increase of NIS 43 million, deriving mainly from an increase of NIS 48 million in the provision for fines of the Electricity Authority, an increase of NIS 18 million in the provision for loss with respect to the gas pipeline, an increase of NIS 16 million in the provision for contingent claims, a decrease of NIS 41 million in expenses with respect to works for external parties and a decrease of NIS 9 million in the provision for doubtful debts.

Distribution of Administrative and General Expenses according to Electricity Chain Segments: Administrative and general expenses in the generation, transmission and distribution segments

amounted to NIS 348 million, NIS 108 million and NIS 258 million, respectively.

f. Expenses (Income) with respect to Liabilities to Pensioners Expenses deriving from liabilities to pensioners, net, in the reporting period amounted to approximately

NIS 146 million, compared to an income of approximately NIS 19 million, a change of approximately NIS 165 million. The change derives mainly from cancelling of a provision for the refund, pursuant to the new salary agreement and agreement with the Supervisor of Wages and Work Agreements. See details of the new salary agreement and the conclusions with the Supervisor of Wages and Work Agreements in section 10.6.7.4 in Chapter 6 of the prospectus and in Note 19 to the Financial Statements.

Detailed Expenses Deriving from Liabilities to Pensioners, Net, according to Electricity Segments are as follows: Distributing pension expenses between the various segments is done by the current salary ratio in operating costs for the electricity chain existing in the reporting period: 53.02% in generation, 7.73% in transmission and 39.24% in distribution.

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g. Financial Expenses The increase in financial expenses for the cumulative period compared to the same period in the previous year, are as follows:

For the Year Ending

Difference Sum Analysis Difference 31/12/2011 31/12/2010

NIS in millions

A. Erosion of Financial Liabilities

A change from financing income to financing expenses from the erosion of financial liabilities in foreign currency amounting to NIS 2,925 million net after deposits, deriving from a transition from real revaluation at a rate of (7.86%) for the same period in the previous year to a real devaluation rate of 5.11% for the reporting period

Transition from net financing income to net financing expense after deposits 2,925 1,022 (1,903)

Transition from financing expense to financing income from financial hedge contracts (1,414) (1,169) 245

Total decrease in financing income 1,511 (147) (1,658)

Transition from financial income to expenses transferred to the regulatory liability according to the Electricity Authority’s decision with regard to the Company’s exposure to foreign currency due to a transition from real revaluation to real depreciation of the rate basket (1,099) (135) 963

Increase in financial expenses, due to changes in the known CPI, net after deposits 137 145 8

Decrease from erosion of working capital, loans and receivables items (103) 86 189

Total decrease in financing income due to erosion of financial liabilities 448 (51) (497)

B. Other Financial Expenses

Decrease in interest expenses (104) 2,430 2,534

Increase in expenses from interest swap transactions 8 19 11

Decrease in expenses transferred to a regulatory asset for normativeinterest differences 12 (133) (144)

Change from financial income to expenses of loans and receivables 156 120 (36)

Total increase in other financial expenses: 72 2,436 2,365

Total increase in financial expenses before capitalization 518 2,385 1,867

C. Capitalization of construction projects

Increase in the capitalization of financial expenses 40 200 160

Total increase in financing expenses in the reporting period, compared to the corresponding period in the previous year, after the transfer to a regulatory asset and after capitalization of financial expenses 478 2,185 1,707

Presented in the Financial Statements Other financing expenses, net 2,653 1,048

Transfer of financial expenses (income) to a regulatory asset (268) 819

Financial expense capitalization (200) (160)

Total financial expenses 2,185 1,707

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Detailed Financial Expenses according to Electricity Chain Segments are as follows: Net financial expenses are divided between the various segments mainly according to the net ratio of operated fixed assets. Financial expenses in the generation segment: an approximate NIS 203 million increase. In the transmission segment: an approximate NIS 107 million increase and in the distribution segment: an approximate NIS 168 million increase.

h. Taxes on Income

The 2011 Amendment (as defined in section a 2e4 above) cancelled the gradual decrease of the corporate tax rate, prescribed under the Economic Efficiency Law and determined an increase in the corporate tax rate to 25%, starting from 2012 onwards. The 2011 Amendment caused an increase in the deferred taxes liability of the Company as of December 31, 2011 of approximately NIS 1,206 million charged against expenses in the statement of operations and comprehensive income.

See more details of reasons for the change in the balance of the deferred taxes in Note 22 to the Annual Financial Statements.

i. Net Income (Loss) The net loss in the reporting period amounted to approximately NIS 785 million, compared to a net

profit of approximately NIS 2 million for the same period the previous year, a change of approximately NIS 787 million.

4. Comparison and Analysis of Operating Results for 2010 compared to 2009

a) Statements of Operation and Comprehensive Income in Millions NIS for the Years Ended:

31/12/10 % 31/12/09 % Change Change % Comment No.

NIS in millions Revenues 19,843 ‐ 19,723 ‐ 120 1% a4b

Cost of operating the electricity system 16,689 84% 15,510 79% 1,179 8% a4c

Profit from operating the electricity system 3,154 16% 4,213 21% (1,059)

Sales and marketing expenses 790 4% 786 4% 4 1%

Administrative and general expenses 671 3% 857 4% (186) (22)% a4d

Expenses (income) from liabilities to pensioners, net

(19) ‐ (226) (1%) 207 92% a4e

Income from current operations 1,712 9% 2,796 14% (1,084)

Financial expenses, net 1,707 9% 2,512 13% (805) a4f

Income before tax 5 ‐ 284 1% (279)

Income tax 3 ‐ (1,140) (6%) 1,143 (100)% a4g

Net income 2 ‐ 1,424 7% (1,422)

b) Revenues Net revenues from the sale of electricity for 2010 from the sale of 52,037 million kWh, totaled

approximately NIS 19,619 million, compared to approximately NIS 19,494 million from the sale of 48,947 million kWh in 2009. This consists of an approximately NIS 125 million increase in revenues, an increase of approximately 0.64%.

The peak of electricity demand of the economy for the 2010 reporting period was in August 2010, reaching 11,530 megawatts, including 10,950 megawatts produced by the Company, about 380 megawatts produced by private producers and independent producers, and approximately 200 megawatts arising from decreased demand, through other agreements, where the available standard capacity of the Company then was 11,520 megawatt (excluding private producers and other agreements), compared to the peak electricity demand in July 2009 of 10,280 megawatts, including 9,900 megawatts produced by the Company's units, about 330 megawatts produced by private producers and independent producers and about 50 megawatts arising from decreased demand through other agreements, where the available standard capacity of the Company then was 11,010 megawatts (excluding private producers and other agreements).

288F-

The change in revenues noted above derives mainly from the following reasons: - A decrease of approximately NIS 1,105 million as a result of a real decrease in average income per

kWh (a decrease of approximately 5.79%). - An increase of approximately NIS 1,231 million as a result of an increase in consumption (an

increase of approximately 3,157 million kWh, which constitutes an increase of approximately 6.45%).

Effects of collecting the income recognized by the Electricity Authority as a result of changing the definition of the seasons (in 2009, the winter season included the months December – March and the summer season included the months July – September, while the change of the winter season by the Electricity Authority to December – February and the summer season to July – August resulted in shorter winter and summer seasons by two months in 2010, compared to 2009, which resulted in decreased income from load time rates between the seasons). The definition of time load rates for high and premier voltage supply was also changed (in 2009, the high rates in winter included the morning hours while in 2010 these became off‐peak hours). This change also added to the decrease in the rates and decreased income between the seasons (in the summer and winter seasons the time load rates increased by 6.5% on average with a decrease of 24% for the remaining months of the year). Details of Company revenues for the years 2010 and 2009 according to the electricity chain segments: ‐ Generation segment – net income from electricity sales for the generation segment for the cumulative period amounted to approximately NIS 15,096 million, compared to NIS 14,944 million for the same period the previous year, an approximate NIS 152 million increase in the revenues. The change in revenues derives from two main factors: a decrease of approximately NIS 791 million as a result of a real decrease in the rate, offset by increased consumption of about 3,090 million kWh, at the rate of 6.3%, which is an increase of approximately NIS 943 million.

‐ Transmission segment – net revenues from sales of electricity in the transmission segment for the cumulative period, amounted to NIS 1,768 million, compared to NIS 1,778 million for the same period the previous year, an approximate NIS 10 million decrease in revenues .

‐ Distribution segment – net revenues from sales of electricity in the distribution segment for the period amounted to approximately NIS 2,755 million, compared to approximately NIS 2,666 million for the same period the previous year, an approximate NIS 89 million decrease in revenues.

c) Electricity System Operation Costs

Operating costs of the electricity system in 2010 amounted to approximately NIS 16,689 million, compared to approximately NIS 15,510 million in 2009. An increase of approximately NIS 1,179 million, derived mainly from consumption of more expensive fuels.

1) Depreciation and Amortization

Depreciation and amortization expenses presented in the statement of operations for the 2010 equaled approximately NIS 4,284 million compared to a total of approximately NIS 4,086 million for the year 2009, which constitutes an increase of approximately NIS 198 million, derives from increased investments.

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Detailed Depreciation and Amortization Expenses according to Electricity Chain Segments are as follows: ‐ Generation Segment ‐ depreciation and amortization expenses presented in the statement of operations for the generation segment for the cumulative period amounted to approximately NIS 3,203 million, compared to NIS 2,080 million for the same period the previous year, an approximate NIS 1,123 million increase. The Company recorded a provision with respect to non‐recognition of fixed assets construction costs in the generation segment of approximately NIS 953 million in 2010.

‐ Transmission Segment ‐ depreciation and amortization expenses presented in the statement of operations for the transmission segment for the cumulative period amounted to NIS 877 million, compared to approximately NIS 861 million for the same period the previous year, an approximate NIS 16 million increase.

‐ Distribution Segment ‐ depreciation and amortization expenses presented in the statement of operations for the distribution segment for the cumulative period amounted to approximately NIS 1,157 million, compared to approximately NIS 1,145 million for the same period the previous year, an approximate NIS 12 million increase.

2) Fuel

The cost of fuel consumed (without the salary component) for 2010 amounted to a sum of approximately NIS 8,981 million, and a sum of approximately NIS 9,115 million (including the salary component) compared to approximately NIS 9,098 million (without the salary component) and a sum of approximately NIS 9,218 million (including the salary component) for 2009. A decrease of approximately NIS 117 million (without the salary component) and of approximately NIS 103 million (with the salary component), which constitutes a decrease of approximately 1.29% and approximately 1.11% respectively, is largely explained as follows: (a) An increase in the consumed quantity of diesel fuel of approximately NIS 64 million along

with a decrease in the cost of diesel fuel consumed due to a real price increase amounting to approximately NIS 65 million (a decrease of approximately 5.05% in the average cost per ton compared to the same period the previous year).

(b) An increase in the cost of consumed natural gas of approximately NIS 23 million and an increase in the quantity of natural gas consumed of approximately NIS 441 million, (an increase of approximately 0.82% in the average cost per ton compared to the same period the previous year).

(c) An increase in the cost of crude consumed, arising from a real price increase, amounting to approximately NIS 42 million (an increase of approximately 21.32% in the average cost per ton compared to the same period the previous year) and a decrease in the quantity of crude consumption of approximately NIS 57 million.

(d) A decrease in the cost of coal consumption due to a real price decrease amounting to approximately NIS 571 million (a decrease of approximately 10.58% in the average cost per ton compared to the same period the previous year) and an increased amount of coal consumed equaling NIS 10 million.

d) Administrative and General Expenses

Administrative and general expenses in 2010 amounted to approximately NIS 671 million, compared to approximately NIS 857 million in the same period of the previous year, a decrease of approximately NIS 186 million. The decrease derives from decreasing the provision for fines with respect to a delay of operation dates of generation units according to the development plans of the Company. See details in section 7.1.3.1. b(2)(c) in chapter 6 of the prospectus.

e) Expenses (Income) from Liabilities to Pensioners Income deriving from liabilities to pensioners, net, for 2010 amounted to approximately NIS 19 million, compared to income amounting to approximately NIS 226 million for the same period the previous year, a change of approximately NIS 207 million. The decreased income derives from implementing the letter of the Supervisor of Wages and Work Agreements in the Ministry of Finance from August 2006, that required the Company to refund amounts with respect to salary and work agreement exceptions in previous years, which caused a decrease in salary costs in 2009 while on the other hand a salary agreement, for 2010 was entered in January 2011. See details of the new salary agreement in Note 19 to the Annual Financial Statements.

290F-

Detailed Expenses Deriving from Liabilities to Pensioners, Net, according to Electricity Segments are as follows: Distributing pension expenses between the various segments is done by the current salary ratio in operating costs for the electricity chain existing in the reporting period: 52.89% in generation, 7.19% in transmission and 39.92% in distribution.

f. Financial Expenses

Decrease in financial expenses for the cumulative period compared to the same period in the previous year, is as follows:

For the Three Months Ending

Difference Sum Analysis Difference 31/12/2010 31/12/2009

NIS in millions

A. Erosion of Financial Liabilities

Increase in financing income from the erosion of financial liabilities in foreign currency amounting to NIS 733 million net after deposits, deriving from an increase in real revaluation at a rate of 4.19% in 2009 to a real revaluation rate of 7.86% in 2010 (733) (1,903) (1,170)

No change in financial hedge agreements ‐ 245 245

Total increase in financing income (733) (1,658) (925)

Increase in financial income transferred to the regulatory liability in the reporting year, according to the Electricity Authority’s decision with regard to the Company’s exposure to foreign currency due to the increased real revaluation in the rate basket. 451 964 513

Decrease in financial expenses due to changes in the known CPI, net after deposits (48) 8 56

Increase in financial expenses, from erosion in working capital loans and receivables 9 189 180

Total increase in financial income from erosion of financial liabilities (321) (497) (176)

B. Other Financial Expenses

Decrease in interest expenses (394) 2,534 2,928

Financial expenses from interest swap transactions 11 11 ‐

Expenses transferred to regulatory asset due to normative interest differences (145) (145) ‐

Loans and receivables (47) (36) 11

Total decrease in other financial expenses: (575) 2,364 2,939

Total decrease in financial expenses before capitalization (896) 1,867 2,763

C. Capitalization of projects under construction

Decrease in the capitalization of financial expenses (91) 160 251

Total decrease in financial expenses in 2010, compared to 2009 after the transfer to a regulatory asset and after capitalization of financial expenses (805) 1,707 2,512

Presented in the Financial Statements Other financial expenses, net 1,048 2,250

Transfer of financial expenses to a regulatory asset 819 513

Finance expenses capitalization (160) (251)

Total financial expenses (income) 1,707 2,512

291F-

Detailed Financial Expenses according to Electricity Chain Segments are as follows: Net financial expenses are divided between the various segments mainly according to the net ratio of operated fixed assets. Financial expenses in the generation segment: an approximate NIS 402 million decrease. In the transmission segment: an approximate NIS 187 million decrease and in the distribution segment: an approximate NIS 218 million decrease.

g) Taxes on Income

Total taxes expenses in 2010 amounted to approximately NIS 3 million compared to an income of NIS 1,140 million in 2009. The change derives from a change in the tax rate. The Economic Efficiency Law (as defined above), published on July 23, 2009, prescribes, among others, an additional gradual decrease in the corporate tax rate to 18% in 2016 and thereafter. According to these amendments, corporate tax rates from 2011 onwards were supposed to be: in 2011 – 24%, in 2012 – 23%, in 2013 – 22%, on 2014 – 21%, in 2015 – 20% and in 2016 and thereafter – 18%. As a result of the arrangement determined in the Economic Efficiency Law, the taxes on income expenses decreased by approximately NIS 1,206 million, recorded to the statement of operations and comprehensive income 2009.

See details, including the cancellation of the outline determined in the Economic Efficiency Law, in Note 22 to the Annual Financial Statements.

5. Operating Results according to Quarterly Statements of Operations for 2011

Adjusted to NIS of December 2011, NIS in millions 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total (Unaudited) (Audited) Revenues ......................................... 5,191 5,103 8,079 6,159 24,532 Cost of operating the electricity system ............................................. . 4,017 4,058 6,092

5,867

20,034

Profit (loss) from operating the electricity system ............................ 1,174 1,045 1,987

292

4,498

Sales and marketing expenses ........ 225 201 204 249 879 Administrative and general expenses 187 173 190 164 714 Expenses (income) from liabilities to pensioners, net ............................... 140 (6) 6 6 146 Income (loss) from current operations 622 677 1,587

(127)

2,759

Financial expenses (income), net .... 455 229 866 635 2,185 Income (loss) from current operations before income tax ........ 167 448 721

(762)

574

Expenses (income) from taxes on income ............................................ 20 88 137 1,114 1,359 Income (loss) from current operations after taxes .................... 147 360 584

(1,876)

(785)

292F-

The changes in operating results between quarters are due, inter alia, to: a) Revenues Net revenues from the sale of electricity for the fourth quarter from the sale of 12,911 million

kWh, totaled approximately NIS 6,073 million, compared to approximately NIS 4,887 million from the sale of 12,856 million kWh for the same period the previous year. This consists of an approximately NIS 1,186 million increase in revenues, an increase of approximately 24.27%. The change in revenues noted above derives from two reasons, which are: - An increase of approximately NIS 1,165 million as a result of a real increase in average income

per kWh, an increase of approximately 23.84%. ‐ An increase of approximately NIS 21 million as a result of an increase in consumption of

approximately 0.43%. b) Fuel Cost The cost of fuel consumed (without the salary component) in the fourth quarter amounted to a

sum of approximately NIS 3,891 million, and a sum of approximately NIS 3,928 million (including the salary component) compared to approximately NIS 2,167 million (without the salary component) and a sum of approximately NIS 2,199 million (including the salary component) for the same period the previous year. An increase of approximately NIS 1,725 million (without the salary component) and of approximately NIS 1,729 million (with the salary component), which constitutes an increase of approximately 79.6% (without the salary component) and approximately 78.63% (with the salary component), is largely explained as follows: (1) An increase in the consumed quantity of diesel fuel of approximately NIS 1,301 million and a

decrease in the cost of diesel fuel consumed due to a real price decrease amounting to approximately NIS 324 million (a decrease of approximately 20.07% in the average cost per ton compared to the same period the previous year).

(2) An increase in the cost of consumed natural gas of approximately NIS 91 million and a decrease in the quantity of natural gas consumed of approximately NIS 285 million, (an increase of approximately 19.29% in the average cost per ton compared to the same period the previous year).

(3) An increase in the cost of crude consumed, arising from a real price increase, amounting to approximately NIS 58 million (an increase of approximately 16.99% in the average cost per ton compared to the same period the previous year) and an increase in the quantity of crude consumption of approximately NIS 297 million.

(4) An increase in the cost of coal consumption due to a real price increase amounting to approximately NIS 491 million (an increase of approximately 41.46% in the average cost per ton compared to the same period the previous year) and an increased amount of coal consumed equaling NIS 117 million.

The change in the fuels mix in the reporting period was mainly influenced by exogenous factors, as detailed in section a 3c3 above.

c) Financing Expenses The changes in the financing expenses in the last quarter are: (1) An increase in the erosion of net financial obligations, including hedge transactions due to a

real devaluation at the rate of 2% in the financial obligations basket of the Company for the period, in the amount of NIS 164 million.

(2) A decrease in the financial expenses resulting from financing expenses transferred to regulatory liabilities, due to a devaluation of the rate basket of approximately 1.37%, in the amount of NIS 57 million.

(3) Income with respect to net CPI linked loans, after deposits in the amount of NIS 44 million. (4) Net interest expenses in the quarter amount to NIS 610 million (4) Capitalization of financing expenses according to the recognized capitalization in the rate,

amounting to NIS 52 million.

d) Taxes on Income The effect of the change in the tax rate in 2011, (increased tax rates from a weighted rate of 18.35% before the change to 25% after the change), amounted in a tax expense recorded in the last quarter of the year in the amount of NIS 1,114 million.

293F-

6. Liquidity for the Reporting Period a. General

The cash surplus created from current activities, from taking long term loans and from other loans, was used largely to finance development activity required by the electricity sector, meaning investment in fixed assets amounting to approximately NIS 4,141 million and repayment of loans and debentures amounting to approximately NIS 3,688 million. 1) Cash Flow from Current Operations Cash flow from current operations for the period amounted to a positive flow of NIS 1,595 million,

compared to a positive flow of NIS 3,468 million in the corresponding period last year. The change in cash flow from current operations derives mainly from using a more expensive fuels mix

(which will be collected in future from the consumers), from changes in taxes expenses following the change in the tax rate, from increased expenses with respect to employee – employer relations (see section a 3d above) and from capital losses deriving from impairment of fixed assets.

2) Cash Flow for Investment Activities

Cash used for investment activities in the period reached a negative flow of approximately NIS (4,449) million, compared to a negative flow of NIS (3,641) million in the corresponding period last year. The change derives from increased investment in fixed assets.

3) Cash Flow from Financing Activity

Cash flow from financing activities in the report period amounted to a positive flow of approximately NIS 728 million, compared to a negative flow of approximately NIS (624) million deriving from financing activities in the corresponding period last year. The change in cash used for financing activities derives mainly from repayment of long‐term debentures offset by the issuing of non‐negotiable index‐linked debentures and from loans received from banks in Israel and abroad. See details in section b below

b. Financing Sources

1) General The Company finances its actions from its own sources, from offering debentures in Israel and abroad

and from loans from banking corporations in Israel and abroad. Details of the debentures issued by the Company during the report period and of loans received from banks are presented below: (a) In 2011, the Company raised approximately NIS 4 billion through private placement of debentures

(series 2022) (In this section: "Debentures") in the Israeli capital market as follows: In January 2011 the Company raised approximately NIS 2.5 billion. In June 2011 the Company raised approximately NIS 1.1 billion and approximately NIS 0.4 billion in July 2011, through an additions expansion of the debentures series.

(b) On December 15, 2011, the Company received an index linked loan from Bank Hapoalim, of NIS 1 billion.

(c) The Company received six loans from a foreign bank in the approximate amount of 16.1 billion Euro.

(d) Capital Raising Abroad ‐ The international capital markets are volatile in response to the continued debt crisis in Europe and the difficulties in the American economy. Nevertheless, the Company has access to international capital markets that enables the Company to raise funds in the current circumstances, based on indications received from leading international investment banks. The Company did not offer debentures abroad in 2011.

(e) After the statement of financial position date, the Company offered debentures in the international market, in the amount of $ 500 million, to certified institutional buyers in the U.S.A., according to Rule 144A of the U.S.A. Securities Law – 1933 and outside the U.S.A., based on Regulation S of the U.S.A. Securities Law. The Company also received a loan of approximately 0.1 million Euro from a foreign bank.

294F-

2) Long Term Loans (a) Over the course of the reporting period, a total of approximately NIS 5,097 million was raised

through loans and debentures from the following sources: Debentures issued in NIS NIS 4,016 millionLoans in foreign currency NIS 81 millionIndex linked loans NIS 1,000 million

NIS 5,097 million

(b) The balance of loans and long‐term and extended term debentures as of December 31, 2011,

without debentures to the State of Israel, is approximately NIS 40,397 million, detailed as follows:

Liabilities in Index‐Linked NIS Millions of NISIndex‐linked debentures to the public 19,572 Other index‐linked loans (a) 1,648 21,220 Non‐linked NIS debentures in public offerings 657Non‐linked NIS loans 250

Total Non‐Linked NIS 907

Dollar Linked Liabilities Money raised from a private offering for the sale of debentures in the US in US dollars

2,579

Loans in US dollars (b) 5,020Money raised from a private offering for the sale of debentures in Europe in US dollars

267

Debentures issued to institutional investors in Europe and the US, traded on the Singapore stock exchange, in US dollars

6,687

Total in Linked to US dollars 14,553Money raised from a private offering for the sale of debentures in Japan in yen

3,697

Loans in Euros 2,720Loans in Swiss francs 2

Total 43,099 Less discounts/premiums on debentures, current maturities, issuance expenses and hedge agreements, net.

(3,049)

Total debentures and liabilities to banks and others 40,050

Long term accounts payable 347

Total 40,397

(a) Including loans guaranteed by the State of Israel equaling NIS 353 million. (b) Including loans guaranteed by the State of Israel equaling NIS 789 million.

Details of Loans Recorded in the Company's Books, Secured by a State Guarantee are as follows:

Balance in Million NIS, as of December 31, 2011

Contract Details Currency Balance in Books

Weighted Interest*

Market Interest

Loan from Discount Bank NIS 122 5.47 5.67

Loan from Bank Hapoalim NIS 231 4.96 5.16

Loan from EDC Bank $ 23 6.83 7.23

Loan from Citi Bank $ 766 5.84 7.6

Total 1,142

* Weighted interest, since the loan was received in several installments. The Interest includes a guarantee commission at the rate of 0.2%.

295F-

(c) Long Term Credit Period Average as of December 31, 2011 – The credit was received from banks and others. The average credit for the reporting period was approximately NIS 44,018 million and consisted mainly of long term loans and debentures (including hedge, postponed, premium and discounting of debentures transactions).

3) Short Term Credit Average Short Term Credit Period received from banks and others, as of December 31, 2011 was approximately NIS 4,100 million and consisted mainly of short term loans, overdrafts and current maturities of long‐term loans.

4) Suppliers’ and Customers’ Credit Average Suppliers’ Credit Period as of December 31, 2011 is approximately 35 days. Average credit

period from suppliers for the reporting period amounted to approximately NIS 1,608 million. Average Customers’ Credit Period as of December 31, 2011 is approximately 56 days. Average credit

period to customers for the reporting period amounted to approximately NIS 3,523 million.

b. Exposure to Market Risks and their Management

1. The Company's Market Risk Manager The Company's person responsible for market risk management is the Senior Vice‐President of Finance and Economics, Mr. Harel Zeev Blinde. For details of his education, qualifications and business experience see sections 7.1 and 7.2 in the prospectus.

2. Description of the Company’s Market Risks

The Company sells its product, electricity, at a price set by an outside body ‐ the Electricity Authority. Namely, according to the rate determined by the Electricity Authority. Determination of the rate is based on the principle of the different components in the rate, which occasionally do not match the Company’s actual costs. As a result, regarding the bulk of its activities, the Company is not exposed to market risks, with the exception of the following: See also Note 27 to the Annual Financial Statements. a) Currency Risks

The major part of the Company's revenues is nominally in NIS. At the same time, as of December 31, 2011, an amount of NIS 20,971 million is in foreign currency and constitutes 46% of the long term obligations of the Company, without permanent bonds, before entering into hedging transactions. Therefore, fluctuations in exchange rates cause changes in the financing expenses of the Company that may affect the financial results of the Company. Due to the considerable volume of long term obligations in foreign currency, the business results of the Company are expressed in gains or losses, affected by fluctuations in the NIS – foreign currency exchange rates. When the Electricity Authority determined the electricity rate for the generation segment, it defined a new hedging mechanism for each segment of the electricity supply chain. The hedging mechanism is updated on the annual update of the electricity rate date, according to Company liabilities denominated in foreign currency, which are recognized by the Electricity Authority. This recognition will decrease gradually up to the complete cancellation of the hedging mechanism in April 2013, according to the following schedule:

Starting Point ‐ 36%April 2010 ‐ 27%April 2011 ‐ 18%April 2012 ‐ 9%April 2013 ‐ 0%

In accordance with the decreasing schedule of the hedging mechanism, the Electricity Authority reduced in April 2011 the financing component linked to the foreign currency, recognized in the rate from 27%, to a rate of 18% of the foreign capital recognized as ("hedged sum"), linked to a "determining basket" defined by the Electricity Authority as linked to the U.S.$ and the Euro at the rate of 75% and 25% respectively. The hedged sum is intended to reflect part of the financing expenses/income derived from the exposure of the Company to foreign currency and transfer it to electricity consumers. As a result of the decision of the Electricity Authority to decrease the rate of the hedged financing component in the rate, the Company was required to increase the volume of hedging transactions in the capital market.

296F-

Regarding the balance of the exposure, in excess of the hedged amount in the rate, the Company took various steps, intended to reduce the effect of fluctuations in exchange rates by decreasing the balance of the exposure to foreign currency, by entering into hedging transactions. Yet, the market capacity may be limited and cause a deviation in the Company's exposure to foreign currency in relation to the desired exposure rate according to the Company's policy. The Company is also exposed to exchange rates fluctuations deriving from part of the procurement agreements of goods and services for building generation units, as follows: Purchase cost of generation units’ equipment was determined normatively according to the GTH price list, published in U.S. Dollars. The Electricity Authority recognizes the purchase cost in foreign currency translated into NIS at the known exchange rate on the normative purchase date. Hence, the rate does not provide hedging against changes in index rates versus changes in foreign currency rates after the purchase date. If the Company will be required to present its financial statements in accordance with the complete IFRS principles, the Company will not be able to record a regulatory asset/ liability. Therefore, the hedging mechanism in the electricity rate, designed to hedge certain obligations in foreign currency will be implemented in a different mode in the financial statements and may cause fluctuations in the financial expenses of the Company, due to a gap between the change rate of the CPI and the change rate of the determining basket.

b) Interest Risks

The Company is exposed to the difference between the interest rate recognized (in foreign currency and NIS) in the rate base, which is only updated upon the yearly rate update, and the interest rate (in foreign currency and NIS) with respect to its actual liabilities. Therefore, the Company is also exposed to changes in interest rates dictated by the market, mainly regarding loans raised by the Company which bear variable interest rates. Moreover, an increase in market interest rates may considerably increase the costs of loans which the Company is required to raise. This exposure may affect the financial results of the Company. The Company is exposed to the difference between the interest recognized in the rate base, which changes only on the annual rate update and the actual interest rate with respect to its financial liabilities.

c) Capitalization of Loan costs

Financing and capital costs with respect to the construction of fixed assets, which are accepted in the electricity rate, are recorded as part of assets under construction, when it is highly likely that these costs will be recognized in the rate. They are capitalized to assets under construction until the date on which these assets are ready for their intended use. Capitalization of financing costs with respect to construction is recorded as a decrease of financing expenses. Capitalization of capital costs with respect to construction is recorded as other income according to section 15 of the international American standard SFAS 71.

The Company is exposed to the difference between the interest recognized for capitalization according to the rate and the actual interest rate for capitalization.

d) Input Price Change The input basket for the other rate components, except for fuel costs, part of the operating costs and part of the capital costs was linked to changes in the CPI. Therefore, the Company is exposed to market risks deriving from a real increase in the prices of other inputs, which reflect the components of the rate.

e) Capital Market Changes Affecting the Pension Funds and Pension Obligation The Company is obliged to maintain an appropriate financial fund in the Central Pension Fund (the “Fund”) that will enable pension payments to entitled pensioners and employees of Generation A and Generation B, according to the actuarial liability, calculated by the actuary of the Fund. The Fund calculates the actuarial liability of the Company for employees in the pension plan to determine the sum that the Company should deposit as a fund.

297F-

According to this liability, the Company will be responsible for making‐up any deficit between the Fund and the liability. At the same time, there is a particular uncertainty regarding the volume of deposits that the Pension Fund will require. The deposits in the pension fund of the Company are based on a forecast of cash flows expected in the future, which are based on several actuarial assumptions. The actual pension liabilities of the Company may differ from the forecasted liabilities. Moreover, the actuarial model for calculating the deposits in the pension fund may change in the future according to changes in life expectancy, regulatory issues, economic climate and other issues. These changes may cause a surplus or a deficit in the Company's liabilities to the pension fund. In this context, the main risks to which the Company is exposed are: a. The investment policy of the Fund and its effect on the Fund – The fund held by the Fund includes

various assets, comprised mostly of Government debentures and CPI linked bank deposits. Therefore, the yield of the Fund is affected by the inherent risks of markets behavior and its effect on the composition and value of the assets in the fund.

b. Average duration risks – the changes in yields of Government debentures have the highest effect on the financial value of the liabilities (the reserve) compared to the financial value of the assets (the fund) caused by the longer average duration of the reserve compared to that of the fund. Reduction of market risks requires therefore, diversification of investments in terms of the mix of held financial assets, the average duration, credit rating, etc. and adjustment or the average duration to the average duration of the reserve, as far as possible.

c. Credit risks – failure of a third party to meet its obligations to the Fund may decrease the value of Fund assets.

3. The Company’s Policy for Managing Market Risks

As a rule, the Company acts in the matter of finances and investments, according to law, so as to minimize costs and financial risks and achieve maximum returns, while spreading its investments throughout various financial institutions. The policy of the Company is to manage market risks arising from economic exposure of the Company to currency risks. The Company's policy for managing the market risks to which it is exposed is as follows: a) The Company’s policy for Managing Market Risks of Exposure to Currency Risks

The Company's policy is to manage market risks arising from the economic exposure of the Company. In order to minimize the Company’s exposure to foreign currency fluctuations, the Board of Directors of the Company has reached the following decisions concerning the Company’s exposure: 1) The sum of real exposure due to liabilities linked and denominated in foreign currency passed on

to electricity consumers as the hedging component in the rate, the Company will execute foreign currency hedge transactions (mainly swap and forward) to conform the expense structure to the recognized revenue structure according to the makeup of the determining basket, defined by the Electricity Authority. The swap transactions will be for a minimum of one year.

As a rule, transactions shall be executed in order to cover at least 85% of the balance of exposure, so that the amount exposed in each currency will not surpass the cumulative value of 15% of the loan balance in the currency in question.

2) Concerning the balance of exposure of the Company's foreign currency liabilities, which are not included in the hedging component of the electricity rate (after implementing paragraph a above) ‐ the Company shall enter into hedge transactions (mainly forward and swap), if market conditions justify it, so as to minimize exposure to foreign currency.

Swap transactions shall be for a minimum of one year taking into account inflation in Israel and Western countries, along with capital market interest rates.

3) To enable dynamic implementation of the policy and to avoid random technical exceptions, the Company's Senior VP of Finance and Economics instructed on July 11, 2011, to prevent the exposure amount in each currency from an up or down deviation of 5% of the balance of the loan in that currency with an addition of 2% of the balance of the loans for each 1% in the gap between interest, if it is negative to the debit of the Company.

4) The instruction of the Senior VP of Finance and Economics permits a deviation in excess of 15% only if the amount of the exposure is no greater than $10 million or the equivalent of that sum in any other foreign currency, each foreign currency separately.

5) The Company will consider possible hedging transactions to spread the exposure to interest and foreign currency (variable/fixed interest) for the purpose of reducing the exposure to rising interest rates, if market conditions will justify it.

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6) Pursuant to the aforementioned in section b 1 above, the Company recently started to conduct

hedging transactions for procuring goods and services in foreign currency. The Company conducted hedging transactions with respect to purchased stage B of the emergency project during August 2011.

b) The Policy of the Company to Contend with Market Risk Affecting Pension Funds and Pension

Liabilities The Company acts to deal with market risks affecting the ability of the Fund to effect payments to entitled employees out of its assets, as follows: 1) On all matters regarding the funds, the Company designates the market risks management to

economical exposure. 2) A dedicated department is charged with the task of controlling the financial activity of the Fund

and supervising the conformance to all legal directives and the management services agreement between the Company and the management company of the Fund.

3) The Company has a representative on the Fund's Board of Directors and in its committees (in addition to a representative of Company employees). These directors participate in defining the suitable policy for managing the funds, including providing a solution to the risk of average duration gaps between the assets and the liabilities by adjusting, as best as possible, the average duration of the assets to investments, with due consideration of the borrower's risks and investment volume and also investing the major share of Fund assets in NIS linked assets.

4) Aiming to reduce the fluctuations in transfers to the Fund, mainly due to the change in the yields curve for capitalizing the actuarial liability, the Company acted to spread the "exceptional debt".

5) On November 15, 2010, the change in the articles of the Main Pension Fund was approved by the Supervisor of the Capital Market in the Ministry of Finance.

6) The Fund manages the pension funds according to its policy and not according to the Company's policy. It is known that the Fund is comprised of different assets, mainly Government debentures and index linked deposits in banks. Therefore, the yield of the Fund is affected by the inherent risks of markets behavior and its affect on the composition and value of the assets in the Fund.

c. The Scope of Authority in the Company’s Management, in Managing the Exposure to Foreign Currency

As per the Company’s policy concerning the treatment of exposure deriving from market risks, as detailed above, the head of the Finance Department is authorized to approve currency exchange transactions and interest swap transactions. The head of the Finance department is not limited to quantities related to authorization to approve hedge transactions. Additional hedging transactions, e.g., options, etc., require the approval of the Senior VP of Finance and Economics. In addition, the Board of Directors has determined that certain Company employees shall perform, on behalf of the Company, hedge transactions in accordance with its policy.

d. Supervising and Realizing the Risk Management Policy

1) General

The Company maintains a periodic system for the management of financial market risks, by carrying out monthly tracking of its financial liabilities and their hedges. The Company tracks its liabilities over the reporting period and will perform hedges based upon its needs and according to set policy, after consultation and independent opinions from outside experts.

2) Supervision by the Board of Directors

Each quarter, when discussing the financial statements, a detailed report shall be delivered to the Board of Directors concerning the currency exposure at the end of each quarter, which is the main exposure of the Company to Market risks, for which the Company has a policy in place, approved by the Board of Directors regarding the hedging transactions carried out over the current quarter. At the same time, every quarterly report submitted to the Board of Directors on the exposure to currency conditions indicates that for reasons of flexibility and materiality, whenever the amount of the currency exposure does not exceed a sum equivalent to $ 10 million, a deviation from 15% is allowed

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3) Company Control Mechanisms The Company's Internal Audit occasionally tracks the performance of decisions made by the Board of Directors and its committees on the subject of exposure to currency risks, to prevent, inter alia, deviation from the Company's policy for managing market risks. The audit is conducted according to the accepted audit standards and to work plans approved by the Audit Committee of the Board of Directors.

The Company has an exposure team that monitors the progression of the exposure to the exchange

rate in relation to the Company's financial liabilities once a month and recommends appropriate transactions.

e. Further Details Concerning the Management of Financial Market Risks

1) Events Concerning Exposure to Market Risks and Management of Market Risks after the Statement

of Financial Position Date There are no events of exposure to market risks after the statement of financial

position date. 2) Exposure to Foreign Currency and CPI

Over the course of the reporting period the Company derived a profit of approximately NIS 1,220 million as a result of currency exchange transactions and a loss from forward transactions amounting to approximately NIS 51 million. The purpose of hedge transactions is to hedge the Company’s exposure to foreign currency and their results are the reverse of the results of the exposure of the base asset ‐ the Company’s foreign currency liabilities. Therefore, one must note that the aforementioned NIS 1,169 million profit was offset by a loss derived from loan erosion, on account of which these swap and forward transactions were made. The Company has index linked financing expenses. However, these expenses are relatively stable and therefore create a lower accounting exposure for the Company than the fluctuations in currency rates.

3) The chances of loss from the various investments, and the Company’s debts as a result of the

possibility that the opposing party in the transaction or the Company’s debts will fail to meet their obligations or in the absence of the possibility to legally enforce the existence of a debt, are equal to the balance of these assets in the Company’s balance sheets.

4) The Company has no market risk from off balance sheet positions, as the purpose of these

transactions is purely defensive. 5) Starting from the third quarter of 2011, the Company implements the following method for

revaluating the non‐negotiable liabilities in NIS and in foreign currency for the notes and disclosure in the Board of Director's report: a. Debentures

1. Debentures in NIS The non‐negotiable debentures issued by the Company are revaluated according to individual

revaluations, calculated by Mirvach Hogen Ltd., which was chosen by the Ministry of Finance as the company that calculates the individual price quotes and the interest rates for institutional organizations, from March 20, 2011 (the “Transition Date").

2. Debentures in Foreign Currency Debentures quoted individually on the Bloomberg system are revaluated according to this

quote. Long term non‐negotiable debentures in U.S. Dollars, without a specific quote in the

Bloomberg system are revalued through the interest rate schema for the longest debenture for which an individual quote exists, together with the difference between the risk‐free interest rate, according to the return on the Treasury Bills that corresponds to the life span of that debenture, and the risk‐free interest according to the return on Treasury Bills according the life span of the debenture for which an individual quote exists.

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Short term non‐negotiable debentures in U.S. Dollars, without a specific quote in the

Bloomberg system, are revaluated according to the individual quote for the shortest debenture, less the difference between the CDS (Credit Default Swap) of the Company for the period according to the life span of that debenture and the CDS of the Company according to the life span of the related non‐negotiable debenture. Then the difference between the risk‐free interests rate for the period is deducted according to the return on the Treasury Bills.

Debentures in Japanese Yen are revaluated at the return rate that is converted from a return in U.S. Dollars, using the YAX function in the Bloomberg system.

b. Loans The fair value of the loans is revaluated through discounted cash flows expected with respect to

the loans. Discount rates are determined for the different liabilities as follows: 1. Loans in NIS Loans in NIS are revaluated according to an interest curve, built on the basis of individual

quotes for the non‐negotiable debentures, according to their liability channels (linked/ unlinked) and guarantees given to the lenders.

2. Loans in Foreign Currency Loans in U.S. Dollar are revaluated on the basis of the interest on U.S.A. Treasury Bills with

the addition of the CDS of the Company. Loans in other foreign currencies are revaluated by converting the interest on the

aforementioned loans in U.S. Dollar through the SWPM function in Bloomberg system.

c. The difference between Fair Value Revaluation Methods The change in the capitalization rates for obligations in NIS derives mainly from the use of

individual price quotes of the non‐negotiable debentures of the Company according to the model of Mirvach Hogen Ltd. which is based on dividing the negotiable market to tenths according to the yield to maturity on the loan and determining the place of the non‐negotiable loan in those tenths according to the risk premium derived from the price of transactions/issuances in the non‐negotiable market. This model expresses in a more updated way the changes in the risk premium of the debt as reflected in the negotiable market, according to changes in the related tenth. These individual quotes come instead of the interest vector according to the Company rating, previously used by the Company, provided by Shaarey Ribit Ltd., which provided these quotes to institutional organizations up to the transition date, with the addition of the increment according to the results gained by the Company in the last issue. The change in the discount rates for liabilities in foreign currency derives mainly from the use of individual price quotes provided by Bloomberg system of debentures issued by the Company abroad. These individual quotes come instead of rates of return on debentures issued by the Company with the addition of the initial issuance premium, previously used by the Company.

f. Linkage Basis Report

Information concerning the linkage terms of the Company's monetary balances as of December 31, 2011, and the same period in the previous year, see Note 27 to the Annual Financial Statements.

g. Sensitivity tests

See information on sensitivity tests in Note 27 to the Annual Financial Statements.

h. Positions in derivatives See information on maximum holding of derivatives in Note 27 to the Annual Financial Statements.

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c. Aspects of Corporate Governance 1. Contributions

The Company is prevented from making contributions in light of Government Companies Authority directives.

2. Directors Possessing Accounting and Financial Skills In accordance with the Securities Regulations, the Board of Directors decided in 2004, that the appropriate minimal number of Directors possessing accounting and financial skills is three (3), this taking into account, among other things, the size of the Company, its type and character, the complexity of its activities and the number of members of the Board of Directors. In the opinion of the Board of Directors, on the decision making date, this number will permit the Board of Directors to meet the obligations imposed upon it, including obligations imposed upon it under the Companies Law – 1999 ("The Companies Law") and regulations legislated by its force and the Company’s documents of incorporation, especially as it pertains to its responsibility of the Board of Directors in examining the Company’s financial condition and in issuing and approving Financial Statements. On May 24, 2012, the Company's Board of Directors decided, pursuant to a discussion of the subject, to increase the minimal number of Directors possessing accounting and financial skills to five directors. The Board of Directors believes that the determined number of five (5) Directors possessing accounting and financial skills will enable it to fulfill its duties in accordance with the law and the incorporation documents of the Company and especially in view of its duty to review the financial condition of the Company and its responsibility for preparing and approving the financial statements and will ensure qualitative discussion and review of financial and accounting subjects in the meetings of the Board of Directors and its committees. The decision of the Board of Directors was based on the following considerations: a) The type and complexity of the accounting and financial issues related to the activity of the Company

and to the preparation of its financial statements in view of the type and scope of its activity, the internal and external controls required, including the Internal Audit and the audit of an external auditor, and the extended regulation applied to the Company, inter alia, in the accounting and financial field, due to its status as a public and Government company, subjected to the supervision of different regulatory entities.

b) Specifically, the presence of the following issues, which increased their weight in the activity of the Company and its financial reporting processes in recent years: Preparing financial statements according to accounting standards unique to the Company and the expected transition to full reporting according to the International Financial Reporting Standard (IFRS); treatment and presentation mode of the actuarial liabilities of the Company; application of stricter SOX principles than those applied by the majority of companies in Israel; and the structure of the Company's financial debt.

c) Reinforce principles of corporate governance applied to the Directors in the Company in performing their duties and strengthening the duties required of them, along with reinforcing the rules related to preparing and approving financial statements in reporting corporations.

d) The minimal number of five (5) Directors possessing accounting and financial skills, closely corresponds to the accepted number in other companies of the same size and financial and accounting complexity as the Company, and is even higher than that in the majority of the companies.

As of the date of this report, the Company has eight (8) Directors possessing accounting and financial skills: Dr. Ziv Reich, Mr. M. Ben‐Ami, Ms. Iris Stark, Mr. Raik Abu Rish, Mr. Michael Lazer, Ms. Vered Itzhaki, Mr. Izhak Lax and Mr. Arie Rapoport. For details see sections 7.1 and 7.2 in the prospectus. The Directors possessing accounting and financial skills act in committees of the Board of Directors dealing with financial and accounting matters, as follows: The Financial Statements Reviewing Committee, Audit, Budget, Financial Management and Risks Management, Agreements and Assets, Strategy, Structural Change and Image, Human Resources and Organization, Actuary, Budget, Regulation, Business Development, Marketing and Service, Corporate Responsibility.

3. Independent Directors The Companies Law defines arrangements aimed at reinforcing the independence of the Board of Directors of a public company, and states, inter alia, that a public company is entitled to include in its Articles a stipulation, whereby independent Directors, in the number defined by the company will serve in its Board of Directors and the company is also entitled to set their percentage out of the serving members

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of the Board of Directors. The regulation recommends appointing one third of independent Directors at least in a company with a control holder or whoever is the control holder of a controlling concern. Since the authority to appoint Directors in a Government Company, is granted to the Minister of Finance and the Minister of Energy and Water in consultation with the appointments review committee, on February 8, 2009 the Company addressed the Government Companies Authority and requested to receive its position and guidelines on adopting directives on the subject of the independent Director's arrangement, the percentage of the independent directors their number and service period in the Company's Articles.

The position of the Government Companies Authority, as received by the Company on February 24, 2009, is that including a binding stipulation in the articles of a government public company that requires the appointment of a certain number of independent Directors, as defined in Amendment No. 8 to the Companies Law, may impose significant limitations on appointing Directors for that company due to the strict requirements which an independent Director has to fulfill regarding his relations with the State and entities under its control. On the other hand, the Government Companies Authority's position is that it does not seem that such a binding stipulation will contribute to significantly improve the activity of the Board of Directors in the Company and reinforce its independent status, above the current protections provided by the stipulations of the Government Companies Law and the principles of the administrative law. Therefore, the Company did not adopt a directive regarding the percentage of independent directors in its Articles.

4. The Company’s Internal Auditor

a) Details of the Internal Auditor 1) The Internal Auditor is Mr. Igal Harel, who began his service as the Internal Auditor on March 17,

2011. 2) The Internal Auditor conforms to the conditions stipulated in section 146(b) of the Companies

Law and to the directives of sections 3a and 8 of the Internal Audit Law ‐ 1992 (in this section "Internal Audit law").

3) The Internal Auditor is an employee of the Company and does not act in any other capacity in the Company, in addition to the Internal Audit, except for the position of the ombudsman for public and employees' complaints. Fulfilling these additional roles does not affect his ability to perform his primary role.

4) The Internal Auditor does not have any material business relations or other material relations with the Company and does not hold any position outside the Company which creates, or may create, a conflict of interests with his role as an Internal Auditor.

b) Appointment Process On March 3, 2011, Mr. Shai Rosenstock, the former internal auditor, resigned from his position as the

Internal Auditor of the Company, according to the employment termination agreement entered between him and the Company. Mr. Shai Rosenstock resigned from the Company at his request, which was accepted by the Company. For details on the end of the employment of Mr. Shai Rosenstock as the internal auditor of the Company see Immediate Reports of the Company of February 10, 2011 (Ref. No. 2011‐01‐045561 and of February 17, 2011 (2011‐10‐052668), presented as a reference. On March 17, 2011, the Company’s Board of Directors unanimously decided to adopt the recommendation of the Audit Committee from March 3, 2011 and appoint the deputy and vice Internal Auditor, Mr. Igal Harel, as the Acting Internal Auditor starting from the resignation date of the internal auditor, Mr. Shai Rosenstock, according to the agreement on the termination of his employment and up to the appointment of a permanent Internal Auditor by the Board of Directors, according to the proposal of the Audit Committee, who will be chosen through a process according to the Circular of the Government Companies Authority on the subject of Appointing an Internal Auditor 2010‐2011, and according to any law applied to the appointment of an internal auditor. According to the Circular of the Government Companies Authority on the subject, the Company's Board of Directors approved on August 25, 2011, the election format of the internal auditor, as presented by the Audit Committee. The Location Committee, appointed to conduct this process, reviewed the candidates who presented their candidacy according to the determined process, rated the candidates according to predefined criteria and recommended Mr. Igal Harel as the most suitable candidate for the position. On November 17, 2011, the Company's Board of Directors decided to adopt the recommendation of the Audit Committee and appoint Mr. Igal Harel as the Internal Auditor of the Company.

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c) Identity of the Supervisor of the Internal Auditor 1) The CEO and the Chairman of the Board of Directors of the Company supervise the Internal

Auditor and Public Complaints Commissioner on behalf of the organization. 2) The identity of the supervisors conforms to the directives of section 148 and section 49 of the

Government Companies Law. 3) The obligations and the authorities of the Internal Auditor are set in the procedure “The Internal

Audit and Public Complaints Commissioner” on the Company. This Internal Audit procedure is approved by the Audit Committee.

d) Work Plan

1) In 2010, the internal audit completed a general processes risks review. The risks review served as the basis for outlining a new multi‐year work plan for the Internal Audit for the years 2011 ‐ 2013. The multi‐year work plan (2011‐2013) was approved by the Audit Committee in July 2010 were submitted to and discussed by the Audit Committee in July 2010 and by the Board of Directors in December 2010.

2) The Internal Auditor submits a proposed annual work plan, in coordination with the Chairman of the Board of Directors, the Chairman of the Audit Committee and the CEO. The annual work plan is discussed and approved by the Audit Committee and by the Board of Directors. The work plan for 2011 was approved by the Audit Committee and approved by the Board of Directors in December 2010.

3) The duties and authorities of the internal auditor are determined in accordance with section 4(a) to the Internal Audit Law and by the Audit Committee, according to the authority delegated to it for this purpose in the past by the Company's Board of Directors. On May 24, 2012, the Board of Directors approved, a motion to reconfirm its previous decision to delegate to the Audit Committee its authority to determine the duties and authorities of the Internal Auditor. The Company's Board of Directors did not delegate additional statutory authorities granted to it to any of its committees.

4) Demands to perform audit tasks and sometimes audits with higher priority than other tasks during the work year are initiated by the Chairman of the Board of Directors, the Chairman of the Audit Committee, the CEO, members of the Board of Directors and the Internal Auditor. In addition, the Internal Audit conducts additional audits that are not planned in advance during the year, pursuant to audit reports of the State Comptroller and pursuant to direct and anonymous complaints received by the Company. All these are integrated in the work plan within the approved scope of the plan.

The Internal Auditor prepares an annual report every year, summarizing the Internal Audit reports

completed during that year. The semi‐annual report and the annual report of the Internal Audit are submitted to the Chairman of the Board of Directors, the Chairman of the Audit Committee of the Board of Directors and the CEO.

5) The Internal Auditor submitted an audit report in 2011 on the subject of material transactions (including transactions that require special approvals according to section 270 of the Companies Law and exceptional transactions as defined in the Companies Law) which the Company entered into up to December 2010. The material transactions for 2011 are audited by the Internal Auditor in 2012.

6) The work plan for 2011 provides the Internal Auditor for unplanned tasks in the scope of 20 tasks. 7) During the period of January – December 2011, the Internal Audit submitted audit reports,

including follow‐up reports in the area of computerized information systems. 8) As of the date of the prospectus, the Internal Auditor completed the proportional part of the

multi‐annual plan of the internal audit for the years 2011 ‐2013. 9) In December 2011, the Audit Committee and the Board of Directors approved the work plan of

the internal audit for 2012.

e) Audit of Held Companies 1) Work plans of the Internal Audit include, from time to time, audit of the subsidiaries. An audit

report on the Jordan Properties Company was submitted in 2011. 2) An independent Internal Auditor was appointed for the National Coal Supply Corporation ("The

Coal Company"). The supervision of the work of the internal auditor at the Coal Company is performed by the Audit Committee and the Board of Directors of the Coal Company, as concluded in May 2012 between the legal adviser and the secretary of the Company and the Chairman of the

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Board of Directors of the Coal Company. The Internal Auditor of the Company will receive all the material related to the internal audit in the Coal Company that he will require to perform his work. In the Company's understanding, there is no limitation on transferring the information from the Coal Company to the Company.

f) Scope of Employment

1) The number of employment hours of the Internal Auditor during the report year:

Internal Audit in the Company Internal Audit at held corporations

Internal Audit Public Complaints

Audit of activities in Israel About 44,500 About 16,000 -

Audit of activities outside Israel - - -

The Internal Audit has 43 budgeted positions for employees who perform audits and handle

public and employees complaints (including secretaries and administrators). The Internal Auditor clarifies complaints from the public, including employee complaints, assisted by employees of the Internal Audit. 11 employees out of the budgeted positions are designated to handle public complaints. In addition, the Internal Auditor engages outsourced audit services to assist fulfillment of the work plan and other audit tasks or on subjects requiring expertise that the internal audit lacks. The scope of the outsourced audit services is not material.

2) According to the multi‐year work plan, as approved in July 2010, by the Audit Committee and approved by the Board of Directors in December 2010, the Company estimates that the work scope of the Internal Audit is required and sufficient to perform internal audits of material issues in the Company about once every three years.

g) Performance of the Audit

a) As stated by the Internal Auditor, audits are conducted according to accepted professional standards of Internal Auditing, in accordance with the applicable laws and in conformance to the Internal Audit Law and to the directives of the Government Companies Authority, furnished from time to time in circulars of the Government Companies Authority.

b) The Board of Directors and the Audit Committee assess that the Internal Auditor conformed to the requirements specified in the professional standards.

c) The competence of the Internal Auditor and his compliance with professional standards were examined by the Locating an Internal Auditor Committee in 2011.

h) Access to Information

The Internal Auditor and his representatives are granted free, continuous and direct access to every hard copy or digital document, data, database, or information, including financial data, for performing their tasks. The Internal Auditor and his representatives are entitled to enter every asset and inspect it, in conformance with the contents of section 9 of the Internal Audit Law.

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i) Reports of the Internal Auditor

a) Reports of the Internal Auditor are submitted in writing. The Internal Auditor submits a summarized report of the work of the Internal Audit and a follow‐up report on implementation of decisions and recommendations.

b) During the work year, the Internal Auditor submits final versions of audit reports to the Chairman of the Board of Directors, to the CEO and to the Chairman of the Audit Committee of the Board of Directors. Audit reports are submitted to the members of the Board of Directors, to members of Management and to the audited entities through the Secretary of the Board of Directors. The semi‐annual reports submitted by the Chairman of the Board of Directors to the Finance and Energy and Water Ministers and to the Manager of the Companies Authority include a report on the performance of the Internal Audit in the Company.

c) During January – December 2011, the Internal Auditor presented 142 reports: 100 audit reports, and 42 examination reports. During this period, the Audit Committee of the Board of Directors held 10 discussions on the Internal Auditor’s findings and recommendations which took place on March 24, 2011, April 7, 2011, May 5, 2011, June 23, 2011, July 21, 2011, August 18, 2011, September 8, 2011, October 27, 2011, November 17, 2011 and December 8, 2011.

j) Evaluation of the Board of Directors of the Internal Auditor’s Activities

According to the multi‐annual plan, the Board of Directors estimates that the scope of the Internal Auditor’s activities allows the auditing of material subjects once every 3 years or so. This scope, the character and continuity of the Internal Auditor’s activities and his work plans are, in the Board of Director’s estimate, reasonable and are capable of realizing the Company’s Internal Auditing goals.

k) Wages The Internal Auditor is an employee of the Company. The Board of Directors estimates that his wages do not affect the ability of the Internal Auditor to exercise his professional consideration.

l) Miscellaneous According to the professional standards of the Global Institue of Internal Auditors and also according to the Government Companies circular No. 2011‐4‐2, the quality of the internal audit should be reviewed once every five years. The last review was conducted in 2007. The quality of the internal audit was not reviewed in 2011, since as detailed in section c 4b above, the internal auditor at that time resigned at the beginning of 2011 and his replacement, Mr. Igal Harel, who was first appointed as an Acting Internal Auditor only, was finally appointed as the Internal Auditor of the Company at the end of 2011. Therefore, the review of the quality of the internal audit was postponed to a date after the appointment of the permanent Internal Auditor. The review of the audit quality will be performed accordingly in 2012. The review of the internal audit quality will be performed on two levels: The first level will relate to reviewing the internal audit system of the Company. This review will examine, inter alia, the interface between the Audit Committee and the internal auditor and other organs in the Company (Board of Directors, Management, etc.). The second level will audit the quality of the work of the internal auditor and his team. This level will examine whether the internal auditor functions as required to promote the Company's internal audit objectives. The review will be performed in 2012.

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5. Financial Report Approval Process

In accordance with the Securities Regulations (Periodic and Immediate Reports) – 1970, and the Securities Authority directives dated July 23, 2007 and February 21, 2011, concerning financial report approval procedures for a reporting corporation (according to Section 36a(b) of the Securities Law – 1968), the Company must provide disclosure concerning the Financial Statement approval process and controls over it, as follows: a) The Committee for Reviewing the Financial Statements

On January 27, 2011, the Board of Directors approved the establishment of the Committee for Reviewing the Financial Statements (the “Committee”). The Committee is not the Audit Committee of the Board of Directors.

b) Members of the Committee The Committee is comprised of five directors, as follows: Dr. Ziv Reich, CPA, Chairman of the Committee, Ms. Iris Stark, CPA, Mr. Michael Lazer, CPA, Izhak Lax, Attorney and Mr. Arie Rapoport, CPA. For further details according to the guidelines of the Securities Authority of February 21, 2011, see sections 7.1 and 7.2 in the prospectus. The members of the Committee for Reviewing the Financial Statements signed a statement declaring that they have the ability to read and understand financial statements. Two of the committee members did not sign the said statement on the appointment date to the committee, due to a technical error, however, they signed this statement soon afterwards, declaring that their statement on their ability to read and understand financial statements was true for their appointment date to the committee as well.

c) Financial Statements Approval Process:

The Committee, in its authority according to the Government Companies Regulations (Directives and Conditions Related to the Approval of the Financial Statements) ‐ 2010, discusses the Financial Statements of the Company and reviews the different issues concerning the financial reporting. The Committee discusses, inter alia, the following subjects, which are presented, reviewed and explained by the Company's Management: a) Valuations and estimates prepared for the Financial Statements. b) Internal controls related to the financial reporting. c) Complete and adequate disclosure in the Financial Statements. d) The adopted accounting policies and the accounting treatment applied to material affairs of the

Company. e) Valuations, including the assumptions and estimates that served as their basis, which is used as the

basis for the data in the Financial Statements. The Committee also reviews various aspects of control and risk management, both aspects reflected in the Financial Statements and aspects that affect the reliability of the Financial Statements.

For discussing the Financial Statements as of December 31, 2011, the Committee held two meetings, on March 15, 2012 and on March 25, 2012. The meeting held on March 15, 2012, was attended by: Committee members; Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. Yigal Harel, Acting Internal Auditor; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, Ms. Iris Ben‐Shatal‐Levy, Deputy Company Spokeswoman; Representatives of the External Auditors Brightman Almagor Zohar & Co., Representatives of the government companies authority; and Representatives of the Law Firm Herzog Fox Neeman & Co.. The meeting held on March 25, 2012, was attended by: the, Committee members, Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. Moshe Bachar, Deputy CEO; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary; Ms. Iris Ben‐Shatal‐Levy, Deputy Company Spokeswoman; Mr. Yigal Harel, Internal Auditor; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, Representatives of the External Auditors Brightman Almagor Zohar & Co.; and Representatives of the Law Firm Herzog Fox Neeman & Co.

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In the meeting held on March 29, 2012, the committee discussed the material changes entered in the financial statements of the Company as of December 31, 2011, as part of preparing the draft prospectus, which was scheduled to be published on the basis of the annual financial statements. The meeting was attended by: the, Committee members, Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. Nisim Hilo, Attorney, Deputy Legal Advisor; Mr. Yigal Harel, Internal Auditor; representatives of the External Auditors Brightman Almagor Zohar & Co.; and Representatives of the Law Firm Herzog Fox Neeman & Co. On June 10, 2012, the committee discussed the material changes entered in the financial statements of the Company as of December 31, 2011, and March 31, 2012, as part of preparing the draft prospectus. The meeting was attended by: the, Committee members; Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, Representatives of the External Auditors Brightman Almagor Zohar & Co.; and Representatives of the Law Firm Herzog Fox Neeman & Co. On June 24, 2012, the committee discussed the main changes entered in the financial statements of the Company as of December 31, 2011, and March 31, 2012, as part of preparing the prospectus, for attaching the statements to the prospectus and for publishing the statements again to the public in the amended version, with the changes required for the prospectus. The meeting was attended by: the, members of the Committee for reviewing the financial statements, except Ms. Iris Stark; representative of the Board of Directors chambers, Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary; representatives of the Accounting and Economy Division of the Company, Representatives of the External Auditors Brightman Almagor Zohar & Co.; and Representatives of the Law Firm Herzog Fox Neeman & Co. After discussing the Financial Statements, the Committee concludes its recommendations on the approval of the Financial Statements and submits them to the Board of Directors a reasonable time before the convergence of the Directors. The Company's Board of Directors decided that a reasonable time for receiving the recommendations of the Committee is at least two (2) business days before the meeting, except in special cases, in which the recommendations will be submitted to the Board of Directors at a shorter time before the scheduled meeting of the Board of Directors and under the circumstances, the Board of Directors will confirm that this is a reasonable time. Prior to determining the recommendations of the Committee for Reviewing the Financial Statements of 2011, none of the discussions were attended solely by committee members. After receiving the recommendations of the Committee, the Board of Directors discusses the Financial Statements of the Company and material issues related to the financial reporting. The Company's Management presents the main results of the operations of the Company and the financial data for the reporting period to the Directors, addressing material events that occurred during the period. During the presentation, the Management answers questions asked by the Directors and provides the required explanations and clarifications, as required. The Company's Board of directors discussed the Financial Statements of the Company, on March 22, 2012 and on March 29, 2012. The meeting held on March 22, 2012, was attended by all members of the Board of Directors, Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary; Mr. Moshe Bachar, Deputy CEO; Mr. Oren Helman, Deputy CEO Regulation; Mr. Yigal Harel, Internal Auditor; Mr. Amir Linve, Assistant to the CEO and Head of the Structural Change Administration; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, Ms. Iris Ben‐Shatal‐Levy, Deputy Company Spokeswoman; Representatives of the External Auditors Brightman Almagor Zohar & Co.; Representatives of the Law Firm Herzog Fox Neeman; and the financial advisors to the Board of Directors.

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The meeting, held on March 29, 2012, was attended by: all members of the Board of Directors, except Ms. Shlomit Barnea‐Farago and Mr. Avraham Natan; Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary; Mr. Moshe Bachar, Deputy CEO; Mr. Oren Helman, Deputy CEO Regulation; Mr. Itzhak Yahin, Human Resources Division Manager, Mr. Yigal Harel, Internal Auditor; Mr. Amir Linve, Assistant to the CEO and Head of the Structural Change Administration; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, representatives of the Budgets Division; Mr. Yigal Arnon, Deputy Company Spokesman; Representative of the Government Companies Authority; Representatives of the External Auditors Brightman Almagor Zohar & Co.; Representatives of the Law Firm Herzog Fox Neeman and Lahav & Co. Attorneys Office, and the financial advisors to the Board of Directors. In the meeting, held on March 29, 2012, the Board of Directors discussed and approved the financial statements which were scheduled to be published as part of the prospectus of the Company for offering debentures to the public, based on the financial statements as of December 31, 2011. The meeting was attended by: all members of the Board of Directors, Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. Nisim Hilo, Deputy Attorney, Legal Adviser and Company Secretary; Mr. Yigal Harel, Internal Auditor; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, representatives of the Budgets Division; Ms. Iris Ben‐Shahal, Deputy Company Spokeswoman; Representative of the Government Companies Authority; Representatives of the External Auditors Brightman Almagor Zohar & Co.; Representatives of the Law Firm Herzog Fox Neeman and Lahav & Co. Attorneys Office; Representatives of S. Horovitz & Co., Law Firm; and the financial advisors to the Board of Directors. On June 10, 2012, the Board of Directors discussed and approved the draft financial statements as of December 31, 2011 and as of March 31, 2012, for attaching them to the draft prospectus, as filed with the Securities Authority. The meeting was attended by: members of the Board of Directors, Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, Representatives of the External Auditors Brightman Almagor Zohar & Co.; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary. Since more than three (3) days elapsed from the date on which the Board of Directors approved the financial statements that will be attached to the draft prospectus for filing with the Securities Authority, the Board of Directors, in its meeting on June 14, 2012, discussed and approved again the draft financial statements as of December 31, 2011 and as of March 31, 2012, which were attached to the draft prospectus, as filed with the Securities Authority. The meeting was attended by: all members of the Board of Directors, Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; representatives of the Accounting and Economic Division of the Company, representatives of the Finance Division of the Company, Representatives of the External Auditors Brightman Almagor Zohar & Co.; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary and his representatives; Representatives of the Law Firm Herzog Fox Neeman & Co., and the financial advisor to the Board of Directors, Mr. Shmuel Gotler, CPA. On June 24, 2012, the Board of Directors discussed the main changes entered in the financial statements of the Company as of December 31, 2011, and March 31, 2012, as part of preparing the prospectus, and approved the attaching of the statements to the prospectus and publishing the statements again to the public in the amended version, with the changes required for the prospectus. The meeting was attended by: the, members of the Board of Directors except Mr. Gideon Frank and Ms. Vered Itzhaki; representative of the Board of Directors chambers, Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary; representatives of the Accounting and Economic Division of the Company, representatives of the finance division of the Company; Representatives of the External Auditors Brightman Almagor Zohar & Co.; Representatives of the Law Firm Herzog Fox Neeman & Co.; and the financial advisor to the Board of Directors, Mr. Shmuel Gotler, CPA. On June 28, 2012, the Board of Directors approved again the amended financial statements of the Company as of December 31, 2011, and March 31, 2012, and approved the publication thereof. The meeting was attended by: the, members of the Board of Directors except Mr. Yossi Vadana; representative of the Board of Directors chambers, Mr. Eliyahu Glickman, Chief Executive Officer; Mr. Harel Zeev Blinde, VP Finance and Economics; Mr. David Yahav, Attorney, Legal Adviser and Company Secretary and his representatives; Mr. Yigal Harel, Internal Auditor; representatives of the Accounting and Economic Division of the Company, representatives of the finance division of the Company; Ms.

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Iris Ben‐Shahal, Company Spokeswoman; Representatives of Government Companies Authority; Representatives of the Law Firm Herzog Fox Neeman & Co.; On July 2, 2012, the Board of Directors discussed and approved (in a telephone meeting, attended by all its members) the submission of a request to the Securities Authority for obtaining its permission to amend the prospectus and also approved the publication of the amendment to the prospectus and the publication of the amended prospectus. The Board of Directors also approved the submission of a request to the Stock Exchange to amend the prospectus. In addition, the Board of Directors reapproved the financial statements as of December 31, 2011 and as of March 31, 2012, in the updated version, as included in this prospectus and reapproved publication of the amended financial statements. The Committee will determine an independent procedure for its activity, no later than 30 days from the prospectus date.

d) The Nature of the Organs Responsible for the Approval Process of the Financial Statements The Company’s Board of Directors headed by Mr. Yiftah Ron‐Tal, the Committee, headed by Dr. Ziv Reich, CPA, acting as the Chairman of the Committee, all other aforementioned Committee members, as well as CEO Mr. Eliyahu Glickman and Senior VP of Finance and Economics, Harel Zeev Blinde.

e) Additional Steps Taken by the Company to Ensure Correctness of the Financial Statements and the

Report of the Board of Directors The Company acts in accordance with the Regulations of the Government Companies Authority (Additional Report Concerning Actions Taken and Representations made to Ensure Correctness of the Financial Statements and the Directors’ Report) ‐ 2005, according to which the Company must attach to its Financial Statements, both yearly and quarterly, an additional report on controls enacted and procedures set, in order to ensure the correctness of the annual or quarterly Financial Statements, as the case may be, including signed statements of each position holder in the Company who signed on those reports. As for the processes performed by the Committee and by the Board of Directors prior to approving the Financial Statements, see paragraph 3 above. The Company has formulated a “Workings of the Disclosure Committee on the Subject of Disclosure in the Financial Statements” procedure, which includes the formation of a Disclosure Committee for the purpose of, among other things, confirmation, implementation and execution of examinations of control effectiveness over the periodic Financial Statements, including verification that the information contained in the reports is complete, accurate and proper, as well as for confirming controls and procedures ensuring the disclosure of the aforementioned information and the assessment and reporting of their effectiveness, discussion of inherent weaknesses that require disclosure, reporting and tracking of the correction of these weaknesses, etc. The findings and recommendations of the committee are reported to the Senior Vice President ‐ Finance and Economics. In addition, the Company has set a “Working Procedure for the Approval of Financial Statements, Changes in Critical Accounting Policies and Changes in Actuary Premises”, which sets in place, among other things, a discovery, treatment and reporting mechanism concerning events and information that may influence critical accounting policies and/or actuarial assumptions according to which the Company operates, including transferring reports and discussions to the appropriate Company persons, comprising the Senior Vice President ‐ Finance and Economics, the Senior Vice President ‐ Human Resources, the CEO, the Chairman of the Committee for Reviewing the Financial Statements, Members of the Committee for Reviewing the Financial Statements, the Chairman of the Board of Directors and members of the Board of Directors.

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6. The Internal Enforcement Plan As of the publication date of the report, the Company started an adoption process of an Internal

Enforcement Plan for the Company. Following intensive and comprehensive efforts, the Management of the Company, together with its legal advisors, formed an outline for an Internal Enforcement Plan in accordance with the criteria for recognizing internal enforcement plans for securities, published by the Securities Authority on August 15, 2011, constituting the required principles and work processes framework, which the Company requires to complete the adoption and implementation of an effective internal enforcement plan according to the Company's structure, activities and unique characteristics. The Company formed the outline of the Enforcement Plan, while reviewing current work processes and procedures and updating and integrating them in the suggested outline and identifying parties involved in the work processes. On July 28, 2011, the Company's Board of Directors appointed a dedicated Committee of the Board of Directors ‐ the Corporate Responsibility Committee, to attend, inter alia, to the adoption and implementation of the Internal Enforcement Plan in the Company according to tasks designated to it, within the outline of the plan. In its meeting on November 10, 2011, the Corporate Responsibility Committee discussed and reviewed the outline of the Internal Enforcement Plan and decided to recommend to the Company's Board of Directors to approve the outline of the plan. On January 26, 2012, the Corporate Responsibility Committee decided to recommend to the Board of Directors to appoint Mr. David Yahav, legal advisor and Company Secretary, as the person in charge of internal enforcement. On June 16, 2012, the Company's Board of Directors approved the outline of the internal enforcement plan and appointed Mr. David Yahav as the person in charge of internal enforcement. During the work process of outlining the Internal Enforcement Plan, the Company set timetables for implementing the milestones required to complete the plan's adoption process.

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7. External Auditors of the Company a. The Identity of the External Auditors The External Auditors of the Company are the Brightman Almagor Zohar & Co. auditing firm. In accordance with the decision of the General Meeting No. 87 on August 2, 2011, the appointment of

the Brightman Almagor Zohar & Co. auditing firm as the Company's external auditors was reconfirmed for the period starting January 1 2011 and up to December 31, 2011, subject to the approval of the Government Companies Authority, which was received.

b. Fees of the Outside Auditor

The total fees of the outside auditor in respect with audit services and other services relating to tax services audit and other related services for the years 2010 – 2011 are detailed below:

For the year ended on December 31 2011 2010 Brightman Almagor Zohar & Co. Brightman Almagor Zohar & Co. Hours NIS'000 Hours NIS'000 a. Fees for audit services,

for services related to audits and for tax services

21,350 4,618 26,651 5,614

b. Other fees ‐ total fees

for services provided by the outside auditor which are not included in paragraph (a) above

4,650 1,162 1,455 393

Hours dedicated by the External Auditor in providing other related services in 2011:

Work related to the draft debentures offering circular abroad and draft prospectus in Israel

3,000

Work related to the communication between the auditors and the Government Companies Authority

350

Feasibility review of the financial statements translation 500

Special tax work 450

Work on providing special auditor confirmations 350

Total hours dedicated to accompanying services 4,650

Hours dedicated by the External Auditor in providing other related services in 2010:

Work related to the draft debentures offering circular abroad which did not materialize

397

Review of the adequacy of the translation of the financial statements 528

Special tax work 356

Work on providing special auditor confirmations 175

Total hours dedicated to accompanying services 1,455

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In the opinion of the Company, performance of the related services provided by the external auditor do not affect the independence of the external auditor.

The fees of the external auditor, including the scope of hours and rate per hour are determined in accordance with the rules of the Government Companies Authority (Appointment of External Auditors and their Fees) – 1994 and according to its circulars, without the involvement of the Company. Current advance payments are paid to the external auditor during the audit year, according to the progress of the regular audit and review work, for services related to the audit and for tax services, up to the ceiling determined for these types of work. The balance of the fee (less advance payments paid) is paid at the end of the audit year, pursuant to the approval of the Government Companies Authority. During the audit year, the external auditor also receives payment of fees related to providing additional services, which are not included in the aforementioned list, according to the progress of the work and subject to the approval of the Government Companies Authority.

8. The Link between Rewards to Senior Position Holders and Stakeholders in the Company and Their

Contribution to the Company

a) Rewards to Senior Position Holders The reward to position holders in the Company, as a Government Company, differs completely from rewards in other public companies. The salary terms of senior position holders who receive the highest rewards in the Company are determined according to collective agreements and arrangements applied to all Company employees. These agreements and arrangements do not include any reward mechanisms that are determined by ability and/or performance results and salary updates are made according to agreements entered with all the employees. Therefore, in actual fact, The Company's Board of Directors has limited discretion in determining the reward of these position holders.

b) Reward to Stakeholders

1) The CEO of the Company is not one of the five position holders who received the highest salary among senior position holders in the Company in 2011. The reward of the Company's CEO differs significantly from the reward of holders of similar positions in other public companies. The employment agreement of the Company's CEO is a personal employment agreement in a uniform version, dictated by the Companies Authority in accordance with the Government Companies Circular No. 2001/1, of November 7, 2001. The salary of the CEO is determined on the basis of Government decisions on the subject and on guidelines and periodic announcements of the Government Companies Authority, which determine a ceiling for salaries of CEOs in Government companies (this salary is updated according to the classification of the Company and once a year, in accordance with the increase rate of the CPI).

Up to December 2011, the employment terms of the CEO included a personal reward mechanism.

The personal reward was limited, in accordance with the guidelines of the Government Companies Authority to an amount that shall not exceed 10% of the pension salary. The granting of the reward is subject to the approval of the Board of Directors. As on December 27, 2011, following the decision of the Government Companies Authority to raise the Company's classification, and in accordance with its announcement on the subject, the salary ceiling of the CEO was raised, but his entitlement to a personal reward was cancelled, effective as of that date.

Pursuant to the aforesaid, the Company's Board of Directors has limited discretion in determining the salary of the CEO, or the scope of the personal reward to the CEO.

2) The employment agreement of the Company's Chairman is a personal employment agreement in

a uniform version, dictated by the Companies Authority in accordance with the Government Companies circular, mentioned in sub‐section (1) above, regarding the Company's CEO. The salary of the chairman is determined according to the classification of the Company, as determined by the committee for classifying Government companies, and is updated once a year in accordance with the increase in the CPI and subject to the approval of the Company's Board of Directors.

Up to December 2011, the employment terms of the Chairman of the Board of Directors included a personal reward mechanism. The personal reward was limited in accordance with the guidelines of the Government Companies Authority to an amount that shall not exceed 10% of the salary. Following the aforesaid change in the classification of the Company and the resulting increase in

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salary, the personal reward mechanism was cancelled on December 27, 2011, effective as of that date.

According to the aforesaid, the Company's Board of Directors has limited discretion in determining the salary of the Chairman of the Board of Directors or the scope of his personal reward.

3) Directors’ compensation pay is determined according to the law, as detailed in section 8.1.2 of the

prospectus: Outsider directors' compensation pay is determined according to the Company's classification, in accordance with the sums specified in the Government Companies Regulations

(Rules for Compensation and Expenses to an outsider Director) – 1994, that do not allow an discretion in determining the compensation pay rate (the amounts are fixed, unlike a salary range).

External Directors compensation pay is determined in accordance with the decision of the general meeting of the Company according to minimum amounts set for the Company in its determined classification in the Companies Regulations (Rules for Compensation and Expenses to an External

Director) – 2000, although these regulations allow the company to determine a higher compensation. Directors employed by the State do not receive a reward.

c) The Board of Directors Review of the Link Between the Reward to Senior Position Holders and

Stakeholders in the Company and their Contribution to the Company The Company's Board of Directors examined in its meeting on March 29 2012 the reward terms of

position holders and stakeholders detailed in section 8 of the prospectus. Based on the aforementioned information, the Board of Directors concluded that the rewards paid to the five senior position holders and to stakeholders in the Company, who receive that highest rewards in the Company, match the complexity of their positions and are reasonable. The Company's Board of Directors determined that salary terms of position holders in similar positions (or no at a similar rank) in other public companies with a similar scope of activities to that of the position holders of the Company, detailed in section 8 of the prospectus, are significantly lower.

d. Instructions for Disclosure Related to the Financial Reporting of the Company 1. The Financial Reporting of the Company The Consolidated Financial Statements of the Company fulfill the directives of the Government Companies

Regulations for preparing financial statements and in accordance with the directives of the Securities Regulations (Preparing Annual Financial Statements ‐ 2010). The Government Companies Regulations for preparing financial statements, in the version related to reporting according to international accounting standards, were published in the Official Gazette on June 30, 2008 and were extended several times since then and apply to the Financial Statements up to and including 2011 and to the interim periods of these years, including comparative data included in these Financial Statements. On May 22, 2012, the "Government Companies Regulations" were extended up to December 31, 2014. From January 1, 2015, the Company will fully implement the International Financial Reporting Standards (IFRS). See details in Note 3 e to the Annual Financial Statements.

The Company consolidates the National Coal Supply Corporation in its Financial Statements. The financial

data in the Board of Directors’ Report are data from the Consolidated Financial Statements of the Company.

2. Events that Occurred after the Statement of Financial Position Date

a) Actions and Steps taken related to the Cash Flow Condition of the Company

(1) Following the meetings and discussions conducted between the Company and representatives of the Ministry of Finance, as detailed in section a1 b1 above, on a possible assistance outline for the Company in contending with its cash flow needs during the first quarter of 2012, several steps were taken, which, as estimated by the Company, may have a positive effect on the Company's cash flow, including extending the duration of the reduced purchase tax on imported diesel oil, reduced excise on the local diesel oil, postponing deposits in the dedicated account for the emergency plan, spreading payments of the periodic payments to VAT and receiving approvals from the Ministry of Environmental Protection, that enable the Company to use crude instead of diesel oil in a certain generation unit (and subject to certain conditions. See details of these steps

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in section 28.5 of Chapter 6 in the prospectus and also section 7.10.7 in this report of the approvals granted by the Ministry of Environmental protection.

(2) Despite the aforementioned steps which bridges and are expected to bridge part of the

Company's cash flow gap for 2012, pursuant to aggravated decrease in natural gas quantity supplied to the Company from "Yam Thetis" reserve and the continued disruptions in natural gas supply from Egypt, and noting the Company's need to prepare a stock of fuels for the summer months, the Company estimated in the beginning of March 2012, that it expects to be unable to purchase the required fuels quantities according to forecast needs of the system without Government assistance.

See immediate report on March 1, 2012 (Ref. No. 2012‐01‐057828).

(3) Pursuant to the aforementioned, the Company applied again in March 2012 to the Ministry of Finance, requesting an urgent solution for financing excess fuels procurement, inter alia, by way of providing a state guarantee to a bridging issue of non‐negotiable debentures of the Company in an amount that will reflect its cash flow needs until the planned offering of negotiable debentures, listed for trade in the Tel Aviv Stock Exchange will be offered to the public ("The Offering in the Stock Exchange"). On March 20, 2012, the Company and the Ministry of Finance agreed on a consolidated principles outline for solving the cash flows problem of the Company, until the offering in the stock exchange will be effected. According to these principles, it was decided, inter alia, that the Chairman of the Company's Board of Directors will act to approve a decision of the Board of Directors on transferring approximately NIS 600 million from the trust account, managed by the Trust Company of the United Mizrahi Bank Ltd., with respect to non‐budgetary salary components (see details of these salary components in section 14.6.7 of Chapter 6 in the Prospectus) ("Trust Account") to the Central Provident Fund for Pension to Company

Employees, according to the deposits rate required for this Fund ("The Fund"); the Company will act to increase the cash flow to an additional amount of up to NIS 1 billion; the Company will act to raise funds (in excess of funds secured by a State guarantee under the offering in the stock exchange), to enable the Company to perform the debt recycling required in 2012 – 2013 (except the need for a solution for the cash flow problem arising from the fuels problem); the Ministry of Finance will act to provide a State Guarantee in the amount of NIS 1.5 billion for a period of up to 18 months; the Company will apply to the Taxes Authority and request its approval for spreading tax deduction payments required from the Company during the calendar year; and the Electricity Authority will act to provide NIS 600 million out of the dedicated account for the emergency plan, to be used by the Company. See details of the concluded principles in section 28.8 to Chapter 6 of the prospectus. Under this outline, it was also noted, that based on the aforementioned steps, except for a drastic change, in is expected that the Company will have the sources required for its operation, including procurement of the fuels stock required for the summer season, development of the transmission grid, including connection of additional electricity producers and implementing all the decisions of the Electricity Authority on all matters related to managing the electricity shortage in the summer of 2013.

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(4) On March 22, 2012, the Electricity Authority decided , inter alia, to spread the electricity rates at a

gradual rate during 2012 ‐ 2014; postpone the monthly deposits in the dedicated account for Stage B of the emergency plan in the mount of NIS 167 million in each of the months January ‐ June 2012. The Company will resume deposits from August 2012 up to January 2013. The total postponed deposits amount to NIS 1 billion; the Electricity Authority will act to conclude an outline for redeeming up to NIS 600 million from the balance of the funds in the dedicated account for the emergency plan, to be used by the Company, subject to certain conditions, e.g., receiving an obligation and adequate guarantees from the Company, to the satisfaction of the Electricity Authority regarding the sources for returning the funds to the account at the rate, format and dates to be determined by the professional team of the Electricity Authority, according to the development needs and subject to ensuring that at the end of 2012, the dedicated account for the emergency plan will resume the financial volume as it was prior to the cash flow bridging actions described in this section. The decision of the Electricity Authority also states that a dedicated mechanism will be established for managing the funds of the addition to the recognized fuels costs, in relation to the recognized cost in the last rates update ("The Addition to Fuels Cost" and "The Dedicated Account for Fuels", respectively), under conditions determined by the Electricity Authority. The decision of the Electricity Authority and the outline for spreading the rate increase are based on the assumptions of Government assistance to the Company, as concluded after January 2012 and recently, including, increased exemption from excise tax, furnishing guarantees, spreading VAT payments, spreading income tax payments and extending the effective date of the Government Companies Regulations for preparing financial statements. This Government assistance was subjected to conditions detailed below and especially to the contribution of the Company by implementing efficiency steps, continued credit raising, performing actions to develop the electricity sector, including entry of private producers and using the trust account funds according to the legal means available to it.

The terms of the Government assistance, as stated in the decision of the Electricity, are inter alia, increase of the discount rate in the tax exemption with respect to purchasing diesel oil for electricity generation (excise) from 69% to 88%; spread of VAT payments of the Company over several payments during the calendar year; provide a State guarantee for a public offering in the stock exchange in a sum that corresponds to the cumulative effect of the addition to the fuels costs during 2012‐2014 on the liquidity of the Company, subject to fulfilling the other conditions in the decision of the Electricity Authority, where the proceeds of the offering in the stock exchange will be deposited in a dedicated account for purchasing fuels, under conditions detailed in the decision of the Electricity Authority; the Ministry of Finance will provide a State guarantee to the Company for immediate funds raising during March – April 2012, in a cumulative amount that will not exceed NIS 1.5 billion; and Payments of the Company to income tax in April – July will be spread and postponed by the Government.

The Electricity Authority detailed in its decision the conditions required by the related parties of the Government for Government assistance, which specify that until the Government guarantee becomes effective, the Company will at least take the following steps: raise at least all the missing financing sources required for its activity, which is not related to the need to finance extra fuel costs; .will file a prospectus for an offering on the stock exchange with the Securities Authority no later than May 2012 and will conduct the issue on the stock exchange, on the possible date, up to no later than July 1, 2012. In response to the Company's request that the Electricity Authority will amend its decision in a way that will ensure that non implementation of the float up to the aforementioned date will not affect the Government support to the Company, the Electricity Authority extended the said date, on June 25, 2012, to the end of July 2012. Will implement the efficiency steps it presented to the Government, which will result in saving no less than NIS 400 million per year. Will act immediately and without any conditions, to employ the legal means available, to redeem an amount of not less than NIS 600 million out of the trust account. In addition, the Company will continue its actions regarding the trust account including the redemption of funds out of this account, as will be required, with due consideration of the position of the regulators team, appointed on the subject and according to the law.

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Will implement, during 2012‐2014, the development plan for the transmission grid, to develop

the economy and ensure entry of private electricity producers into the electricity sector; and will deposit in a dedicated account the receipts from the issue on the stock exchange according to the conditions determined by the Electricity Authority.

(5) As on the date of the prospectus, the Company started to implement the actions required from it

as a condition for increasing the rate and implementing the outline described in section d 2(d) above. This includes preparations of the Company in recent months with the stock exchange for performing the offering according to this prospectus.

(6) The Audit Committee and Company's Board of Directors approved on March 29, 2012, the

preparation and issue a of private placement of non‐negotiable debentures in Israel, to be secured by a State guarantee ("The Private Placement") and also approve preparation and obtaining a loan secured by a State guarantee from banks in Israel or abroad ("The Loan"), including entering into an agreement with the State for providing the guarantee to secure the private placement or the loan, as the case may be, in a total amount (for the private placement and/or the loan together) that will not exceed the NIS 1.5 billion, all subject to receiving the required regulatory approvals. On April 5, 2012, pursuant to receiving the required regulatory approvals, the Company completed a private placement of debentures of the "NIS Electricity 2013" series, secured by a State guarantee, in the amount of NIS 1.5 billion. See details in the Immediate Report on April 5, 2012 (Ref. No. 2012‐01‐097548).

(7) On May 24, 2012, the Company received a letter from the Accountant General's office, stating

that the Accountant General will enable the Company to issue additional debentures, guaranteed by the State, in 2013, to recycle the debt secured by the State in the amount of NIS 3 billion, due to be repaid in that year (this relates to recycling a debt with respect to a debenture issued in a private placement in April 2012, as detailed above and to recycle a debt with respect to an expected repayment of a debentures series, expected to be floated in this prospectus and due to be repaid in 2013). The debt will be recycled only for the purpose of covering the increased fuels costs of the Company. The said debt recycling will be subject to receiving all the required regulatory approvals.

(8) On May 25, 2012, the Electricity Authority transferred to the Company NIS 600 million out of the

dedicated account for the emergency plan. (9) Following discussions conducted between the Company and representatives of the Ministry of

Finance on the cash flow gap of the Company, deriving from the severe crisis in the natural gas supply, the Company received on May 28, 2012, a letter from the Director General of the Ministry of Finance on the implementation of the outline of the solution to the cash flow of the Company. According to this letter, the State reaffirms that it will grant a guarantee or other financing solutions to the cumulative cash flow deficit of the Company, caused by the excess fuels costs of the Company and according to the cash flow needs deriving from the increased fuels costs and according to the cash flow requirements deriving from the purchase of these fuels. According to this principle, the Government will act to place a State guarantee in the amount of NIS 3 billion for issuing debentures to the public based on a prospectus, all subject to the approval of the Finance Committee of the Knesset. The letter states that in addition to the aforesaid, the Government will provide financing solutions in accordance with the principles of the aforementioned outline, in the amount of NIS 1.1 billion, according to the cash flow needs of the Company for financing excess cost of fuels purchases and with due attention to the required safety margin. It is also stated that the Company will act to the best of its ability to provide additional financing sources in the course of its current activity

b) Unilateral Cancellation of the Contract with East Mediterranean Gas S.A.E ("EMG") On April 22, 2012, the Company was notified by E.M.G., which supplied natural gas from Egypt to the

Company, that the Egyptian Government gas companies (Egyptian Natural Gas Holding Company (EGAS) and Egyptian General Petroleum Corporation (EGPC), which supply the natural gas to E.M.G.,

cancelled their agreement with E.M.G. for selling natural gas. The event is not expected to have a material negative impact on the financial condition of the Company and/or its cash flow, beyond the

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aforesaid, since as mentioned, the gas supply from Egypt was partial and irregular for more than a year. As detailed in section 7.10.9.2(b) in Chapter 6 of the prospectus and in Note 8 b2 to the Annual Financial Statements, the Company is currently in an international arbitration process against EMG and the Egyptian Government gas companies, EGPC and EGAS, claiming compensation for the heavy damages it incurred and will incur as a result of the continued violations of the agreements on the supply of natural gas it entered with them. The Company, jointly with its international legal advisors, is studying the implications of the unilateral cancellation of the agreement between EMG and EGPC and EGAS on the international arbitration process it conducts against these companies.

c) Continued Depletion of Yam Thetis Reserve In April 2012, Noble Energy Mediterranean Ltd. ("Noble") announced that the daily quantity of natural

gas that will be supplied to the Company from Mari B field was reduced to about 95,000 MMBTU (about a quarter of the contractual quantity) and that another decrease in the natural gas quantity delivered to the Company from this field is possible. An initial review, conducted by the Company, shows that the additional cost of buying alternative, more expensive fuels to replace the natural gas pursuant to this decrease is estimated at $ 250,000 per day.

In May 2012, Noble notified the Company of another decrease in the daily quantity of natural gas to be supplied to the Company from Mari B field, to about 88,000 MMBTU (about one fifth of the contractual quantity) and a possible additional decrease of the quantity of natural gas delivered to the Company from this reserve. This decrease is expected to increase the fuels cost of the Company, due to the need to buy more expensive fuels in place of the shortage in natural gas.

The Company estimates that the Electricity Authority will recognize the added cost of fuels arising from the decreased supply of natural gas in the electricity rate and that until the Company will receive coverage under the electricity rate, a solution will be provided to the additional costs arising from buying alternative fuels, under the steps detailed in the decision of the Electricity Authority on March 22, 2012 (as detailed in section d a3) and in the letter of the Director of the Finance Ministry, mentioned in section 2 a) (7) above.

The aforementioned on estimates of the Company regarding the implication of the decreased quantity

of natural gas is forward looking information, as this term is defined in the Securities Law, based inter alia, on assumptions of the Company regarding the current anticipated demand for electricity and the forecast fuels consumption until the end of 2012. Moreover, the aforementioned estimates of the Company regarding the recognition of the added fuels costs in the rate and regarding the provision of a solution under the steps detailed in the decision of the Electricity Authority is forward looking information and it is not certain that all or part of the aforementioned steps will materialize, since it is based, inter alia, on discussions conducted on these subjects between the Company and Government entities and depends on decisions of the Government and other regulatory entities outside the control of the Company.

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d) Preparations for Supplying Electricity during the Summer Months Reviews conducted by the Company as on the prospectus date, indicate that in the summer months of

2012, the available generation capacity of the Company is expected to exceed peak demands for electricity by about one percent (1) only, when considering an expected faults rate of 5%. It also shows that in the complete absence of gas supply, and/or in the event of a failure in one of the generation units of the Company (exceeding the aforesaid expected faults rate of 5%) and/or in the event of extreme weather conditions that will increase the demand for electricity, in relation to the expected peak demands, the available generation capacity of the Company may be even lower than the peak demand for electricity, by about seven percent (7%) and in such a case the Company will not be able to supply the full demand for electricity during peak hours and will have to initiate power cuts to consumers for time periods that may extend over several hours in extreme cases.

For details of solutions to electricity shortage in the coming summer, implemented by the regulatory

authorities, see section 6.8 of Chapter 6 in the draft prospectus. The Company estimates that the inability to supply the full demand for electricity, expected in the

coming summer, is not expected to have a direct material negative impact on its financial condition or its cash flow condition. See details on the inability of the Company to supply the full demand for electricity, including a possible exposure, arising from failure to build the power station at Alon Tavor, in section 7.1.3.2 of Chapter 6 in the prospectus,

The aforementioned estimates of the Company of its ability to supply the demand for electricity in the

coming summer and the effect of such a condition on the financial or cash flow condition of the Company is forward looking information, as this term is defined in the Securities Law, 1968, based inter alia, on demographic variables, economic variables (GDP), weather and demand forecasts in the coming summer, which are typically uncertain.

e) Events related to the dedicated trust account for covering non‐pension components in its actuarial liabilities ("The Dedicated Trust Account")

For the For the pension wage components that are not of allowance types (see details of these salary components in section 14.6.7 of Chapter 6 in the prospectus), the Company deposits amounts into a trust account that is managed by the United Mizrachi Bank Trust Company Ltd. ("the Trust Account"), in accordance with a trust agreement that was signed on March 23, 2000 ("the Trust Agreement"). See more details of the trust account and the liabilities for which the funds are deposited in section 10.6.7.6 of Chapter 6 in the prospectus.

As stated in Section 2(e)(6) above, on March 22, 2012, under the decision of the Electricity Authority concerning the spread of the rise of the electricity charge rates for the years 2012‐2014, it was noted that as a condition for giving Governmental aid to the Company, the Company will immediately and unconditionally, by all ways and means, according to the judgment, release an amount not less than NIS 600 million from the Trust Account, and the Company is required to continue to act in connection to the Trust Account, including the release of funds from it, as required, considering the position of the regulatory team appointed for this matter and according to the law.

In addition, on March 22, 2012, the Board of Directors of the Company made a decision whereby the Company is to act to release the NIS 600 million from the Trust Account (see immediate report of that date, Ref. No. 2012‐01‐077079). Following this decision, the employees of the Corporation started, in accordance with the instructions of the workers' union, on March 25, 2012, a list of sanctions. These sanctions led the Corporation to apply to the Regional Labor Court in Haifa, on March 26, 2012, with a request to provide urgent temporary relief (see immediate report of that date, Ref. No. 2012‐01‐078561). On March 27, 2012, following a hearing in the presence of the parties, the Court ordered the Company employees to stop the sanctions immediately and return to regular work, while at the same time, the Court stated that until is issues a reasoned decision, the Company will not act to transfer funds from the trust account to the Central pension fund (see immediate report of that date, Ref. No. 2012‐01‐081897).

On March 29, 2012, the Company received a reasoned decision of the Haifa District Labor Court on

the request for temporary relief, stating that the employees of the Company should avoid sanctions, that enables the Company to act according to the decision of the Board of Directors and release the amount of NIS 600 million from the dedicated trust account for covering non‐budgetary components to the central provident fund for pension. The employees’ organization filed a request to appeal the

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said decision and on April 30, 2012, the National Labor Court decided that there is no reason to interfere in the decision of the District Labor Court on the Company's request for temporary relief. Therefore, as of the date of the prospectus, the Company is entitled to act according to the decision of the Board of Directors and transfer the said NIS 600 million. Pursuant to the decision of the National Court, the Company addressed the trustee on May 28, 2012, requesting him to transfer on May 31, 2012, a sum of NIS 50 million from the trust account to the Central Pension Fund (gradually, as detailed in the decision), where additional requests for transferring funds from the trust account to the Fund will be issued at a later date. On June 4, 2012, the representative of the trustee announced that under the circumstances and in view of the contradicting positions of the Company and the representatives of the employees regarding the funds in the trust account, the trustee decided to appeal to the authorized court and request its instructions according to the Trusteeship law, 1979, and determine the rights of the parties. On June 12, 2012, the trustee applied to the Center District Court, requesting its instructions on the way he should act in view of the said contradicting orders.

As on the date of the report, the hearings of the aforementioned main proceeding continue at the Haifa District Labor Court. The hearing of the request is scheduled to June 21, 2012.

In the court hearing on June 21, 2012, the parties agreed to the proposal of the court, which became an effective decision, in which the court instructed the trustee to transfer funds to the Fund in accordance with the instructions of the Company, provided that the total transferred sums or assets will not exceed NIS 600 million. The Company undertook, with the consent of the State, to refrain from instructing the trustee to transfer additional amounts from the trust account, as long as the court proceedings continue, where in this context, the Company, the employees representatives and the State can appeal to the court within 75 days from the date on which the Board of Directors will issue its decision on instructing the trustee about the trust account, exceeding NIS 600 million.

Regarding the Trust Account, on March 26, 2012, the Company received a document containing recommendations of the regulator team, appointed by force of the Government decision, to increase coordination and efficiency of the supervision of the Company ("Regulators Team") (see immediate report on March 27, 2012, Ref. No. 2012‐01‐080742). According to the indications of the Conclusions chapter in this document, the regulators believes that the Company should do everything necessary, including before the Trustee and the beneficiaries and by law, to release money deposited in the Trust Account, which the Corporation is not required to deposit. This document also states that the decision of the Board of Directors of the Company of March 22, 2012, concerning the release of NIS 600 million, constituted, in the opinion of the regulators team, a "first step for the execution of the foregoing".

This in view of the fact that there was no reason for depositing with respect to the "Free Electricity" component, since this right is granted in kind, within the framework of the Company's operation. At the same time, the regulators team believes that the arrangement presented by the Company following the decision of the Board of Directors on March 31, is in contrast to the principles detailed in the recommendations. Therefore, the Company's Board of Directors should discuss these conclusions and continue to make the suitable decisions and act accordingly concerning the balance of the funds in the said account, to implement the aforementioned principles. The regulators team also believes that the Company should consider acting, at the first stage and immediately to exercise the stipulations of the trust agreement in a way that will use the trust account funds for its purpose according to the trust agreement. Among other things, the Company should examine immediate use of the funds in one or more of the ways stated by the trust agreement regarding the use of the trust funds. In practice, the regulators team believes that the Company should consider exercising its authority, as determined by the trust agreement, to instruct the trustee for the purpose of receiving refunds from the trust account with respect to payment it paid out of its resources. As the founder of the trust account, the Company should also reconsider the range of means at its disposal, including according to trust laws, to interpret the trust agreement or adjust it to arrangements to which it is obligated and not beyond that. In the opinion of the regulators team, the deposits deposited by the Company in the trust account with respect to components for generation A employees, which are not listed in Annex A to the agreement of 1996, prior to March 4, 1996 and also each deposit with respect to components to generation B employees and also deposits with respect to components with generation C employees are deposits for which no obligation to deposit was found. On April 24, 2012, the Company addressed the regulators team, requesting to receive the legal opinion which served as the basis for the recommendation of the regulators team, insofar as the Company's Management and Board of Directors will adopt the recommendations of the Regulators Team, after the Company will study the subject, it will act to transfer the funds from the trust account according and subject to the directives of the law and the related agreements. This action is expected to provide cash flow savings

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to the Company. The Company estimates that the employees’ organization will oppose this action. The employees’ organization may take organizational steps.

The aforementioned as to estimates of the Company regarding the opposition of the employees’ organization to transfer funds from the trust account is forward looking information, as this term is defined in the Securities Law, based on the actions and demands of the employees’ organization regarding the trust account in the past. Realization of this estimate is uncertain and depends on the decisions of the employees’ organization.

For details on the regulators team, see section 22.4 in Chapter 6 of the prospectus. For more details on events that occurred after the statement of financial position date, see Note 35 to

the Annual Financial Statements.

f) Approval of an Obligation for Indemnification in Advance of Directors and Position Holders in the Company.

For details on the approval of the Company's Audit Committee and Board of Directors to provide indemnification in advance to directors and position holders in the Company see section 8.2.3 1(2) in Chapter 8.

g) Tamar Agreement On June 14, 2012, the Company received the decision of the Anti‐Trust Commissioner to exempt the

Company from the obligation to receive the approval of the Court on a limiting agreement between the Company and the partnership of Tamar gas reserve. See details in Note 24 a1 to the Annual Financial Statements.

On June 15, 2012, the Electricity Authority published its decision on principles for recognizing costs with respect to agreements for purchasing natural gas. See details in Note 24 a1 to the Annual Financial Statements and section 7.10.10.2 (c).

3. Critical Accounting Estimates

a) Preparation of the Financial Statements in accordance with accepted accounting principles requires the Management of the Company to make evaluations and estimates which affect the reported values of the assets, liabilities, revenues and expenses and also the disclosure concerning contingent assets and liabilities. For details on the use of critical accounting estimates of the Company, see Note 2 aa to the Annual Financial Statements.

b) Additional details regarding the critical accounting estimates of the Company are presented below. 1. Benefits to employees:

(a) Actuarial changes in the report year. The Company decided to change the discounted electricity estimate in its actuarial estimate

of the liability as on December 31, 2011, following research conducted by the Company on the subject, while using a forecast of the increase in electricity rates and a change in the electricity cost offered to a pensioner. The effect of the change on the balance is an increase of approximately NIS 10 million in the liability. The update has no material effect on the statement of operations and comprehensive income of the Company as of the statement of financial position date, due to the spreading mechanism of IAS 19, applied by the Company.

(b) Analysis of sensitivity to change according to key factors and estimate as of December 31, 2011.

Actuarial Assumptions The Change Increase The Change Decrease Capitalized interest rate (0.1%) 303 0.1% 296

Salary increase rate 0.5% 573 (0.5%) 532

Pension increase rate 0.5% 767 (0.5%) 710

(c) As aforesaid, the Company applies IAS 19, which states that the created actuarial profits/ losses that are gaps between the assumptions in the forecast and the actual data are attributed to an asset called "Actuarial Profits/ Losses" and are depreciated over 15 years.

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2) Assets depreciation in accordance with IAS 36: Sensitivity test according to the weighted cost of capital (WACC)

WACC 0.5%‐ 0.25%‐ Determined Capital Prices

0.25%+ 0.5%+

Minimum usage value in NIS million

65,448 65,194 64,944 64,695 64,450

The books value as on December 31, 2011 is NIS 64,454 million. See more information on the sensitivity test and its impact in Annex B (Assets Impairment Test) to the Annual Financial Statements.

3) Fair value of financial instruments – see Note 27 h to the Annual Financial Statements.

4. Material and Highly Material Valuations a) In accordance with Section 8(b) of Chapter 1 of the Securities Regulations (Periodic and Immediate

Reports) – 1970 (The following regulations) and also according to the legal position No. 105‐23 of the Securities Authority on the subject and the attached clarification: When a material valuation serves as the basis to determine the value of data in a periodic report, including determining that there is no need to change the value of the data, the report will disclose different parameters detailed in the regulations and in the event of a highly material valuation, it will be attached to the report.

The Securities Authority determined "quantitative" tests (statement of financial position test and results test) to examine the materiality of the valuations. Nevertheless, the Securities Authority stated that an alternative test may be defined, where a qualitative examination of the features of the corporation justify it.

According to the results test, as determined by the Securities Authority, the effect of the change in value arising from the valuation related to the total net or comprehensive profit respectively, of the Company in the reporting period ("The Results Test of the Securities Authority"). The Company is of the opinion that the profit test (the Results Test) of the Security Authority, is not a reflective test of the Company, considering the unique features of the Company and its activities, as detailed below: 1) The Company's profit is low in relation to the volume of operations of the Company and is highly

affected by fluctuations of external parameters. 2) The revenues of the Company are based on a rate determined by the Electricity Authority. 3) The Company is subject to regulatory supervision. It control on its revenues, is almost non‐

existent, since the rate is predetermined and the quantity is affected by the demand for its services and products and it is a rigid demand.

4) The Company believes that the profitability index is of secondary importance compared to criteria of financial soundness and the ability to repay obligations.

5) The high differences in profit both in annual and quarterly results depend on factors outside of the Company's control.

6) A considerable part of the Company's operations is in investment, which is not expressed in the net profit results.

In light of the qualitative considerations specified in sections 1‐6 above, the Company concluded that the Results Test, as defined by the Securities Authority, is not a suitable tool for reviewing the valuation materiality of the Company. The Company will examine the materiality of the valuations according to a different qualitative results test that reflects correctly the materiality subject in valuations in the Company's financial statements.

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Based on the aforementioned the Company will examine the materiality of the valuation according to the following tests: (a) Statement of financial position test – to examine the valuation in relation to the total assets of the

Company, as presented in the consolidated statement of financial position as of the last date of the reported period (identical to the statement of financial position test determined by the Securities Authority).

(b) Results test – to examine the effect of the change in the value of a single asset/liability on the annual profit of the last known year, neutralizing incidental effects (after tax). The profit calculated for 2011 is approximately NIS 660 million (net after tax effect). A valuation that maintains a ratio of a single asset/liability, where its value constitutes 10% or more of the total assets of the Company as of the financial statements date, or a single asset/liability, where the change in their value consists of 10% or more of the profit, calculated as aforementioned, will be considered highly material. A valuation that maintains a ratio of 5% or more will be considered material. The materiality of the valuations will be examined separately for each stand alone asset/liability, provided that there is no dependence between certain assets to certain liabilities requiring an examination as one group. The subject was submitted to the Company's Committee for Reviewing the Financial Statements and these tests were approved by the Board of Directors.

b) Disclosure with respect to a valuation that served as the basis to determine the value of data in the

Financial Statements Details of valuations classified as material/highly material according to the aforementioned test, in

accordance with regulation 8b(i) to the Securities Regulations are presented below:

1) Very High Materiality Valuations

The Company conducts very high materiality valuations of the actuarial liability with respect to benefits to employees in accordance with IAS 19, tests assets impairment in accordance with IAS 36. Information regarding this valuation is presented below:

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b) Disclosure with respect to a valuation that served as the basis to determine the value of data in the Financial Statements (continued) 1) Very High Materiality Valuations (Continued)

(a) Actuarial liability with respect to benefits to employees in accordance with IAS 19 (continued)

Identification of Valuation subject Actuarial obligation for employee benefits in accordance with IAS 19

The timing of the evaluation: December 31, 2011

Evaluation subject value immediately before the valuation date had generally accepted accounting principles, including depreciation and amortization, not required the change in value according to the valuation;

‐

Determined in accordance with the evaluation NIS 19,097 million

Identifying assessor and his characteristics: Assessment was carried out by Ernst & Young (Israel) Ltd. (hereinafter:" Ernst & Young") by Emanuel Berzack and the Actuarial department staff supervised by him. Emanuel Berzack B.Econ.Sc. (Actuarial Statistics) University Witwaterstand, South Africa, is an authorized Actuary (full member of the Israel Association of Actuaries – FILAA, and the Institute of Actuaries in England – FIA). His professional experience ‐ over the past 12 years includes actuarial estimates of employee benefits of similar types to that of the Company, pension liabilities of pension funds, insurance liabilities of insurance companies, duties of an actuary or an examining actuary examines or auditor.

Dependency on evaluation order On March 29, 2011 the new actuary of the Company from Ernst & Young (Israel) Ltd., who provides actuarial services to the Company from the first quarter of 2010, received a letter of indemnification from the Company. For details, see Note13 l. to the Annual Financial Statements as of December 31, 2011.

Evaluation model which the appraiser used DCF

Assumptions according to which the appraiser performed the valuation, depending on the model estimates:

Weighted grossed up interest rate in the current value of the liability is 2.77% Real update of salary during the work period ‐ Individual salary development model of active employees and including salary increase between current salary agreementsor general future salary agreements (offsetting inflationary effect). Real update of pension amounts after employment termination – individual pension development model of pensioners (offsetting inflationary effect). Pensioners and survivors mortality including updating mortality rates – according to the Ministry of Finance circular of May 17, 2007. For additional actuarial assumptions, see the Actuary's Opinion in Annex A.

The organ in the Company that decided to enter an agreement with the appraiser

The Company's Human Resources Department, which convened the team that decided on recruiting the new actuary of the Company, was responsible for the initial agreement. In 2011, the engagement contract was renewed by the Accounting and Economics Department.

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(b) Assets value impairment in accordance with IAS 36

Identification of Valuation subject Actuarial obligation for employee benefits in accordance with IAS 36



NIS 64,454 million (book value)

Statement of financial position value of the subject of the valuation, determined in accordance with the evaluation

NIS 64,944 million

Identifying assessor and his characteristics: Kesselman Finance Pricewaterhouse Coopers Ltd. ("KesselmanFinance") under the direction of Dr. Tzur Fenigstein, CPA with an MBA with Honors with a BA in Accounting and Economics. Both from Tel Aviv University. Tzur is a partner in Kesselman & Kesselman (PWC), Finance and Economics Practice Leader at Kesselman Finance. His experience includes project management and research in strategic financial advice, preparation of expert opinions, preparation of economic work in public policy and regulation, evaluation and assessment of company business plans.

Dependency on evaluation order No

Evaluation model which the appraiser used DCF


Forecast of future cash flows, expected to derive from one cash generating unit was based on current rate base structure and based on assumptions representing, inter alia, the economic conditions that will exist during the useful life of the assets of the units, most important of which are:

- In examining cash generating units, the Company has identified three segments of the company as one cash generating unit. ‐ The current rate base structure of the generation segment, as determined in February 2010, will end at the end of 2014, the new rate will be effective early 2015. - The new rate base of the transmission and distribution segments, after its publication will apply from April 1, 2012. - the new rate bases of the three operations segments of the Company will provide full coverage for investment and operational costs of the Company, in accordance with the Electricity Sector Law. - Fuel costs which the Company will incur will be covered in electricity rate throughout the forecast period. In addition, the Company is expected to record a profit from the fuels mix in 2012‐2013 in light of the current and expected shortage of gas ‐ The weighted cost of capital (WACC) for calculating the return on equity. Discount rates taken into account in calculating the recoverable amount are: 6.37% for the generation segment, and 6.1% for the network segments. Such values reflect the time value of money, and the specific risks as determined in the electricity rate for each operation segment.

The organ in the Company that decided on the engagement of the assessor

The Accounting and Economics Department Manager

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Six months elapsed from the valuation date, i.e., December 31, 2011 and up to the publication date of the report, namely more than 90 days have elapsed. The events after the statement of financial position date, which are described in Note 35 to the Annual Financial Statements, do not change the conclusions of the valuation.

2). Material Valuations As of the date of the report and according the test implemented by the Company described above, the

Company has material valuations (which are not highly material) on the subject of Swap transaction according to IAS 39.

Valuation of the Swap transaction

Identification of Valuation subject Valuation of Swap transaction No. 357, 575, 614, 615 in accordance with implementing the directives of IAS 39



‐

Statement of financial position value of the subject of the valuation, determined in accordance with the evaluation

NIS 241,226,449

Identifying assessor and his characteristics: Kesselman Finance Pricewaterhouse Coopers Ltd. ("Kesselman Finance") under the direction of Mr. Gil Mor, CPA with an MBA with Honors with a BA in Accounting and Economics. Both from Tel Aviv University. Mr. Mor is a partner in Kesselman & Kesselman PricewaterhouseCoopers, Expert in finance and valuations. His experience includes project management and research in strategic financial advice, preparation of expert opinions, preparation of economic work and valuations of companies and financial instruments.

Dependency on evaluation order No

Evaluation model which the appraiser used ‐ A Swap transaction is a type of a currency exchange transaction in which one side transfers to the other side a certain amount in currency A and receives from him a certain sum of currency B at fixed dates and interest rates.

‐ SWAP Transactions 357, 575, 614 and 615 are linked and unlinked NIS swap into U.S. Dollar transaction.

‐ The value of the Swap transaction is measured through the debentures exchange method, which is an accepted method for measuring this type of transactions: The fair value of the Swap transaction is calculated as the difference between discounted payment flows at suitable risk free interest rates.


The value of the Swap transactions was calculated on the basis of the structure of interest curves of both currencies (source: Bloomberg) and the exchange rate as of the valuation date. In addition, an adjustment to credit risk with respect to the transaction was also made.

The organ in the Company that decided on the engagement of the assessor

The Accounting and Economics Department Manager

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c. Disclosure of Quantitative Tests Results applied to Examine the Materiality of the Valuation In accordance with the legal position No. 105‐23 of the Securities Authority when a valuation is

classified as material/highly material, as the case may be, according to tests determined by the Securities Authority while according to the alternate test determined by the Company, the valuation is not material/highly material, results of the quantitative tests applied by the Company should be detailed, including tests determined by the Securities Authority. Examining the effect of the change in value according to the results test of the Securities Authority is based on the change in value after tax, while examining the effect of the change according to the normative profit test is made according to the valuation before tax, since the normative profit is before tax. As of the date of this report and the prospectus, the Company does not have valuations of hedge transactions which would have been classified as material/very highly material valuations, when tested according to the tests of the Securities Authority, but according to the alternative test determined by the Company these valuations are not considered as material/very highly material valuations as the case may be.

5. Disclosure of the Forecasted Cash Flows for Financing Repayment of Corporate Liabilities

1. According to section 10 (b) (14) to the Securities Regulations on the disclosure of forecasted cash

flows to finance repayment of Company's liabilities, the Company's Board of Directors reviewed the forecast cash flow of the Company and the ability of the Company to fulfill its current and expected obligations on the due dates thereof. a) The cash flow forecast reviewed by the Board of Directors is based on the new rate base for the

generation segment, applied since November 1, 2011. The cash flow forecast is also based on the following assumptions:

(1) Demand for electricity forecasts, made by the Company. (2) Implementation of the development plan of the Company for 2012, as approved by the Board

of Directors and for 2013, based on forecasts of the Company, together with the execution of stage B of the emergency plan, at the financial scope and according to the financing framework approved by the Electricity Authority in its decision on March 7, 2011.

(3) Increase of electricity rates with respect to the added costs arising from the transition to generation with more expensive fuels (mainly diesel fuel), due to the stopped natural gas supply from Egypt, including the reduced gas supply from the Israeli reserve pursuant to the depletion of the reserve and the instruction of the Ministry Energy and Water to reduce purchases from this reserve until the date on which natural gas will be supplied from "Tamar" gas reserve.

(4) Maintain the outline of the 88% discount on purchase tax/excise on purchases of diesel fuel. (5) Commencing the use of liquefied gas (LNG) at the end of 2012/beginning of 2013 and the

start of natural gas purchased from "Tamar" reserve in from the beginning of July 2013. (6) On the subject of payments deposited in the Main Pension Fund of IEC Workers ("The Fund"):

(a) Spread the actuarial deficit of approximately NIS 1.4 billion (as on April 30, 2012) over 10 years, with a monthly payment that will not be less than NIS 50 million, as long as the actuarial deficit exists, according to the amendment of the articles of the Fund, approved by the Commissioner of the Capital Market, Saving and Insurance Division in the Ministry of Finance.

(b) Payments with respect to the "current deficit", arising from accrued current rights, will be deposited in three equal consecutive monthly payments

Fund raising, as required according to the development of cash flows, will be performed

according to the decisions of the Board of Directors relating to this subject. The Company estimates that it will be able to raise the required sums, including sums required with respect to its current operations, including the additional costs deriving from the transition to generation using liquid fuels due to lack of natural gas, as aforesaid. The said financing of the added costs will be performed within the framework of the outline agreed upon with the State, including and without derogating, will be funded according to the outline of the solution for the cash flow of the Company, detailed in the letter of the Director of the

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Ministry of Finance on May 28, 2012 and subject to any law. (7) See more details on the Company's cash flow condition in Note 1 f to the Annual Financial

Statements.

b) The Company takes loans from the banking system in Israel and abroad in considerable amounts. Since the end of the 1980s, the Company started offering debentures in the Israeli market (public

and private). From 1996, the Company started to issue foreign currency debentures in private placements of debentures in foreign currency to the international market (mainly in the U.S.A. and Europe) according to the American Securities Law, exempt from debentures registration according to the Securities Act 1933, Reg. S 144A (in the U.S.A.), and according to Regulation S of this law (outside the U.S.A.). The Company continued to issue debentures over the years, while maintaining its presence in the international markets and in Israel.

This ability of the Company was proven during crisis periods as well, such as the global financial crisis at the end of 2008 and the beginning of 2009 and also in February 2012, when the Company raised funds in the international market in the middle of the current cash flow crisis.

c) Pursuant to noting the report of the Company's Management on steps of the Government and others taken to assist the cash flow condition of the Company, including the letter of the Director General of the Ministry of Finance to the Chairman of the Company on May 28, 2012, on implementing the outline of the solution to the cash flow of the Company, detailed in section d 2 above, the Company's Board of Directors believes that based on the Company being an essential service provider to the electricity sector and a Government Company and in light of its importance to the Israeli national economy, there is a clear interest in enabling the Company to purchase the liquid fuels required to generate electricity, due to a lack of natural gas ‐ purchases which will create a material cash flow deficit and will therefore act to ensure the raising of the required debt and providing the financial sources require to finance the excessive fuels costs deriving from the natural gas crisis, including financing according to the outline of the solution for the cash flow of the Company, detailed in the letter of the Director of the Finance Ministry on May 28, 2012 and subject to any law. Accordingly and in light of the steps taken by the Company to reduce expenses and raise the funds required to bridge the cash flow deficit, the Company's Board of Directors believes that the Company will bridge the cash flow gap successfully, until it will receive full rate coverage with respect to its costs. Accordingly, the Company's Board of Directors determined in its meeting on May 29, 2012, after reviewing the forecast cash flow of the Company for the period of 24 months from the end of the financial statement date ("The Forecast Cash Flow Period") and after hearing the estimates of the Management on the possibility of receiving financing from banks and raising a debt in the capital markets in Israel and/or abroad, and considering the steps taken by the Government to assist the cash flow condition of the Company up to the report date, as well as the expected steps of the Government in the coming months, that there is no probable concern that the Company will not meet all its present and expected obligations on the due dates within the forecast cash flow period.

The aforesaid on the estimations of the Board of Directors of the ability of the Company to bridge the deficit is a forward looking information, as defined in the Securities Law, which is based on estimates of the Board of Directors according to data available to it on the date of the report, including assumptions which served as the basis of the cash flow, the quantity of natural gas that will be supplied to the Company from Yam Thetis reserve and the operation commencing date of the Tamar gas reserve. Nevertheless, it is not certain that all or part the aforementioned steps, expected to assist the Company will be realized or succeed, or that the environmental conditions in which the Company acts will not worsen (among other things, if and insofar as the quantity of natural gas from Yam Thetis reserve will continue to decrease, or that the Tamar gas reserve will not commence operation on the scheduled data) and in such an event, it is not certain that the steps approved up to the date of the report will suffice to bridge the cash flow gap of the Company.

d) Attached, as an Annex to this report, forecasted cash flows of the Company for the period April 2012 to March 2014.

ISRAEL ELECTRIC CORPORATION LIMITED · 2012. 11. 21. · Companies Authority; (2) a...

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