PRICING SUPPLEMENT (To Offering Circular dated October 29, … Final Pricing... · 2014. 11....

PRICING SUPPLEMENT (To Offering Circular dated October 29, 2014)

THE ISRAEL ELECTRIC CORPORATION LIMITED U.S.$1,250,000,000 5.000% Notes due 2024

The Israel Electric Corporation Limited (the “Company” or “IEC”), a company organized under the laws of the State of Israel and 99.846% owned by the State of Israel, proposes to issue U.S.$1,250,000,000 aggregate principal amount of 5.000% Notes due 2024 (the “Notes”). The Notes will bear interest at the rate of 5.000% per year. Interest on the Notes is payable on May 12 and November 12 of each year, beginning on May 12, 2015. The Notes will mature on November 12, 2024, and will be repaid at their principal amount. The Notes are redeemable prior to maturity, in whole or in part, at the Company’s option at a redemption price set forth under “Description of the Notes” in the Offering Circular or upon the occurrence of certain changes in Israeli tax law requiring the payment of additional amounts as described herein. In addition, in the event of a change of control or other specified events, holders of Notes (“Noteholders,” and each a “Noteholder”) may require the Company to redeem their Notes at redemption prices set forth under “Description of the Notes” in the Offering Circular.

The Notes will be general obligations of the Company and will be secured by a valid and enforceable perfected floating charge (the “Note Floating Charge”) on the present and future assets of the Company that are charged under any other floating charge created by the Company, whether now existing or hereafter created. For a description of the Note Floating Charge, see “Description of the Notes — Note Floating Charge” in the Offering Circular. The Notes are not obligations of, or guaranteed by, the State of Israel.

The Company is required to withhold or deduct, directly or through a TASE Member (as defined herein), amounts from interest or discount payments to Noteholders who are identified as Israeli tax residents. However, the Company is not required to withhold or deduct any amount from interest or discount payments to Noteholders, up to an aggregate principal amount of $1.6 billion of Notes, who are identified as non-Israeli tax residents on account of Israeli taxes pursuant to an exemption granted by the Israeli Tax Authority. For more information, see “Taxation – Israeli Tax Considerations” in the Offering Circular.

There is currently no market for the Notes. Application has been made to list the Notes on the system of the Tel Aviv Stock Exchange (“TASE”) for trading by institutional investors (“TACT Institutional”). No certainty can be given that this application will be granted and there can be no assurances that an active trading market for the Notes will develop. The Notes will be in registered form in minimum denominations of U.S.$200,000 and in integral multiples of U.S.$1,000 in excess thereof.

Investing in the Notes involves risks. See “Risk Factors” beginning on page 20 of the Offering Circular. The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”). Subject to

certain exceptions, Notes may not be offered, sold or delivered within the United States or to U.S. persons (as defined in Regulation S under the Securities Act (“Regulation S”)). The Notes may be offered for sale (i) to qualified institutional buyers (as defined in Rule 144A under the Securities Act (“Rule 144A”)) (“QIBs”) in the United States in reliance on Rule 144A or (ii) to non-U.S. persons (within the meaning of Regulation S) outside the United States in reliance on Regulation S. See “Plan of Distribution” in the Offering Circular. The Notes are subject to restrictions on transfer. See “Transfer Restrictions” in the Offering Circular.

Notwithstanding anything in the Offering Circular to the contrary, the Israeli Securities Law, 1968 (the “Israeli Securities Law”) permits the offer, sale, disposition or other transfer of the Notes conducted on the TACT Institutional only by and between QIBs and Qualifying Investors. Thus, notwithstanding the fact that the Notes may be transferable pursuant to an applicable exemption from the Securities Act, all transactions relating to the Notes conducted on the TACT Institutional or placed by a broker acting in its capacity as a TASE Member must be by and between QIBs and Qualifying Investors.

“Qualifying Investor” means a non-U.S. person (within the meaning of Regulation S) who is purchasing the Notes in an offshore transaction (within the meaning of Regulation S) who is either (A) an “institutional investor,” as set forth in Section 15A(b)(1) of the Israeli Securities Law and that has provided the requisite certification under the First Addendum of the Israeli Securities Law (a “Qualified Israeli Investor”) or (B) a person described in sub-paragraph (1) of Section I of Annex II to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (“MIFID”) who is authorized or regulated by a member state (“Member State”) of the European Economic Area (a “Qualified European Investor”); provided that (A) in relation to offers of Notes in any Member State, “Qualifying Investor” shall only include Qualified European Investors and such offers will be subject to any relevant implementing measure in each Member State of Article 2(1)(e) of the Prospectus Directive and (B) in relation to offers of Notes to natural persons resident in the State of Israel or entities organized or formed in the State of Israel, “Qualifying Investor” shall only include Qualified Israeli Investors. See “Transfer Restrictions” in the Offering Circular.

The Notes have not been, and will not be, offered to the public in Israel within the meaning of the Israeli Securities Law. The Notes may be offered in the State of Israel only to Qualified Israeli Investors (as defined herein) in reliance on an exemption from the requirement to file a prospectus pursuant to Sections 15A(b)(1) and 15A(b)(2) of the Israeli Securities Law. Accordingly, no prospectus will be filed in the State of Israel in connection with the Offering. See “Notice to Israeli Holders” in the Offering Circular.

Offering Price for the Notes: 99.031% of principal, plus accrued interest, if any, from November 12, 2014 The Notes will be represented on issue by one or more global notes, which will be deposited with or on behalf of and registered in the name of Bank

Leumi Nominee Company Ltd. and credited through the Tel Aviv Stock Exchange Clearing House Ltd. (“TASECH”) and participants of the TASECH (“TASE Members”) to the accounts of their clients (including Euroclear Bank SA/NV (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream”)) on or about November 12, 2014. The Notes will not be eligible for clearance with The Depository Trust Company. See “Book-Entry, Delivery and Form” in the Offering Circular.

Joint Book-Running Managers Barclays Citigroup

Co-Managers BofA Merrill Lynch Credit Suisse

November 5, 2014

PS-1

SUMMARY OF TERMS

The following is a summary of the principal terms of the Notes to be issued by the Company pursuant to its U.S.$5,000,000,000 Global Medium-Term Note Program (the “Program”). This summary supplements the description of, and incorporates by reference the terms of, the Notes contained in the Offering Circular dated October 29, 2014, and should be read in connection therewith. Capitalized terms used herein and not otherwise defined have the meaning ascribed to such terms in the Offering Circular.

Issuer: ........................................................... The Israel Electric Corporation Limited

Issue: ............................................................. U.S.$1,250,000,000 of 5.000% Notes due 2024

Issue Date: .................................................... November 12, 2014

Maturity Date: .............................................. November 12, 2024

Rate of Interest: ............................................ 5.000% per annum. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

Interest Payment Dates: ................................ May 12 and November 12 in each year, commencing May 12, 2015

Issue Price: .................................................... 99.031% of principal amount, plus accrued interest from November 12, 2014

Early Redemption Amount: .......................... The Notes will be redeemable upon the occurrence of certain changes in Israeli tax law requiring the payment by the Company of additional amounts in respect of the Notes as described in the Offering Circular and upon an Event of Default, in each case at 100% of the principal amount of the Notes, together with interest accrued to the date of redemption. See “Description of the Notes — Redemption — Early Redemption Amounts” in the Offering Circular.

Redemption at the Option of the Noteholders: .........................................

The Notes will be subject to redemption at the option of holders of the Notes following the occurrence of the following certain events:

• at any time during the term of such Note, such Note is downgraded byS&P, for any reason, to a rating level two notches below IEC’sinternational long-term corporate credit and senior debt ratings levelassigned by S&P (“IEC’s S&P’s Rating”), and is downgraded byMoody’s, for any reason, to a rating level two notches below IEC’sinternational long-term corporate credit and senior debt rating levelassigned by Moody’s (“IEC’s Moody’s rating”), and the rating level ofsuch Note is not restored by either S&P or Moody’s to the level of IEC’sS&P Rating or IEC’s Moody’s Rating, as applicable, within the threemonth period beginning on (i) the date of the downgrade (if S&P andMoody’s downgrade such Note on the same date) or (ii) the date of thelater downgrade (if S&P and Moody’s downgrade such Note on differentdates); provided that the new rating level of such Note assigned by S&Pis a level lower than BB+ and assigned by Moody’s is a level lower thanBaa3;

• a Change of Control; or

• upon the occurrence of an event or circumstance which could reasonablybe expected to have a Material Adverse Effect;

each a “Put Event.” If at any time while any Note remains outstanding, a Put Event occurs, then holders of the Notes will have the option to require the Company to redeem the relevant Notes at the principal amount outstanding of the Notes plus, in certain circumstances, Foregone Margin, together in any case with accrued interest to the put date. See “Description of the Notes — Redemption” in the Offering Circular for definitions and additional

PS-2

detail.

Redemption at the Option of the Company: .............................................

The Notes will be redeemable, in whole at any time or in part from time to time, at the Company’s option at a redemption price equal to the greater of:

(i) 100% of the principal amount of the Notes to be redeemed on that redemption date; and (ii) as determined by the Quotation Agent (as defined below), the sum of the present values of the remaining scheduled payments of principal and interest on the Notes being redeemed on that redemption date (not including any portion of such payments of interest accrued as of the date of redemption), discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined below), plus 50 basis points, plus, in each case, accrued and unpaid interest thereon to the date of redemption. Notwithstanding the foregoing, installments of interest on Notes that are due and payable on interest payment dates falling on or prior to a redemption date will be payable on the interest payment date to the registered holders as of the close of business on the relevant record date according to the Notes and the Fiscal Agency Agreement.

“Comparable Treasury Issue” means the United States Treasury security selected by the Quotation Agent as having a maturity comparable to the remaining term (as measured from the date of redemption) of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of such Notes.

“Comparable Treasury Price” means, with respect to any redemption date, (i) the average of four Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (ii) if the Quotation Agent obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations, or (iii) if only one Reference Treasury Dealer Quotation is received, such quotation.

“Quotation Agent” means any Reference Treasury Dealer appointed by the Company.

“Reference Treasury Dealer” means (i) each of Barclays Capital Inc. and Citigroup Global Markets Inc. (or their respective affiliates that are Primary Treasury Dealers) and their respective successors; provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a “Primary Treasury Dealer”), the Company will substitute therefor another Primary Treasury Dealer, and (ii) any other two Primary Treasury Dealers selected by the Company.

“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Company, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Quotation Agent by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third business day preceding such redemption date.

“Treasury Rate” means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the

PS-3

Comparable Treasury Price for such redemption date.

Notice of any redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each registered holder of the Notes to be redeemed by the Company; provided that notice of redemption may be mailed more than 60 days prior to a redemption date if the notice is issued in connection with a defeasance of the Notes or a satisfaction and discharge of the Notes. Once notice of redemption is mailed, the Notes called for redemption will become due and payable on the redemption date and at the applicable redemption price, plus accrued and unpaid interest to, but excluding, the redemption date.

Unless the Company defaults in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the Notes or portions thereof called for redemption. On or before the redemption date, the Company will deposit with the Paying Agent (if not the Company) money sufficient to pay the redemption price of and accrued interest on the Notes to be redeemed on that date. If less than all of the Notes are to be redeemed, the Notes to be redeemed shall be selected in accordance with the rules of the relevant clearing system or systems, as the case may be, in the case of Notes represented by a global security, or by lot, in the case of Notes that are not represented by a global security.

Restrictive Covenants: .................................. The Notes will contain covenants applicable to the Company, including covenants that limit the ability to incur liens and take actions that could impair the Note Floating Charge and covenants that require the Company to provide periodic reports, maintain public ratings and conduct its business in the ordinary course and in accordance with its constitutive documents and all applicable laws and regulations. See “Description of the Notes — Certain Covenants” in the Offering Circular.

Ranking: ....................................................... The Notes will be general obligations of the Company and will be secured by the Note Floating Charge on the present and future assets of the Company that are charged under any other floating charge created by the Company, whether now existing or hereafter created. As of June 30, 2014, the aggregate principal amount of indebtedness of the Company secured by floating charges on such assets was NIS 35,385 million. The Notes will be effectively subordinated with respect to assets encumbered by fixed charges. As of June 30, 2014, the amount of indebtedness secured by fixed charges was approximately NIS 1,815 million. The Company is restricted in its ability to secure future indebtedness with fixed charges but is not restricted in its ability to secure future indebtedness with floating charges ranking pari passu with or subordinate to the floating charge securing the Notes. These restrictions are imposed by the Note Floating Charge’s prohibition against creating or permitting a lien to subsist on collateral, other than as provided in the negative pledge provisions in the Terms and Conditions of the Fiscal Agency Agreement and by the negative pledge covenant described in “Description of the Notes” in the Offering Circular, both of which contain identical restrictions.

Moreover, because the Notes will not be guaranteed by any existing or future subsidiaries of the Company, the Noteholders’ only claim against such subsidiaries is through the Company’s equity ownership of those subsidiaries (except if the Company is a creditor of such subsidiaries – in which case it may have access to the assets of the subsidiaries with respect to the sums owed by such subsidiaries to the Company). Therefore, the Notes will be “structurally subordinated” in right of payment to the rights of

PS-4

any creditors of such subsidiaries (especially if the Company becomes a holding Company and transfers all or materially all of its assets to its subsidiaries), which means holders of Notes will not have access to the assets of the Company’s subsidiaries until after all of the subsidiaries’ creditors have been paid and the remaining assets have been distributed up to the Company as the equity holder.

Certain Changes to Program Terms: ............. Terms included in issuances of Notes under the Program prior to June 10, 2013 relating to the substitution of the Company as the obligor under the Notes by the successor to its transmission business in connection with Structural Change will not be included in issuances of Notes under the Program after June 10, 2013. As a result, Notes issued after the date hereof will be “structurally subordinated” to Notes issued prior to June 10, 2013 to the extent the successor is a subsidiary of the Company. Notes issued after the date hereof also have the benefit of different Put Events. See “Description of the Notes — Redemption” in the Offering Circular.

Additional Amounts: .................................... Except as required by law or regulation or governmental policy having the force of law, the Company will make payments on the Notes free of withholding or deduction for taxes. In respect of a non-Israeli Noteholder, if withholding or deduction is required by certain relevant taxing jurisdictions, the Company will, subject to certain exceptions, be required to pay additional amounts so that the net amounts a Noteholder receives will equal the amount such Noteholder would have received if withholding or deduction had not been imposed. See “Description of the Notes — Additional Payment Amounts” in the Offering Circular.

Holding of Book-Entry Interests in the Notes: ............................................................

The holding of book-entry interests in the Notes will be limited to TASE Members or persons who hold book-entry interests in the Notes through a client of a TASE Member (such as Euroclear and Clearstream) or a participant of such client. Both Euroclear and Clearstream have appointed Citibank, N.A., a TASE Member, as their custodian in respect of securities listed on the TACT Institutional. As a result, holders of book-entry interests in the Notes will be able to hold such interests through participants of Euroclear or Clearstream. Holders of Notes must rely on the relevant provisions of the bylaws of the TASE and the TASECH as well as the relevant procedures of the financial intermediaries, clearing systems (including Euroclear and Clearstream) and participants through which they hold their book-entry interests to transfer such interests or to exercise any rights of holders of Notes under the Fiscal Agency Agreement (as defined herein). See “Book-Entry, Delivery and Form” in the Offering Circular.

Transfer Restrictions: ................................... The Notes are subject to restrictions on resale and transfer except as permitted under the Securities Act and all other applicable securities laws as described under “Plan of Distribution” and “Transfer Restrictions.” In particular, in some cases book-entry interests in the Notes may only be transferred to QIBs or Qualifying Investors and such transfers may be subject to further restrictions. In addition, such transfers may, in certain circumstances, be required to settle in a manner that may not be customary for investors holding similar securities. See “Book-Entry, Delivery and Form” and “Risk Factors — Risks Related to the Notes — Certain transfers of book-entry interests in the Notes may be required to settle in a manner that may not be customary for investors holding similar securities and may prove difficult to arrange” and “— The transfer of Notes is restricted, which may adversely affect their liquidity and the price at which they may be sold” in the Offering Circular. By purchasing any Notes, you will be deemed to have made certain acknowledgments, representations and agreements as

PS-5

described in “Transfer Restrictions” in the Offering Circular. You may be required to bear the financial risks of investing in the Notes for an indefinite period of time.

No Prior Market: ........................................... The Notes will be new securities for which there is no existing market. Accordingly, there is no assurance that an active trading market will develop for the Notes. In addition, to the extent any market making activity is commenced, it is not likely to be carried out on the TACT Institutional.

Denominations: ............................................. U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof.

Stabilizing Agents: ....................................... Barclays Capital Inc. and Citigroup Global Markets Inc.

Series: ........................................................... Series 6

ISIN: ............................................................. IL0060001943

Fiscal Agent: .................................................. Hermetic Trust (1975) Ltd.

Paying Agent, Calculation Agent, Transfer Agent and Registrar: ......................................

The Israel Electric Corporation Limited

Charge Agent: ................................................ The Bank of New York Mellon, London Branch

Use of Proceeds: ........................................... The Company intends to use the net proceeds of the Notes to finance the Company’s capital investment program, to refinance existing debt and for other corporate purposes as the Company may determine. See “Use of Proceeds.”

Listing: .......................................................... Application has been made to list the Notes on the TACT Institutional.

Governing Law: ............................................ The Notes will be governed by, and construed in accordance with, the laws of the State of New York. The Note Floating Charge will be governed by the laws of Israel.

PS-6

USE OF PROCEEDS

The Company intends to use the net proceeds of the Notes to finance the Company’s capital investment program, to refinance existing debt and for other corporate purposes as the Company may determine. For additional information with respect to the Company’s capital investment program and the anticipated funding for such program, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Business — Development and Capital Investment Plans” in the Offering Circular.

PS-7

CAPITALIZATION

The following table sets forth the consolidated capitalization of the Company as at June 30, 2014 on an actual basis and as adjusted to reflect the issuance of the Notes. You should read this table together with the Interim Financial Statements incorporated by reference in the Offering Circular.

As at June 30, 2014 Actual Adjusted(1)

(in millions of adjusted June 2014

Shekels) (in millions of

U.S. Dollars) (2)

(in millions of adjusted June 2014

Shekels) (in millions of

U.S. Dollars) (2) Cash and cash equivalents ................ NIS 2,356 U.S.$ 685 NIS 6,599 U.S.$ 1,919Credit from banks and other credit providers(3) ....................................... 9,136 2,657 9,136 2,657Short-term investments ..................... 414 120 414 120

Long-term debt, net Notes offered hereby ..................... 4,243 1,234Debentures .................................... 31,204 9,076 31,204 9,076Liabilities to banks ........................ 6,668 1,939 6,668 1,939Debentures to the State of Israel ... 2,532 736 2,532 736Liability to the State of Israel ....... 2,699 785 2,699 785Total long-term debt, net(4) ........... 43,103 12,536 47,346 13,770

Shareholders' equity Share capital .................................. 1,137 331 1,137 331Capital reserves ............................. 1,030 300 1,030 300Capital remeasurement reserve(5) .. (1,764) (513) (1,764) (513)Retained earnings .......................... 12,541 3,648 12,541 3,648Total shareholders' equity ............. 12,944 3,766 12,944 3,766

Total capitalization(6) ........................ NIS 56,047 U.S.$ 16,302 NIS 60,290 U.S.$ 17,536

_______________

(1) As adjusted to give effect to the net proceeds from the offering hereby of the Notes (approximately U.S.$1,234,000,000 net of discounts and estimated transaction costs and fees).

(2) U.S. Dollar amounts have been translated at NIS 3.438 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel, for June 30, 2014.

(3) Excludes the following borrowings after the date of the statement of financial position: The balance sheet herein excludes the following material borrowing after the date of the statement of financial position: In September 2014, the Company obtained short-term committed credit lines from two Israeli banks in an aggregate amount of NIS 800 million. The Company has drawn down NIS 200 million from these short-term committed credit lines which were repaid as of the date hereof.

(4) Excludes the following payments after the date of the statement of financial position: (i) on August 20, 2014, additional negotiable debentures of series 22 in the amount of NIS 500 million par value (a total of NIS 630.5 million including linkage differentials were paid); and (ii) on September 8, 2014, short-term loans in the amount of NIS 400 million were made to two Israeli banks.

(5) The capital remeasurement reserve reflects the retrospective implementation of IAS 19. For further information, see Note 37 to the Annual Financial Statements.

PS-8

(6) Total capitalization is calculated as the sum of current maturities of long-term debt, long-term debt, net and total shareholders’ equity.

PS-9

PLAN OF DISTRIBUTION

Under the terms and subject to the conditions contained in a Terms/Syndication Agreement, dated November 5, 2014, the dealers named below (the “Dealers”) have severally agreed to purchase from the Company, and the Company has agreed to sell to the Dealers, severally, the respective principal amount of Notes set forth opposite their respective names below:

Dealer Principal Amount

of Notes Barclays Capital Inc. ................................................................... U.S.$ 618,334,000 Citigroup Global Markets Inc. .................................................... 618,334,000 Credit Suisse Securities (Europe) Limited .................................. 6,666,000 Merrill Lynch, Pierce, Fenner & Smith

Incorporated ........................................................... 6,666,000 Total U.S.$1,250,000,000

The Company has been advised that the Dealers propose to offer the Notes directly at the offering price set forth on the cover page of this Pricing Supplement and may offer the Notes to certain dealers (who may include the Dealers) at such offering price less a discount. The selected dealers may reallow a concession to certain other brokers and dealers. After the offering, the offering prices, the concessions to selected dealers and the reallowances may be changed by the Dealers.

DOCUMENTS INCORPORATED BY REFERENCE

This Pricing Supplement shall be deemed to be incorporated in, and to form part of, the Offering Circular. No other documents are incorporated by reference herein or therein. Any statement contained in the Offering Circular shall be deemed to be modified or superseded to the extent that a statement contained herein modifies or supersedes such earlier statement (whether expressly, by implication or otherwise). Such documents will be available for inspection at the principal offices in Tel Aviv, Israel of Hermetic Trust (1975) Ltd., the fiscal agent for the Notes, and for collection without charge from The Israel Electric Corporation Limited, 1 Netiv Ha’Or Street, P.O. Box 10, Haifa 31000, Israel.

If at any time prior to the completion of the distribution of any Tranche of Notes, any event occurs as a result of which this Pricing Supplement or the Offering Circular would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it shall be necessary to amend or supplement the Offering Circular to comply with applicable law, the Company will promptly prepare and provide to the Dealers (and file with the TASE and any securities exchange on which any Notes are listed, if necessary) an amendment which will correct such statement or omission or effect such compliance.

OFFERING CIRCULAR

THE ISRAEL ELECTRIC CORPORATION LIMITED U.S.$5,000,000,000

Global Medium-Term Note Program This offering circular (the “Offering Circular”) is prepared in connection with the U.S.$5,000,000,000 Global Medium-Term Note

Program (the “Program”) established by The Israel Electric Corporation Limited (the “Company,” “we” or “IEC”), a company organized under the laws of the State of Israel (the “State of Israel” or “Israel”) and 99.846% owned by the State of Israel, as described herein. This Offering Circular replaces in its entirety the offering circular dated June 10, 2013. The Company may from time to time issue global medium-term notes (the “Notes”) denominated in any currency agreed by the Company and the relevant Dealer or Dealers (as defined below) pursuant to the Program. The Notes will have maturities as may be agreed between the Company and the relevant Dealer or Dealers and as indicated in the applicable Pricing Supplement (as defined below), subject to such minimum or maximum maturities as may be allowed or required from time to time by any applicable law. The maximum principal amount of all Notes from time to time outstanding will not exceed U.S.$5,000,000,000 (or the equivalent, calculated as described herein, in other currencies), subject to the right of the Company to increase such amount upon satisfaction of certain conditions.

The Notes will be general obligations of the Company and will be secured by a valid and enforceable perfected floating charge (the “Note Floating Charge”) on the present and future assets of the Company that are charged under any other floating charge created by the Company, whether now existing or hereafter created. For a description of the Note Floating Charge, see “Description of the Notes — Note Floating Charge.” The Notes are not obligations of, or guaranteed by, Israel.

The Notes may be offered from time to time through one or more of the Euro Dealers and U.S. Dealers listed below and any other dealer appointed from time to time by the Company (each a “Dealer”). Notes may also be sold to a Dealer or Dealers as principal at negotiated discounts or otherwise, and Notes may be sold to or through syndicates of financial institutions for which a Dealer or Dealers will act as a lead manager or lead managers (each a “Lead Manager”).

The Company is required to withhold or deduct, directly or through a TASE Member (as defined herein), amounts from interest or discount payments to Holders (as defined herein) who are identified as Israeli tax residents. However, the Company is not required to withhold or deduct any amount from interest or discount payments to Holders, up to an aggregate principal amount of $1.6 billion of Notes, who are identified as non-Israeli tax residents on account of Israeli taxes pursuant to an exemption granted by the Israeli Tax Authority. For more information, see “Taxation — Israeli Tax Considerations.”

There is currently no market for the Notes. Application has been made to list the Notes issued under the Program on the system of the Tel Aviv Stock Exchange (“TASE”) for trading by institutional investors (“TACT Institutional”). No certainty can be given that this application will be granted and there can be no assurances that an active trading market for the Notes will develop.

The Notes will be represented on issue by one or more global notes, which will be deposited with or on behalf of and registered in the name of Bank Leumi Nominee Company Ltd. (the “Depositary”) and credited through the Tel Aviv Stock Exchange Clearing House Ltd. and participants of the local exchange (“TASE Members”) to the accounts of their clients (including Euroclear Bank SA/NV (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream”)) on or about the relevant issue date. The Notes will not be eligible for clearance with The Depository Trust Company (“DTC”). See “Book-Entry, Delivery and Form.”

Note denominated in U.S. Dollars will have minimum denominations of $200,000 (and any integral multiple of $1,000 in excess thereof). The Notes can be denominated in currencies other than U.S. Dollars, and Notes denominated in pounds Sterling will have a minimum denomination of £200,000 (and any integral multiple of £1,000 in excess thereof) and Notes denominated in Euros will have a minimum denomination of €200,000 (and any integral multiple of €1,000 in excess thereof).

Notice of the aggregate nominal amount of interest payable in respect of, issue price of, and any other terms and conditions not contained herein which are applicable to, each Tranche of Notes will be set forth in a pricing supplement (the “Pricing Supplement”) which, with respect to any Notes to be listed on the TACT Institutional, will be delivered to the TASE on or before the date of issue of such Tranche of Notes.

In some cases, Holders may only transfer book-entry interests in the Notes to QIBs (as defined herein) and Qualifying Investors (as defined herein) and such transfers may be subject to further restrictions as described herein. Furthermore, such transfers may, in certain circumstances, be required to settle in a manner that may not be customary for investors holding similar securities. For more information, see “Risk Factors — Risks Related to the Notes,” “Book-Entry, Delivery and Form” and “Transfer Restrictions.”

SEE “RISK FACTORS” BEGINNING ON PAGE 20 FOR CERTAIN CONSIDERATIONS RELATING TO AN INVESTMENT IN THE NOTES.

The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended (the “Securities Act”). Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to U.S. persons (as defined in Regulation S under the Securities Act (“Regulation S”)). The Notes may be offered for sale (i) to qualified institutional buyers (as defined in Rule 144A under the Securities Act (“Rule 144A”)) (“QIBs”) in the United States in reliance on Rule 144A or (ii) to non-U.S. persons (within the meaning of Regulation S) outside the United States in reliance on Regulation S. See “Plan of Distribution.” The Notes are subject to restrictions on transfer.

Notwithstanding anything in this Offering Circular to the contrary, the Israeli Securities Law, 1968 (the “Israeli Securities Law”) exempts the offer, sale, disposition or other transfer of the Notes conducted on the TACT Institutional by and between QIBs and Qualifying Investors from the general requirement to publish a prospectus. Thus, notwithstanding the fact that the Notes may be transferable pursuant to an applicable exemption from the Securities Act, all transactions involving the Notes conducted on the TACT Institutional or placed by a broker acting in its capacity as a TASE Member must be by and between QIBs and Qualifying Investors.

“Qualifying Investor” means a non-U.S. person (within the meaning of Regulation S) who is purchasing the Notes in an offshore transaction (within the meaning of Regulation S) who is either (A) an “institutional investor,” as set forth in Section 15A(b)(1) of the

Israeli Securities Law and that has provided the requisite certification under the First Addendum of the Israeli Securities Law (a “Qualified Israeli Investor”) or (B) a person described in sub-paragraph (1) of Section I of Annex II to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (“MIFID”) who is authorized or regulated by a member state (“Member State”) of the European Economic Area (a “Qualified European Investor”); provided that (A) in relation to offers of Notes in any Member State, “Qualifying Investor” shall only include Qualified European Investors and such offers will be subject to any relevant implementing measure in each Member State of Article 2(1)(e) of the Prospectus Directive and (B) in relation to offers of Notes to natural persons resident in the State of Israel or entities organized or formed in the State of Israel, “Qualifying Investor” shall only include Qualified Israeli Investors. See “Transfer Restrictions.”

The Notes have not been, and will not be, offered to the public in Israel within the meaning of the Israeli Securities Law. The Notes may be offered in the State of Israel only to Qualified Israeli Investors (as defined herein) in reliance on an exemption from the requirement to file a prospectus pursuant to Sections 15A(b)(1) and 15A(b)(2) of the Israeli Securities Law. Accordingly, no prospectus will be filed in the State of Israel in connection with the Offering. See “Notice to Israeli Holders.”

Co-Arrangers Barclays Citigroup Euro Dealers BofA Merrill Lynch Credit Suisse Morgan Stanley UBS Investment Bank U.S. Dealers Barclays BofA Merrill Lynch Citigroup Goldman, Sachs & Co.

October 29, 2014

IN CONNECTION WITH THE ISSUE OF THE NOTES, CERTAIN DEALERS (OR PERSONS ACTING ON THEIR BEHALF) MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT THESE DEALERS (OR PERSONS ACTING ON THEIR BEHALF) WILL UNDERTAKE STABILIZATION ACTION. ANY STABILIZATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE OF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANY STABILIZATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE RELEVANT STABILIZATION AGENT(S) (OR PERSONS ACTING ON BEHALF OF ANY STABILIZATION AGENT(S)) IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.

The Company accepts responsibility for the information contained in this Offering Circular and all documents incorporated by reference herein. The Company, having made all reasonable inquiries, confirms that this Offering Circular contains all information with respect to the Company, the Company and its subsidiaries taken as a whole (the “Group”) and the Notes that is material in the context of the issue and offering of the Notes, the statements contained herein relating to the Company and the Group are in every material respect true and accurate and not misleading, the opinions and intentions expressed in this Offering Circular with regard to the Company and the Group are honestly held, have been reached after considering all relevant circumstances and are based on reasonable assumptions, there are no other facts with respect to the Company, the Group or the Notes, the omission of which would, in the context of the issue and offering of the Notes, make any statement in this Offering Circular misleading in any material respect, and all reasonable inquiries have been made by the Company to ascertain such facts and to verify the accuracy of all such information and statements.

This Offering Circular is confidential to those to whom it was distributed. The Offering Circular has been prepared by the Company solely for use in connection with the proposed offering of the Notes in this Offering Circular. This Offering Circular is personal to each offeree and does not constitute an offer to any other persons or to the public generally to subscribe for or otherwise acquire Notes. Prospective investors are authorized to use this Offering Circular solely for the purpose of considering the purchase of the Notes. Distribution of this Offering Circular to any person other than the prospective investor and any person retained to advise such prospective investor with respect to its purchase is unauthorized, and any disclosure of any of its contents, without the Company’s prior written consent, is prohibited. Each prospective investor, by accepting delivery of this Offering Circular, agrees to the foregoing and to make no photocopies of this Offering Circular or any documents referred to in this Offering Circular.

In making an investment decision, prospective investors must rely on their own examination of the Company and the terms of the offering, including the merits and risks involved. Prospective investors should not construe anything in this Offering Circular as legal, business or tax advice. Each prospective investor should consult its own advisors as needed to make its investment decision and to determine whether it is legally permitted to purchase the Notes under applicable legal investment or similar laws or regulations.

No person has been authorized in connection with any offering made hereby to give any information or to make any representation that is not contained in or consistent with this Offering Circular or any other information supplied in connection with the Notes and, if given or made, such information or representation may not be relied upon as having been authorized by the Company, the Co-Arrangers (as described above), the Dealers or any affiliate of any of the foregoing. Neither the Co-Arrangers nor any of the Dealers has separately verified the information contained in this Offering Circular. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility is accepted by the Co-Arrangers or the Dealers as to the accuracy or completeness of this Offering Circular or any further information supplied in connection with the Notes. The Co-Arrangers and the Dealers accept no liability in relation to this Offering Circular or any other information provided by the Company in connection with the Notes.

This Offering Circular is to be read in conjunction with all documents which are deemed to be incorporated herein by reference. See “Documents Incorporated by Reference.” This Offering Circular will be read and construed on the basis that such documents are so incorporated and form part of this Offering Circular.

Neither the delivery of this Offering Circular or any amendment or supplement thereto nor the offer, sale or delivery of any Note will under any circumstances create any implication that the information contained herein is correct at any time after the date hereof or the date upon which this Offering Circular has been most recently amended or supplemented or that there has been no change in the business, properties, financial condition, results of operations or prospects of the Company since the date hereof or of such amendment or supplement or that any other information supplied in connection with the Program is correct as of any time subsequent to the date on which it is supplied or, if different, the date indicated in the document containing the same. The Co-Arrangers and the Dealers expressly do not undertake to review such matters during the term of the Program.

Neither this Offering Circular or any amendment or supplement thereto nor any other information supplied in connection with the Notes constitutes an offer or invitation by or on behalf of any of the Company, the Co-Arrangers, the Dealers or any affiliate of any of the foregoing to any person to subscribe for or to purchase any of the Notes. This Offering Circular and any amendment or supplement thereto are not intended to and should not be considered as a recommendation by the Company or any of the Dealers that any recipient of this Offering Circular or any amendment or supplement thereto should purchase Notes. Each investor contemplating

i

purchasing Notes should make its own independent appraisal of the creditworthiness of the Company. Neither the Co-Arrangers nor any of the Dealers undertakes to review the financial condition or affairs of the Company during the term of the arrangements contemplated by this Offering Circular nor to advise any investor or potential investor in the Notes of any information coming to the attention of the Co-Arrangers or any of the other Dealers.

The distribution of this Offering Circular and any amendment or supplement thereto and the offer, sale and delivery of the Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Offering Circular or any amendment or supplement thereto comes are required to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of the Notes and on distribution of this Offering Circular and other offering material, see “Plan of Distribution” and “Transfer Restrictions.” Certain other restrictions may apply as described in the applicable Pricing Supplement. This Offering Circular may not be used in connection with an offer to sell or the solicitation of an offer to buy the Notes in any jurisdiction in which such offer or solicitation is unlawful.

To permit compliance with Rule 144A in connection with resales of the Notes, the Company will furnish upon the request of a Holder and a prospective purchaser designated by such Holder the information required to be delivered under Rule 144A(d)(4) under the Securities Act if, at the time of such request, the Company is neither a reporting company under Section 13 or Section 15(d) of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder.

None of the stock exchanges on which the Notes may be listed under the Program assumes any responsibility for the correctness of any of the statements made or opinions or reports expressed or contained in this Offering Circular. Admission of the Notes to listing and quotation on any such exchange is not to be taken as an indication of the merits of the Company, its subsidiaries or the Notes.

The Notes offered under the Program will be offered in the State of Israel on the basis of a private placement in reliance on an exemption pursuant to Sections 15A(b)(1) and 15A(b)(2) of the Israeli Securities Law. The Notes have not been, and will not be, offered to the public in the State of Israel within the meaning of the Israeli Securities Law and no prospectus will be filed in the State of Israel in connection with any offering of the Notes. Offers of Notes under the Program are not subject to the Israeli securities laws in matters relating to the offering process or the reporting and disclosure obligations, and offers of Notes under the Program are not subject to the regulation of the Israeli Securities Authority. By responding to any offer of Notes under the Program, offerees thereby acknowledge that they understand this paragraph.

ii

TABLE OF CONTENTS Page

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES ......................................................................

v

PRESENTATION OF FINANCIAL AND OPERATING DATA .........................................................................................

vii

DOCUMENTS INCORPORATED BY REFERENCE ..........................................................................................................

ix

FORWARD-LOOKING STATEMENTS ..............................................................................................................................

x

SUMMARY ............................................................................................................................................................................

1

RISK FACTORS ....................................................................................................................................................................

20

RELATIONSHIP WITH THE STATE OF ISRAEL .............................................................................................................

38

USE OF PROCEEDS .............................................................................................................................................................

43

EXCHANGE RATES .............................................................................................................................................................

43

CAPITALIZATION ...............................................................................................................................................................

44

SELECTED FINANCIAL DATA ..........................................................................................................................................

45

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .....................................................................................................................................................................

50

BUSINESS .............................................................................................................................................................................

73

REGULATION .......................................................................................................................................................................

96

MANAGEMENT ....................................................................................................................................................................

116

TRANSACTIONS WITH RELATED PARTIES...................................................................................................................

123

DESCRIPTION OF THE NOTES ..........................................................................................................................................

125

BOOK-ENTRY, DELIVERY AND FORM ...........................................................................................................................

154

TAXATION ............................................................................................................................................................................

159

ERISA CONSIDERATIONS .................................................................................................................................................

169

PLAN OF DISTRIBUTION ...................................................................................................................................................

170

TRANSFER RESTRICTIONS ...............................................................................................................................................

174

LEGAL MATTERS ................................................................................................................................................................

177

INDEPENDENT AUDITORS ................................................................................................................................................

177

LISTING AND GENERAL INFORMATION .......................................................................................................................

177

GLOSSARY ...........................................................................................................................................................................

178

ANNEX A ..............................................................................................................................................................................

A-1

ANNEX B ...............................................................................................................................................................................

B-1

ANNEX C ...............................................................................................................................................................................

C-1

iii

SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES

The Company is organized under the laws of the State of Israel. All of its directors and officers and the independent accountants named herein reside outside the United States (principally in Israel). All or a substantial portion of the assets of these persons and of the Company are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or the Company or to enforce against them judgments obtained in United States courts predicated upon the civil liability provisions of the federal securities laws of the United States. The Company has been informed by its legal counsel in Israel, Herzog, Fox & Neeman, that it may be difficult to assert U.S. federal securities laws claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws because Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear such a claim, under exceptional circumstances it may determine that Israeli law and not U.S. law is applicable to the claim. However, Israeli courts are empowered to enforce foreign (including United States) final executory judgments for liquidated amounts in civil matters, obtained after completion of process before a court of competent jurisdiction (according to the rules of that court’s country and of private international law currently prevailing in the State of Israel) which recognizes similar Israeli judgments. The foregoing is conditional upon (a) adequate service of process being effected and the defendant having a reasonable opportunity to be heard, (b) such judgments or the enforcement thereof not being contrary to Israeli law, public policy, security or the sovereignty of the State of Israel, (c) such judgments not being in conflict with any other valid judgment in the same matter between the same parties, (d) such judgments not having been obtained by fraudulent means, (e) an action between the same parties in the same matter not being pending in any Israeli court at the time the lawsuit is instituted in the foreign court and (f) the enforcement not being time-barred. The Company has appointed Corporation Service Company, 1180 Avenue of the Americas, Suite 210, New York, NY 10036, USA, as agent for service of process in any action in any federal or state court sitting in the City of New York arising out of the offering or any purchase or sale of the Notes or with respect to the Company’s obligations under the Notes and the Fiscal Agency Agreement (as defined below). Consent has not been given by the Company for such agent to accept service of process in connection with any other action.

NOTICE TO INVESTORS IN THE UNITED KINGDOM

This Offering Circular is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Financial Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the Financial Promotion Order, (iii) are outside the U.K. or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the “FSMA”)) in connection with the issue or sale of any Notes may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This Offering Circular is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this Offering Circular relates is available only to relevant persons and will be engaged in only with relevant persons.

NOTICE TO INVESTORS IN THE EUROPEAN ECONOMIC AREA

This Offering Circular has been prepared on the basis that all offers of Notes will be made pursuant to an exemption under the Prospectus Directive, as amended, as implemented in Member States of the European Economic Area (“EEA”), from the requirement to produce a prospectus for offers of the Notes. Accordingly, any person making or intending to make any offer within the EEA of the Notes that are subject of the offering contemplated in this Offering Circular must only do so in circumstances in which no obligation arises for the Company or the Dealers to produce a prospectus for such offer. Neither the Company nor the Dealers has authorized, nor do they authorize, the making of any offer of the Notes through any financial intermediary, other than offers made by the Dealers, which constitute the final placement of the Notes contemplated in this Offering Circular. The expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State. The expression “2010 PD Amending Directive” means Directive 2010/73/EC.

In relation to each Member State of the EEA that has implemented the Prospectus Directive (each, a “Relevant Member State”), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”), no offer has been made and no offer will be made of the Notes to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Notes that has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that, with effect from and including the Relevant Implementation Date, an offer of the Notes may be made to the public in that Relevant Member State at any time to:

(i) legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

(ii) any legal entity that has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000; and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

iv

(iii) fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than “qualified investors” as defined in the Prospectus Directive) in any Relevant Member State subject to obtaining the prior consent of the Company; or

(iv) in any other circumstances falling within Article 3(2) of the Prospectus Directive,

provided that no such offer of Notes will result in a requirement for the publication by the Company or the Dealers of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of Notes to the public” in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes, as such expression may be varied in the Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State.

Each subscriber for or purchaser of the Notes in the offering located within a Relevant Member State will be deemed to have represented, acknowledged and agreed that it is a “qualified investor” within the meaning of Article 2(1)(e) of the Prospectus Directive. The Company and the Dealers and their respective affiliates, and others will rely upon the truth and accuracy of the foregoing representation, acknowledgement and agreement. Notwithstanding the above, a person who is not a qualified investor and who has notified the Dealers of such fact in writing may, with the consent of the Dealers, be permitted to subscribe for or purchase the Notes.

NOTICE TO PROSPECTIVE INVESTORS IN THE UNITED STATES

Neither the U.S. Securities and Exchange Commission (“SEC”) nor any state securities commission has approved or disapproved of these securities or determined if this Offering Circular is truthful or complete. Any representation to the contrary is a criminal offense.

The Notes are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and the applicable state securities laws pursuant to registration or exemption therefrom. Prospective investors should be aware that they may be required to bear the financial risks of this investment for an indefinite period of time. Please refer to the sections in the Offering Circular entitled “Plan of Distribution” and “Transfer Restrictions.”

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES ANNOTATED (“RSA 421-B”) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

NOTICE TO ISRAELI HOLDERS

The Notes may not be offered or sold to any person resident in Israel or entity organized or formed in the State of Israel, unless it is an “institutional investor,” as set forth in Section 15A(b)(1) of the Israeli Securities Law, 1968 (the “Israeli Securities Law”) and that has provided the requisite certification under the First Addendum of the Israeli Securities Law or was individually approved by the Israel Securities Authority as an “institutional investor,” as set forth in Section 15A(b)(2) of the Israeli Securities Law (a “Qualified Israeli Investor”).

v

PRESENTATION OF FINANCIAL AND OPERATING DATA

In this Offering Circular, references to “U.S. Dollars,” “U.S.$,” or “$” are to the currency of the United States of America and references to “NIS,” “Shekels,” or “Agorot” are to the currency of Israel. One Shekel equals 100 Agorot. Unless otherwise specified or the context otherwise requires, references to “Canadian Dollars” are to the currency of Canada, references to the “Euro” are to the single currency introduced at the start of the third stage of the European Economic and Monetary Union pursuant to the treaty establishing the European Union (as amended from time to time), references to “pounds Sterling,” “Sterling” or “£” are to the currency of the United Kingdom of Great Britain and Northern Ireland and references to “Yen” or “¥” are to the currency of Japan.

The Company prepares its financial statements in accordance with the Government Companies Regulations (“Government Companies Regulations”). Starting from 2008, the Company is presenting its financial statements in conformity with International Financial Reporting Standards (“IFRS”), as modified by the required adjustments for the changes in the general purchasing power of the Shekel (pursuant to the rules established in Opinion No. 36, including the provisions set forth in Opinions Nos. 40, 50 and 56, of the Institute of Certified Public Accountants in Israel), and the principles of the FASB as set forth in Chapter RE6 with respect to accounting for regulated activities. In accordance with the Government Companies Regulations the Company will be required to implement full IFRS for the reporting period starting on January 1, 2015. For proposed changes to the Government Companies Regulations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Transition to Full IFRS” and Note 2.a to the Annual Financial Statements.

Except to the extent stated otherwise, the statement of financial position data for the Group as of December 31, 2012 and 2013 and the statement of operations and comprehensive income data for the years ended December 31, 2011, 2012 and 2013 have been extracted from the Group’s audited Annual Financial Statements incorporated by reference herein. The statement of financial position data for the year ended December 31, 2011 has been extracted from the Group’s audited annual financial statements for the year ended December 31, 2012, which are not incorporated herein. The statement of financial position data and the statement of operation and comprehensive income data for the Group as of and for the six and three months ended June 30, 2013 and 2014 have been extracted from the Group’s unaudited Interim Financial Statements incorporated by reference herein.

Unless otherwise indicated, all financial data relating to the Company as of and for each of the years ended December 31, 2011, 2012 and 2013 is presented in Shekels adjusted to December 31, 2013 purchasing power (“adjusted December 2013 Shekels”). Unless otherwise indicated, all financial data relating to the Company as of and for each of the six months ended June 30, 2013 and 2014 is presented in Shekels adjusted to June 30, 2014 purchasing power (“adjusted June 2014 Shekels”). Therefore, the interim and year-end periods are not directly comparable. See Note 2.d to the Interim Financial Statements.

The U.S. Dollar financial data herein is presented at specified rates solely for the convenience of reference. Such data presented should not be construed as representations that the Shekel amounts actually represent such U.S. Dollar amounts. Unless otherwise indicated, for the year ended December 31, 2013, such U.S. Dollar amounts have been calculated at NIS 3.471 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel, the Israeli central bank (the “Bank of Israel”), for December 31, 2013. Unless otherwise indicated, for the six months ended June 30, 2014, such U.S. Dollar amounts have been calculated at NIS 3.438 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel for June 30, 2014. No representation is made that any amount in Shekels or U.S. Dollars referred to in this Offering Circular has been, could have been or could be converted into U.S. Dollars or Shekels, as the case may be, at any particular rate or at all. See “Exchange Rates” for information regarding the rate of exchange between the Shekel and the U.S. Dollar for the periods specified therein.

This document contains measures and ratios, including EBITDA, net debt, the interest coverage ratio and the earnings to fixed charges ratio that are not required by, or presented in accordance with, any accounting framework (“non-GAAP measures”). We present non-GAAP measures because we believe they and similar measures are widely used by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity. The non-GAAP measures may not be comparable to similarly titled measures of other companies, have limitations as analytical tools and should not be considered in isolation or as a substitute for an analysis of our operating results as reported. Non-GAAP measures and ratios are not measurements of our performance or liquidity under IFRS or any other generally accepted accounting principles. Other companies in our industry may calculate these measures differently and, consequently, our presentation may not be readily comparable to other companies’ figures. In particular, you should not consider EBITDA, net debt, the interest coverage ratio, and the earnings to fixed charges ratio as alternatives to (a) operating income or profit or loss for the period (as determined in accordance with our reported results) as a measure of our operating performance, (b) cash flows from operating, investing and financing activities as a measure of our ability to meet our cash needs or (c) any other measures of performance under any generally accepted accounting principles. Each of EBITDA, net debt, the interest coverage ratio and the earnings to fixed charges ratio has limitations as an analytical tool, and you should not consider any of them in isolation or as a substitute for an analysis of our results as reported.

The financial and operating data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Discrepancies in tables between totals and the sums of the amounts listed may occur due to rounding. The financial information and financial statements incorporated by reference in this Offering Circular are not intended to comply with the applicable accounting

vi

requirements of the Securities Act and the related rules and regulations of the SEC which would apply if the Notes were registered with the SEC.

vii

DOCUMENTS INCORPORATED BY REFERENCE

All supplements to this Offering Circular circulated by the Company from time to time, the Company’s unaudited interim consolidated financial statements as of and for the six and three months ended June 30, 2014 (the “Interim Financial Statements”), the Company’s audited consolidated financial statements for the year ended December 31, 2013 (the “Annual Financial Statements”) and the most recently published English translations of future annual and interim financial statements of the Company will be deemed to be incorporated in, and to form part of, this Offering Circular, except that any statement contained herein or in a document which is or is deemed to be incorporated by reference herein will be deemed to be modified or superseded for the purpose of this Offering Circular to the extent that a statement contained in any such subsequent document which is or is deemed to be incorporated by reference herein modified or supersedes such earlier statement (whether expressly, by implication or otherwise). Such documents will be available for inspection at the principal offices in Tel Aviv, Israel of Hermetic Trust (1975) Ltd., the fiscal agent for the Notes, and for collection without charge from The Israel Electric Corporation Limited, 1 Netiv Ha’Or Street, P.O. Box 10, Haifa 31000, Israel. Copies of any documents that in the future may be incorporated by reference in this Offering Circular can be obtained from the Company’s website at http://www.iec.co.il/EN/IR/Pages/default.aspx. The contents of the Company’s website are not incorporated by reference in this Offering Circular.

If at any time prior to the completion of the distribution of any Tranche of Notes, any event occurs as a result of which this Offering Circular would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or if it will be necessary to amend or supplement this Offering Circular to comply with applicable law, the Company will promptly prepare and provide to the Dealers (and file with the TASE and any securities exchange on which any Notes are listed, if necessary) an amendment which will correct such statement or omission or effect such compliance.

viii

FORWARD-LOOKING STATEMENTS

This Offering Circular includes forward-looking statements, including statements regarding the Company’s expectations and projections for future operating performance and business prospects. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “intend” and “may” and similar words or expressions identify forward-looking statements. In addition, all statements other than statements of historical facts included in this Offering Circular are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results or performance of the Company to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which the Company will operate in the future. Accordingly, the Company cautions you against relying on these forward-looking statements. The Company expressly disclaims any obligation or undertaking to release any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company’s expectations with regard thereto or any change of events, conditions or circumstances on which any such statement was based. This Offering Circular discloses, under the caption “Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from the Company’s expectations, including, but not limited to:

• the electricity tariff that the Company charges its customers, which is set by the PUA, sometimes does not cover the Company’s actual costs fully or on a timely basis;

• the Company is subject to reforms in the electricity sector that require structural changes in the Company, the terms or results of which are uncertain;

• the Company is dependent on a limited number of suppliers of natural gas and fuels, the failure of which may cause shortages in the supply of natural gas and liquidity challenges;

• the Company’s operations are subject to extensive regulation, including regulations that require the Company to obtain and maintain licenses;

• the Company will be required to prepare its financial statements based on full IFRS starting on January 1, 2015;

• the Company requires substantial additional financing;

• as an Essential Service Provider (as defined herein) the Company is required to execute development plans that require substantial funding;

• a downgrade in the Company’s credit ratings could increase the Company’s borrowing costs and adversely affect the availability of new financing, as well as the value of the Notes;

• the Company may be obligated to acquire from the Government of Israel (the “Government”) certain assets;

• the Company is subject to increased competition;

• the Company has significant obligations in respect of pension contributions;

• the Company may experience labor disruptions;

• the Company is subject to environmental laws;

• the Company has not established and maintained effective internal controls over financial reporting;

• the Company is exposed to currency, index and interest fluctuations;

• the Company’s outstanding loans and notes (including the Notes) are subject to mandatory prepayment, repurchase or redemption, cross-default and cross-acceleration provisions;

• the Company is currently owned by the State of Israel;

• the Company’s activities are directly impacted by the economic, political and military conditions in the State of Israel and the Middle East;

• the Company is dependent on foreign sources for a substantial amount of fuel and equipment and disruptions in the supply from those sources may adversely affect the Company; and

• the Company is subject to a number of class action lawsuits and other litigation.

All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by such cautionary statements.

ix

SUMMARY

The following summary should be read in conjunction with, and is qualified in its entirety by, the more detailed information and the Company’s financial statements and notes thereto appearing elsewhere in this Offering Circular. The following summary does not purport to be complete and is qualified in its entirety by the full text of this Offering Circular, including the section entitled “Risk Factors,” and, in relation to the terms and conditions of any particular Tranche of Notes, the applicable Pricing Supplement. A glossary of certain of the technical terms used in this summary and used throughout the Offering Circular is set forth under the heading “Glossary.”

The Company

The Company is the sole vertically integrated electric utility company in Israel and generates, transmits, distributes and supplies the vast majority of the electricity used in Israel. The Company is also engaged in the construction of infrastructure for these activities. State of Israel owns 99.846% of the Company’s outstanding shares.

The Company is one of the largest industrial companies in Israel. For the six months ended June 30, 2014, the Company had total revenues of NIS 12,471 million (U.S.$3,627 million) and net loss of NIS 1,128 million (U.S.$328 million) and, as of June 30, 2014, the Company had total assets of NIS 82,727 million (U.S.$24,063 million), in each case in adjusted June 2014 Shekels. For the year ended December 31, 2013, the Company had total revenues of NIS 27,656 million (U.S.$7,968 million) and net loss of NIS 936 million (U.S.$270 million) and, as of December 31, 2013, the Company had total assets of NIS 85,924 million (U.S.$24,755 million), in each case in adjusted December 2013 Shekels.

As of June 30, 2014 and December 31, 2013, the Company had an aggregate installed generating capacity of 13,617 and 13,483 MW, and the Company owned and operated 17 power station sites, including five sites for steam driven power stations. Total sales of electricity by the Company for the six months ended June 30, 2014 and 2013 were 23,784 KWh and 26,265 KWh of electricity, respectively. Total sales of electricity by the Company in 2013, 2012 and 2011 were 53,506 KWh, 57,085 KWh and 53,062 KWh of electricity, respectively.

The Regulatory and Legal Environment

The Company’s business is primarily regulated pursuant to the Electricity Sector Law — 1996 and the regulations promulgated thereunder (as amended from time to time, the “Electricity Sector Law”).

The Sector Reform. The purpose of the Electricity Sector Law is to regulate the activity in the electricity sector for the benefit of the public, while ensuring reliability, availability, quality and efficiency, while facilitating competition and reducing costs.

In recent years, several amendments to the Electricity Sector Law have established an outline for the decentralization of the generation, transmission, distribution and system management activities by separating such activities among several entities (the “Sector Reform”). The amendments to the Electricity Sector Law also provide transitional provisions and a timeline for the implementation of the Sector Reform with regards to the Company (the “Structural Change”) that allows the Company to generate, transmit, distribute, sell and trade in electricity as well as serving as system manager in accordance with the licenses that were granted to the Company under the Electricity Sector Law (the “Licenses”).

The Electricity Sector Law sets certain conditions and restrictions for granting licenses for activities in the electricity sector. The main conditions and restrictions are as follows:

• The Electricity Sector Law determines that no person will engage in the 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, other than pursuant to a license that has been granted to it for this purpose in accordance with the Electricity Sector Law by the Public Utilities Authority — Electricity (the “Public Utilities Authority” or “PUA”), which will take effect after the approval of the Minister.

• In general, a license will not be granted to any person for more than one activity, provided however that (i) it is possible to grant a generation license together with a supply license to one person, with due attention to, among other things, the development of competition in the electricity sector, and (ii) 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 management of the system or will be a holder of means of control in a holder of such a license, and will also be a holder of a license for the generation, distribution or supply of electricity, or if it would hold means of control in the holder of such a license. However, a holder of a license for the management of the system or its subsidiary, if so determined in the license and if crucial for the reliability of the supply of electricity, may also be granted licenses for generation, so long as these licenses are not granted for 5% or more of the generation capacity in the electricity sector, and, if the Minister of National Infrastructures, Energy and Water (the “Minister”) finds that special circumstances exist, 10% or more of such generation capacity.

• No generation license or distribution license will be issued to a person holding means of control of a transmission license holder.

1

• No transmission license will be issued to a holder of means of control of a generation license holder or a distribution license holder.

• No generation license will be issued if one of the following conditions is satisfied: (i) the license applicant holds means of control of a holder of a distribution license that holds 10% or more of the distribution volume in the electricity sector, (ii) the license applicant holds means of control of a distribution license holder, and after receipt of the requested license will hold 10% or more of the volume of the generation capacity in the electricity sector, (iii) a person will hold after the receipt of the requested license 30% or more of the generation capacity in the electricity sector, or (iv) the license applicant is a holder of a transmission license.

• No distribution license will be issued if one of the following conditions is satisfied: (i) 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, (ii) the license applicant holds means of control of a generation license holder, and after receipt of the requested license will hold 10% or more of the volume of the distribution in the electricity sector, or (iii) a person will hold after the receipt of the requested license 25% or more of the distribution volume in the electricity sector.

The Ministers (as defined herein), upon consultation with the PUA and the Government Companies Authority (“GCA”), are entitled to establish percentages that differ from those with respect to the last two bullets above if they find it to be crucial for the promotion of the purposes of the Electricity Sector Law, and they are also authorized to set additional restrictions on the granting of licenses.

For information about the Company’s position with respect to the implementation of the Structural Change, and the transitional provisions of the Electricity Sector Law, see “Regulation — Electricity Sector Law — Structural Change.”

During the years following the enactment of the Electricity Sector Law, the Government adopted several resolutions with respect to the Sector Reform and the Structural Change. Some of these resolutions were subsequently enacted as amendments to the Electricity Sector Law and others have not been adopted or otherwise implemented. For further information with respect to these and other Government resolutions and decisions, see Note 1.e to the Annual Financial Statements.

The Yogev Team. On July 22, 2013, the Minister of Finance and the Minister of National Infrastructures, Energy and Water (the “Ministers”) appointed a steering team headed by Ori Yogev (currently the head of the GCA) to formulate by December 31, 2013 recommendations with respect to the Sector Reform and the Structural Change in the Company (the “Yogev Team”). The Company has no representative on the Yogev Team and is not privy to all of the Yogev Team’s negotiations or discussions.

The Yogev Team’s appointment letter states as follows: “Since 1996, with the enactment of the Electricity Sector Law, the electricity sector in the State of Israel operates under a regime of licenses to all the activities within the sector. The [Company] has a license to transmit, distribute, supply, sell and trade electricity, as well as licenses to generate electricity. The [Company]’s licenses were extended from time to time and they are about to expire by the end of this year. In accordance with the Electricity Sector Law, as currently drafted, it is not possible to grant the [Company] new licenses under its current structure. The licenses are obviously required for the continuity of the activity and the provision of essential services in the electricity sector. The economic and financial condition of the [Company] today also requires a reform and a significant change for the continuity of the company activities and the provision of essential services.”

The Yogev Team tasks are to:

• Review the optimal structure of the electricity sector and the Company, taking into account customary models in the world and those discussed thus far, including the model that was presented to the Company in recent years. The Team will examine the various models with an emphasis on the implementation of competition in the competitive sectors.

• Review the financial strength of the Company to date and bring the Company to a proper financial condition as part of the reform.

• Review an efficiency plan for the Company.

• Propose an overall reform of the electricity sector and the Company, in light of the above.

In March 2014, the Yogev Team's draft recommendations were published for public comment (the “Yogev Draft Report”).

On May 7, 2014, the Company delivered to the Yogev Team its response and initial position regarding the Yogev Team's draft recommendations. The Company’s comments are focused on two major issues: the scope of the future development of the electricity sector (with emphasis on the generation segment) and ensuring long-term stable financial strength for the Company.

On September 8, 2014, the Company received a copy of a letter from Ori Yogev to the National Labor Federation (the “Histadrut”) entitled “The Position of the State Regarding Israel Electric Corporation Ltd” (the “Yogev Letter”). The Yogev Letter set forth a summary of the final proposal to the Company's employees for a Structural Change of the Company acceptable by the Ministers. The letter clarifies, that the subject matter of the letter regarding the Company's changes in the electricity sector will require in one part amendments to primary legislation and in another part other regulation.

2

The Yogev Letter states as follows:

Part A – Implications of the Structural Change for employees’ rights

Downsizing:

1. Elimination of 1,700 permanent positions over the next decade by natural retirement, at a hiring ratio of 1:3. 2. Elimination of 800 temporary positions in the first year of the agreement and increasing outsourcing by 300 employees. 3. IEC staff positions starting in 2025: 10,500 employees, of whom not more than 8,100 will be permanent employees. 4. The option of voluntary retirement will be offered in the first year of the agreement according to conditions to be subsequently

determined.

Remuneration with respect to the Structural Change:

5. Structural Change bonus – each permanent employee will receive a bonus in the amount of NIS 50,000 on the basis of milestones: • One-third of the bonus upon the establishment of the system management company. • One-third of the bonus upon completion of the incorporation of the subsidiary for the gas turbine-based stations. • One-third of the bonus when IEC stations are put up for sale.

6. Pension supplement – all of the permanent employees of the Company who are employed by the Company on the signing date of the detailed agreements for the implementation of the Structural Change will be entitled to a pension supplement of NIS 1,000 per month starting at age 67, as set forth below: • First- and second-generation employees will be given a pension allowance supplement of NIS 1,000. • Third-generation employees will be given a supplement of approximately 10% of salary for pension, which will be an

accruing supplement without defined benefits. • Employees whose pension is more than twice the average salary in the State of Israel will receive a reduced pension

supplement. • The pension supplement will be given in two parts:

- A fixed supplement. - A supplement contingent upon achievement of the milestones, in a manner identical to the grant and graduated according

to salary. 7. Conversion of the free electricity benefit:

• No change for pensioners of the Company on the signing date of the agreement. • New employees and temporary employees on the signing date of the agreement will not receive a benefit or compensation. • Permanent employees on the signing date of the agreement – the free electricity component will be converted to a salary

component at the value of consumption in the amount of 7,500 kilowatt-hours, with a gross-up of the benefit at the present value. The component will be a pension component.

Management flexibility:

8. Cancellation of the parity mechanism with regard to “unsuitability”, thereby enabling management flexibility. 9. Establishment of a new disciplinary system. 10. Complete flexibility of management with respect to the dismissal of temporary employees. 11. Cancellation of parity in tenders committees from the level of section head and up to department head; setting threshold

conditions for managerial positions from the level of section head and up, within the authority of the executive management. 12. Flexibility for executive management in the relocation of employees. 13. Incentive pay – incentive income according to goals and profitability. 14. Attendance at work and ensuring the fulfillment of the quota of working hours.

Salary agreements:

15. New employees will be hired as fourth-generation employees, in grade scales adjusted according to professions and with no automatic grade/pay raises.

16. Managers and additional employees, up to 3% of the actual number of employees, will be employed under personal contracts. 17. Increase in the initial salary and reduction of pay raise mechanisms in such a way as to reduce the total costs of salary.

Part B – The Structural Change at the Israel Electric Corporation

18. Removal of system management from the IEC and operation by a separate government company in the first year of the agreement.

19. IEC will sell the Ramat Hovav stations, the land at Alon Tavor and the land at Eshkol C-D. Power stations will be constructed by private electricity producers according to the needs of the Israeli economy in place of the Eshkol C-D stations, which will be scrapped. A station will be constructed at Alon Tavor according to the needs of the Israeli economy. The Haifa C station will be scrapped.

3

20. At the end of the lifespan of the Reading station, IEC will construct a generation unit of the combined cycle F or H class, with an

installed power capacity of approximately 440 MW on the Reading site, and an additional identical unit approximately one year later, according to the needs of the Israeli economy.

21. Beyond the Reading station and the Ashkelon D station, IEC will not construct or replace additional power stations. 22. IEC will complete the emission reduction project: construction of scrubbers in Units 5-6 at Orot Rabin and Units 1-4 at

Rutenberg; conversion of Units 1-4 at Orot Rabin to natural gas operation, backed up with coal. 23. Smart metering – the meter system will be converted to a digital system in an economical and gradual way, in decreasing order of

consumer size, as a function of the results of the cost-benefit study. The smart metering system, including data control, will be managed by an outside company.

24. A subsidiary of IEC will be established for sites that include generation units based on F and E model gas turbines. 25. A subsidiary will be established for business entrepreneurship abroad (“Electricity Entrepreneurship”). 26. The various sectors of the Company’s operations will be managed as separated and audited profit centers.

Financial soundness:

27. The goal of equity capital relative to the balance sheet will be 35% in 2022. 28. The Company shares will be offered on the stock exchange in 2015 and 2018 at a scope of 15%, provided that a resolution for

appropriate privatization is adopted by a ministers committee. The offering will be contingent on any provisos that might be necessary in order for the State to reserve its right to implement a structural change in the Company in the future; in addition, the Company’s activity as the holder of an Essential Service Provider license will not be adversely affected.

29. IEC will repay its State guarantee-backed undertakings in accordance with the original payment schedule. 30. Real estate properties that are not essential for IEC in the framework of its ongoing operations will be transferred to the State by

means of an arrangement that shall be determined. 31. The State will pay the consideration for the power stations, the system management assets, and the land and buildings that the

State or the system management company will purchase from the Company by offsetting them against IEC’s debt to the State. 32. Real estate properties that serve IEC and that are expected to serve it in the future will remain under the currently existing

arrangement. 33. The Company will take measures to release funds from the trust account in an amount no less than NIS 1 billion; the remaining

amount will finance the non-recurring components on an ongoing basis. The legal proceeding in this matter will continue.

Part C – General

34. In the distribution segment, private entities will be added, up to 10% of the electricity market share. 35. The supply segment will be opened to competition by private entities. Supply licenses will be granted to electricity producers and

to suppliers that comply with threshold conditions, including financial soundness.

Part D – Miscellaneous

36. All supplements given to employees are contingent upon compliance with all of the above goals. This proposal will be valid for 30 days after the date of its submission to the employees.

On September 14, 2014, the Chairman of the Histadrut responded to the Yogev Letter indicating, among other things, that the Histadrut and the employee’s union will not stand idle and will take all measures to oppose the final proposal for the Structural Change.

As of the date of hereof there are material differences between the State's position and the Histadrut's position, especially with respect to employees’ rights in the context of the Structural Change, and there are no active negotiations between the parties. The Company's position is that negotiations must resume and that the Sector Reform must be advanced. The Chairman of the Board of Directors of the Company has sent a letter to the Prime Minister and the Ministers stating as much. The Haifa Regional Labor Court (the “Labor Court”) has also called on the parties to resume negotiations. As of the date hereof, the implementation of the Structural Change has not yet commenced, and there is uncertainty with respect to the final form of the Structural Change, the timing of its implementation and its consequences for the Company and its business affairs and operations.

An English translation of the Yogev Letter is included in Annex C of this Offering Circular. The implementation of the Structural Change, as reflected in the Yogev Letter may have material impact on the Company's business, operations and financial results. For additional information on the Yogev Team, see “Regulation — Structural Change — The Yogev Team” and Notes 1.e and 9.b.6 to the Interim Financial Statements.

Antitrust Authority. The Antitrust Authority sent a notice for a hearing, which was received by the Company on January 1, 2014, that the General Director of the Antitrust Authority may instruct the Company to refrain from increasing its electricity production capacity beyond 13,307 MW, so long as the Company’s production capacity exceeds 50% of the entire electricity sector’s production capacity. Any such restriction would not prevent the Company from improving the efficiency of its production stations, but if the efficiency improvement results in increased production beyond 13,307 MW, then the Company must receive approval from the General Director of the Antitrust Authority in advance. In March 2014 and May 2014, the Company presented its objections to the General Director of the Antitrust Authority both in writing and orally. As of the date hereof, a final decision on the matter by the

4

General Director has not yet been received.

Independent Private Producers. The Government has set a target of increasing the installed generating capacity of electricity by independent private producers (“IPPs”) to 20% of Israel’s installed generating capacity by 2020. In addition, the Government has set a target of increasing the share of electricity generated from sources of renewable energy by IPPs to 5% of Israel’s electricity by 2014 and 10% by 2020. As of June 30, 2014 and December 31, 2013, the IPPs’ share of Israel’s total installed generating capacity was approximately 13.2 % and 7.5%, respectively (including IPPs that produce electricity for self-consumption and not for sale), and the IPPs’ share of renewable energy capacity was approximately 1.5% and 0.8%, respectively, of Israel’s installed generating capacity.

Tenders and conditional generation licenses have been granted to a number of IPPs. As of June 30, 2014 and December 31, 2013, the capacity of tender winners and/or conditional license holders for private electricity production was 5,262 MW and 6,281 MW, respectively, which includes renewable energy. As of June 30, 2014 and December 31, 2013, the capacity of tender winners and/or conditional license holders for private electricity production without renewable energy was 3,887 MW and 4,786 MW, respectively, which is approximately 20% and 23%, respectively, of Israel’s expected generating capacity (taking into account the Company’s existing generation capacity, future and existing producers, Emergency Plan B, Alon Tavor and Project D but excluding renewable energy). In addition, as of June 30, 2014 and December 31, 2013, tenders and conditional licenses have been granted to IPPs using renewable energy technologies for an aggregate production capacity of about 1,375 MW and 1,500 MW, respectively. As of June 30, 2014 and December 31, 2013, the capacity of IPPs who were granted generation licenses to sell electricity to the Company was approximately 1,913 MW and 885 MW, respectively, which is approximately 12.0% and 6.0%, respectively, of Israel’s total installed generating capacity. Some of the IPPs that hold conditional licenses and/or those that won tenders are in advanced building stages (for example, Dalia Power Energies Ltd., which is licensed to have a generating capacity of 870 MW) and others are in advanced planning stages (for example, Dead Sea Works Ltd., which is licensed to have a generating capacity of 327 MW). As of June 30, 2014 and December 31, 2013, the aggregate generating capacity of IPPs in advanced building and planning stages was approximately 2,314 MW and 2,670 MW, respectively, for ultra-high voltage and high voltage, which equals to 14.9% and 18.5% of Israel’s generating capacity as of June 30, 2014 and December 31, 2013, respectively. The rest of the conditional license holders which are conventional IPPs, are at the feasibility stage. Due to the uncertainty involved with these IPP projects, whose completion is outside the Company’s control, the Company cannot predict how many projects will be completed or when any such projects will be completed. See “Business — Competition.”

As of June 30, 2014, approximately 120 large customers that purchase electricity for approximately 1,600 locations have transferred their purchases of electricity from the Company to IPPs. The Company expects that an additional five large customers that purchase electricity for approximately 50 locations will transfer their purchases of electricity from the Company to IPPs during the second half of 2014. The Company expects this trend to continue. Based on the Company's calculations, customers who transferred or, to the best of the Company's knowledge, will transfer to IPP's are expected to consume, based on 2013 consumption levels, an estimated amount of approximately 8 billion KWh a year.

Licenses. In accordance with the Electricity Sector Law, the Company operates pursuant to licenses issued under the Electricity Sector Law. On September 4, 1997, the Minister issued to the Company a general license for the transmission, distribution, supply, trade and sale of electricity in Israel. The activity of system management is being conducted by the Company pursuant to its general license and the Company was not granted a separate license for system management. In addition, the Company was also granted a generation license for each generation unit operated by the Company.

As of the date hereof, the Licenses of the Company have been extended until January 1, 2015. By virtue of Amendment 12 to the Electricity Sector Law, and in accordance with section 60(d11) of the Electricity Sector Law, a further extension of the Licenses until January 1, 2016 will require an order to be issued by the Ministers after consultation with the PUA and the GCA and with the approval of the Economic Affairs Committee of the Knesset, if the Ministers believe that such extension is required for the promotion of the goals of the Electricity Sector Law. This authority of the Ministers to extend the Licenses by order is limited to one period only, which will not exceed one year and therefore in accordance with the Electricity Sector Law in its present version, an additional extension of the Licenses of the Company to a date later than January 1, 2016 will require a legislative amendment.

The Company believes that the above mentioned extension applies to all of its Licenses. However, the PUA has stated that the extension does not apply to certain 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 Company’s development plans that was approved on January 1, 2009. The PUA's position is that it was given the authority to extend these new generation licenses. In view of this position, and for the sake of caution, the Company has applied to the PUA and requested an extension for these new generation licenses. On February 12, 2014, the Minister approved the decision of the PUA of January 23, 2014, within which the validity of these new generation licenses was extended until January 1, 2015.

There is no certainty that the Licenses will be extended or that no changes will be made to the term of the Licenses; however, based on past experience, the Company expects that the Licenses will continue to be extended in the future. In addition, in light of the uncertainty regarding the implementation of the Structural Change, the Company cannot be certain of the length or timing of any future extensions, whether there will be any changes in the terms and conditions of its Licenses or whether they will be extended at all. The Company believes that following the implementation of the Structural Change, the Company will be issued new licenses in

5

conformity with the Sector Reform, but there is uncertainty as to the terms and conditions of such licenses and there is no assurance that the Company will be issued any licenses at all. See “Regulation — Electricity Sector Law — Licenses — The Company’s Current Licenses.”

Electricity Tariffs. The Electricity Sector Law establishes the PUA, the members of which are nominated by the Government pursuant to the Ministers’ proposal. The Electricity Sector Law requires the PUA to set electricity prices or tariffs (the “tariffs” or “tariff”) for each segment of activity, taking into account the type and standard of services. and a fair rate of yield on capital considering the rights and obligations of the holder of an Essential Service Provider's license. The tariffs will be updated by an update formula set by the PUA. The update formula may take account of an improved efficiency coefficient that will be deducted from the update which the PUA, in consultation with the Ministers, decides to take into account, for the greater efficiency of the holder of an Essential Service Provider’s license. For the purpose of determining tariffs, the PUA reviews the costs of the holder of an Essential Service Provider’s license (the Company is an Essential Service Provider within the definition provided by the Electricity Sector Law) and, it may ignore some or all of the costs that, in the PUA’s opinion, are not necessary for the holder of the Essential Service Provider’s license to comply with his obligations. In accordance with the Electricity Sector Law, the PUA sets separate tariffs for the various activity segments (generation, transmission and distribution), as well as tariffs paid by the Company for electricity produced by IPPs. The tariffs for all three segments of activity (generation, transmission and distribution) are based on formulas established by the PUA, which the PUA has periodically revised and which the PUA aggregates in order to determine the various tariffs that the Company may charge its customers, which are set and usually updated annually in April or periodically (as required) by the PUA. Most electricity customers, however, pay a single weighted tariff for electricity that is applied to the group of customers to which it belongs, derived from the total costs of the Company that are recognized by PUA for the purpose of calculation of the tariff, divided by the Company’s total sales to consumers per KWh (Agorot/Cents per KWh) (the “Average Tariff”). For further information about the tariffs, including the factors that the PUA must take into account in determining tariffs, see “Regulation — Tariffs.”

The Company often approaches the PUA requesting that it increase the tariff. The Company’s position regarding the calculation of the tariffs has often differed from that of the PUA, and these differences often involve significant sums and have generally been determined adversely to the Company.

The PUA’s position is that the electricity tariff is not intended under the provisions of the Electricity Sector Law to provide full recognition of all of the Company’s actual costs if such costs are not necessary, in the PUA’s opinion, to fulfill the Company’s obligations as an Essential Service Provider.

In a 2004 petition to the Israeli Supreme Court (the “Supreme Court”), the Company requested that the PUA be required to approve tariffs that would maintain the Company’s financial strength and stability and to increase the tariffs in accordance with its financial statements in order to maintain the real CPI adjusted value of its equity. On September 12, 2004, the Supreme Court rejected the Company’s petition and stated in its judgment that it is satisfied that the PUA has examined the Company’s requests and its decisions were within its authority and reasonable and consequently, the Supreme Court would not intervene in the PUA’s process and considerations in setting the tariffs. Additionally, the Supreme Court ruled that consideration of the maintenance of the Company’s financial strength, although relevant for setting the tariffs, only reflects one aspect of the public good which the PUA is charged with providing for according to the Electricity Sector Law.

In February 2010, the PUA set a new tariff base for the generation segment for the years 2010 to 2014.

The Company’s analysis of the February 2010 generation tariff base indicated that it would not cover all of the Company’s costs associated with generation activities for the period between 2010 and 2014.

On August 8, 2011, reflecting the Company’s increased fuel costs, the PUA revised the recognized costs for the Company in the tariffs and the costs arising from purchasing electricity from IPPs, in each case retroactive to April 1, 2011, which in turn resulted in the Average Tariff being increased by 9.89%, relative to March 22, 2011 levels, effective as of August 14, 2011. On October 24, 2011, the PUA decided to increase the tariff again, which resulted in an increase in the Average Tariff by 4.72% relative to the August 14, 2011 level. Then, on March 22, 2012, the PUA adopted a resolution outlining a further increase of the tariff for the years 2012 to 2014 (the “Gradual Tariff Increase”), as a result of which the Average Tariff increases 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 to recover the liquidity shortfall the Company has faced due to the higher fuel costs over the last few years. The PUA indicated that it elected to adopt the Gradual Tariff Increase because it determined that reflecting the entire cost of these additional fuel costs in a single increase would have resulted in too large an increase in the Average Tariff. On May 6, 2013, the PUA announced an increase of 5.5% in the Average Tariff. The PUA’s resolution from May 6, 2013 replaced the resolution from March 22, 2012 with respect to the 4.4% tariff increase in 2013. In its July 10, 2014 decision, the PUA announced that the tariff for consumers will remain unchanged in 2014 from its current level and noted that the third phase of the Gradual Tariff Increase will not be required since the remaining fuel costs will be recovered under the existing tariff. In addition, the PUA clarified that the tariff is expected to be reduced substantially in 2015 due to the completion of the collection of the remaining fuel costs. See “Regulation — Electricity Sector Law — Tariffs — Regular Update and Tariff Formula.”

Substantially all of the Company’s revenues are denominated in Shekels and, as of June 30, 2014 and December 31, 2013, 57% and 53%, respectively, of the Company’s financial long-term and extended-term liabilities (excluding foreign hedging transactions) were denominated in or linked to currencies other than the Shekel. As of both June 30, 2014 and December 31, 2013, 9% of the

6

foreign capital (the “Financing Component”) is recognized by the PUA as linked to the Determining Basket, a foreign currency makeup defined by the PUA as linked to the U.S. Dollar and the Euro at the rate of 75% and 25%, respectively. The PUA includes the Financing Component in its calculation of the tariffs as a hedging mechanism to reflect a portion of the Company’s financial expenses (or income) resulting from the Company’s foreign currency exposure, effectively transferring a portion of the Company’s exposure to exchange rate fluctuations to its customers. On May 6, 2013, the PUA, in response to the Company’s request, decided to freeze the current hedging mechanism until November 1, 2013. On September 16, 2013, the PUA decided that the hedging rate will be maintained at 9% of the foreign capital set in the tariff base until the next annual tariff update. In the meantime, the Company will review its policy with respect to hedging its foreign currency exposure, taking into consideration the costs and the risks involved in hedging and the effects of hedging on the Company's financial statements and cash flow.

Development and Capital Investment Plans. Pursuant to the Electricity Sector Law, the Minister may, in consultation with the PUA, require the Company to submit its development plans for the Minister’s approval. If the Company fails to submit such development plans for approval, the Minister may, in consultation with the PUA, set a development plan which the Company would then be obligated to implement. The Licenses also require the Company to have development plans and submit them to the Minister for approval. The Company may not conduct any development activities outside the scope of development plans approved by the Minister.

The Company has long-term development plans (up to ten years) to expand the Company’s generation, transmission and distribution capacity in order to meet the projected needs of the Israeli electricity sector. The Company’s development plans seek to achieve optimum stability and economic efficiency in electricity supply over the short and long-term. The development plans serve as a basis for reaching decisions on the required additional generation units, including the type, capacity, date of commencement of operation, location and fuel type, as well as the required additional transmission and distribution facilities.

In devising its development plans, the Company is faced with uncertainty as to certain key elements, including future demand for electricity, fuel prices, competitive and economic factors and new technologies that may become available for developing the generation segment and other segments. As a result, the development plans are subject to change over time and any such changes may have an impact on the Company.

The Company’s current development plans provide for the construction of a natural gas/coal operated power station (Project D), consisting of steam and gas turbine generation units, with an aggregate capacity of 1,524 MW, expected to be completed in 2020 (first unit) and 2021 (second unit). However, on October 2, 2014, the Board of Directors of the Company resolved to freeze all activities related to the building of Project D and to exclude this project from the Company’s working plans and budget for 2015. In addition, the Board of Directors resolved not to include investments in the project in the Company’s five-year financial plans and to instruct the Company's management to approach the Minister with a request to modify the development plans accordingly.

The Company’s current development plans, as approved by the Minister, also include the construction of an additional combined cycle plant at Alon Tavor site, with a capacity of about 400 MW. As of the date hereof, there is a high degree of uncertainty regarding the date of completion of the project. The project was initially included in the Emergency Plan, and is scheduled to be completed by 2020. Although incorporated into the development plans, there is an uncertainty with respect to the implementation schedules of this project.

The Company’s current development plans also provide for capital expenditures in the transmission and distribution segments. On December 15, 2010, the Minister of National Infrastructures, Energy and Water approved the development plans of the Company as submitted. The Company is in the process of implementing the development plans as submitted and approved by the Minister of National Infrastructures, Energy and Water.

The Company’s development plans require significant capital expenditures. The Company has short-term (one year) and medium-term (up to five years) capital investment plans that correspond to its development plans. The Company’s budget for its development plans in 2014 is NIS 4.7 billion. Based on its most recently published forecasts, the forecasted cost for the Company’s capital investment plans for the years 2015 through 2018 is an average of approximately NIS 4.2 billion annually. The Company’s development plans are funded through net cash generated by operating activities and by financings. The Company historically has financed, and in the future expects to finance, its development plans primarily from loans from Israeli and foreign financial institutions, as well as public and private offerings of debt in Israel and abroad. There is no assurance that the Company will be able to successfully complete, or what the terms will be for, such financings in the future. See “Risk Factors – The Company requires substantial additional financing,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Developments in the Company’s Financings and Funding” and “Business — Development and Capital Investment Plans.”

For additional information regarding the Company’s development plans, see “Business — Development and Capital Investment Plans.” For additional information regarding the tariff’s coverage of the Company’s development plans, see “Risk Factors — The electricity tariff that the Company charges its customers, which is set by the PUA, sometimes does not cover the Company’s actual costs fully or on a timely basis.”

Non-compliance with the terms of the Licenses and the regulations applicable to the Company may lead to significant sanctions

7

against the Company, including criminal sanctions and the cancellation of the Licenses, and such non-compliance may also be deemed a breach of certain covenants included in certain of the Company’s financing agreements.

Labor Disputes and Salary Deviations. In October 2013, the Company received a letter from the Commissioner of Wages and Labor Agreements in the Ministry of Finance (the “Commissioner of Wages”) describing the decision of the Commissioner of Wages regarding salary deviations at the Company in four areas: (i) overtime payment not in accordance with actual performance; (ii) payments of certain expenses that materially exceed applicable civil service norms; (iii) certain additional payments for managerial positions that were paid not in accordance with a collective bargaining agreement from 1994, which has lower rates than the Company is presently paying and were paid also to employees who were entitled to such payments; and (iv) inclusion of global overtime payments in certain of management’s pensions. In his decision, the Commissioner of Wages stated that the salary deviations must cease. The Commissioner of Wages also stated his intention to conduct a hearing regarding the possibility of retrieving salary components that were paid to the Company’s employees, pensioners and next of kin.

In response, the Histadrut declared a labor dispute and the employees’ union resolved to take certain actions adverse to the Company. In October 2013, the Company urgently applied to the Labor Court which approved the settlement between the employee’s labor organization, the Histadrut and the Government pursuant to which the decision of the Commissioner of Wages will not come into force until the Labor Court’s decision on the underlying case, and the employees’ union will refrain from taking any actions with regard to the decision of the Commissioner of Wages. The Commissioner of Wages stated in the Government’s response filed with the Labor Court that the implementation of his decision would have the potential financial effect of reducing, by approximately NIS150 million per year, the Company’s salary expenses and a one-time decrease of NIS 450 million on the Company’s actuarial liability. The Company disputes the decision of the Commissioner of Wages that the underlying practices constitute salary deviations and the Company’s position, based in part on legal opinions that the Company received, is that these four areas have been, are being and continue to be paid in accordance with the law, and the Company is required to continue to pay these amounts. Accordingly, the Company also disputes the potential financial effect calculated by the Commissioner of Wages.

In light of the Labor Court’s ruling postponing the effectiveness of the decision of the Commissioner of Wages until the decision in the underlying case, and given the Company’s position stated above, the Company did not reduce its actuarial liability in its financial statements. This labor dispute is still pending before the Labor Court. For additional information on the Commissioner of Wages position and the labor disputes, see Note 34.c to the Annual Financial Statements.

On September 16, 2014, in connection with an ongoing labor dispute regarding the Structural Change, the Labor Court ruled that given the State is not willing to continue negotiations with the employees regarding the potential implications of massive introduction of IPPs into the electricity sector on the Company's employees’ rights and job security, the employees may take unionized actions and may strike, after submitting an outline of the strike they intend to take. With respect to a strike and its scope, there will be a separate hearing to be held shortly. Both the Histradrut and the State filed motions for leave to appeal this decision. In addition, the court ruled that until a further decision is rendered, its previous decision, prohibiting the employees from taking certain sanctions against IPPs and other private entities that operate, or are supposed to operate in the electricity sector, will continue to be in effect. On October 19, 2014, the national labor court ruled that the State of Israel, through its various branches, is not prohibited from granting conditional and new licenses to IPPs and connecting IPPs to the electricity grid, and therefore previous rulings of the Labor Court will not prevent the State of Israel from doing so.

Privatization. On October 5, 2014, the Government approved a long term plan to conduct public offerings of minority interests in government companies during the years 2015 to 2017. For government companies in which the State of Israel has an interest in maintaining control over the long term, the government holdings will be sold through public offerings of equity interests listed on the TASE, alone or in combination with equity financing, in the range of 25% to 49% of the share capital of each such company on a fully diluted basis. For governmental companies in which the State of Israel has no interest in maintaining control over the long term, the privatizations will be effected through one or more offerings, private sales, or a combination thereof.

The Government’s resolution identified IEC as a company in which the State of Israel has an interest in maintaining control over the long term. Accordingly, any public offering of the Company’s equity interests will not exceed 25% of the share capital of the Company on a fully diluted basis. The Government determined that it will advance privatization of the Company during 2017, subject to a Government resolution regarding the Structural Change, which will determine the extent to which the Structural Change will be implemented, and taking into consideration the nature of the Structural Change that will be implemented. In addition, the Government resolved to direct the GCA to act so that companies included in the plan (including the Company) will distribute dividends that will be added to the State of Israel's budget in an aggregate amount of NIS 500 million in each of the years 2015 to 2017, subject to the advancement of the privatization in accordance with the timetable, and subject to the distribution tests and the approvals required by applicable laws and legislative amendments.

Liquidity and Capital Resources

The Company historically has met its working capital and other capital investment requirements from net cash generated by operating activities, loans from Israeli financial institutions (including loans guaranteed by the State of Israel), loans from foreign financial institutions (including loans guaranteed by export credit agencies and one loan from 2005 guaranteed by the State of Israel),

8

public and private offerings of debt in the State of Israel and abroad and loans from provident funds.

The State of Israel’s guarantees were provided because of the Company’s liquidity shortfall caused by severe disruptions in the supply of natural gas in 2011 and 2012.

During 2011 and 2012, the Company experienced a significant reduction in the supply of natural gas as a result of the stoppage of natural gas supplied by companies in Egypt initially due to interruptions from explosions along the natural gas pipeline from Egypt beginning in February 2011, and subsequently due to the termination of supply by the Egyptian companies in April 2012. Additionally, the extraction rate from the Company’s other primary source of natural gas, the Yam Tethys reservoir, had decreased significantly due to the depletion of this reservoir such that the partnership that operates the reservoir has notified the Company that the supply volume will be approximately one-fifth of the maximum contractual volume.

Due to these developments, the Company was required to use alternative and more expensive fuels, including diesel oil, in order to produce electricity, the use of which has been reduced following the commencement of the supply of natural gas from the Tamar reservoir on March 31, 2013. The tariff updates during 2011 and 2012 did not provide immediate compensation for the full effect of the increased fuel costs

Representatives of the Ministry of Finance clarified to the Company that the guarantees were an extraordinary action that was taken because of the severe disruptions in the supply of natural gas that caused the significant increase in fuel costs.

In September 2014, the Company requested that the State of Israel guarantee a line of credit, but the State of Israel's Accountant General refused to provide such a guarantee, noting that such a guarantee would be a limited measure not intended to reduce the Company's routine financing costs. During 2014, the improvement in the financial position of the Company continued due to several factors, including the continued collection of fuel costs resulting from the shortage in the supply of natural gas.

Pursuant to the decision of the Board of Directors, the Company is preserving a liquidity safety cushion with a financial value of not less than NIS 3 billion, consisting of at least NIS 2.2 billion in cash and up to NIS 800 million in diesel and crude oil surplus inventory. As of June 30, 2014, the cash balance was approximately NIS 2.4 billion.

In order to meet the minimum liquidity reserve, in June 2014, the Company raised a sum of NIS 400 million from two Israeli banks which was repaid in September 2014.

In the six month period ended June 30, 2014, the Company raised NIS 1.1 billion in long-term private debt offerings in Israel and loans abroad. The Company needs to refinance certain maturing debt in the second half of 2014 in an amount of NIS 7.3 billion, of which NIS 5.2 billion is expected to mature by October 2014. The Company expects that its current cash balance and expected cash flow for the remainder of 2014 is sufficient to repay the remaining NIS 2.1 billion in debt that is expected to mature in 2014. Recent Material Developments

Short-Term Committed Credit Lines

In September 2014, the Company obtained short-term committed credit lines from two Israeli banks in an aggregate amount of NIS 800 million. The Company drew down NIS 200 million from these short-term committed credit lines, which has been repaid as of the date hereof.

Resignation of Chief Executive Officer

On September 22, 2014, Eliyahu Glickman, the Chief Executive Officer of the Company, announced that he intends to resign due to the Company’s lack of progress in instituting the Sector Reform. Mr. Glickman’s resignation will become effective within a few months in order to enable the election of the next Chief Executive Officer of the Company in an orderly manner. The Board of Directors of the Company resolved to commence a process to identify a successor Chief Executive Officer and appointed a selection committee. For additional information on the appointment procedure of the Chief Executive Officer, see “Relationship with the State of Israel — The Company as a Government Company.”

9

THE PROGRAM Issuer: ....................................................... The Israel Electric Corporation Limited Program Co-Arrangers: ............................

Barclays Capital Inc. Citigroup Global Markets Inc.

Euro Dealers: ...........................................

Credit Suisse Securities (Europe) Limited Merrill Lynch International Morgan Stanley & Co. International plc UBS Limited

U.S. Dealers: ............................................

Barclays Capital Inc. Citigroup Global Markets Inc. Goldman, Sachs & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated

Fiscal Agent: ............................................ Hermetic Trust (1975) Ltd. Paying Agent, Calculation Agent,

Transfer Agent and Registrar: ............... The Israel Electric Corporation Limited Charge Agent: .......................................... The Bank of New York Mellon, London Branch Amount: ...................................................

U.S.$5,000,000,000 (or its equivalent, as of the respective dates of issue, in other currencies or composite currencies) in aggregate principal amount of Notes outstanding at any one time, subject to the right of the Company to increase such limit in accordance with the terms of the Program Agreement.

Currencies: ...............................................

Such currencies or composite currencies as may be agreed between the Company and the relevant Dealer or Dealers and specified in the applicable Pricing Supplement. Each issue of Notes denominated in a currency in respect of which particular laws, guidelines, regulations and restrictions or reporting requirements apply will be issued in compliance with such laws, guidelines, regulations and restrictions or reporting requirements as in effect from time to time. See “Plan of Distribution.”

Method of Issue: ......................................

Notes will be issued in one or more series (each a “Series”). The Notes comprising each Series will be denominated in the same currency, have the same Maturity Date and will bear interest (if any) on the same basis and at the same rate and will have terms which, apart from the Issue Date (as defined herein), the Interest Commencement Date (as defined herein) and the Issue Price (as defined herein), are otherwise identical. The Notes of each Series are intended to be interchangeable with all other Notes of that Series. The Notes of any Series with the same Issue Date, Issue Price and Interest Commencement Date will comprise a tranche (a “Tranche”). A Pricing Supplement will be prepared in respect of each Tranche.

Ranking: ...................................................

The Notes will be general obligations of the Company and will be secured by the Note Floating Charge on the present and future assets of the Company that are charged under any other floating charge created by the Company, whether now existing or hereafter created. As of June 30, 2014, the aggregate principal amount of indebtedness of the Company secured by floating charges on such assets was NIS 35,385 million. The Notes will be effectively subordinated with respect to assets encumbered by fixed charges. As of June 30, 2014, the amount of indebtedness secured by fixed charges was approximately NIS 1,815 million. The Company is restricted in its ability to secure future indebtedness with fixed charges but is not restricted in its ability to secure future indebtedness with floating charges ranking pari passu with or subordinate to the floating charge securing the Notes. These restrictions are imposed by the Note Floating Charge’s prohibition against creating or permitting a lien to subsist on collateral, other than as provided in the negative pledge provisions in the Terms and Conditions of the Fiscal Agency Agreement and by the negative pledge covenant described in “Description of the Notes,” both of which contain identical restrictions.

10

Moreover, because the Notes will not be guaranteed by any existing or future subsidiaries of the Company, the Holders’ only claim against such subsidiaries is through the Company’s equity ownership of those subsidiaries (except if the Company is a creditor of such subsidiaries – in which case it may have access to the assets of the subsidiaries with respect to the sums owed by such subsidiaries to the Company). Therefore, the Notes will be “structurally subordinated” in right of payment to the rights of any creditors of such subsidiaries (especially if the Company becomes a holding Company and transfers all or materially all of its assets to its subsidiaries), which means Holders of Notes will not have access to the assets of the Company’s subsidiaries until after all of the subsidiaries’ creditors have been paid and the remaining assets have been distributed up to the Company as the equity holder.

Replacement of Charge Agent: ................ On October 21, 2014, the Company received notice from The Bank of New York

Mellon regarding its intention to resign as charge agent under the Collateral Trust Agreement due to the local listing and settlement of Notes issued under the Program. Pursuant to the Collateral Trust Agreement the Company shall promptly appoint a successor charge agent and the resignation shall become effective upon acceptance of appointment by the successor Charge Agent. The Company has begun the process of identifying a successor charge agent, but as of the date hereof a successor has not been appointed.

Certain Changes to Program Terms: ........ Terms included in issuances of Notes under the Program prior to June 10, 2013

relating to the substitution of the Company as the obligor under the Notes by the successor to its transmission business in connection with Structural Change will not be included in issuances of Notes under the Program after June 10, 2013. As a result, Notes issued after the date hereof will be “structurally subordinated” to Notes issued prior to June 10, 2013 to the extent the successor is a subsidiary of the Company. Notes issued after the date hereof also have the benefit of different Put Events. See “Description of the Notes — Redemption” for more information on these provisions.

Issue Price: ...............................................

Notes may be issued at their principal amount, at a premium or discount to their principal amount or on a partly paid basis, as specified in the applicable Pricing Supplement.

Maturities: ................................................

Notes of each Series will have such maturities as may be agreed between the Company and the relevant Dealer or Dealers and indicated in the applicable Pricing Supplement, subject to such minimum or maximum maturities as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the Company or the relevant currency.

Redemption at the Option of the Holders:

Unless otherwise indicated in a Pricing Supplement, the Notes will be subject to redemption at the option of Holders of the Notes following the occurrence of the following certain events:

• at any time during the term of such Note, such Note is downgraded by S&P, for any reason, to a rating level two notches below IEC’s international long-term corporate credit and senior debt ratings level assigned by S&P (“IEC’s S&P’s Rating”), and is downgraded by Moody’s, for any reason, to a rating level two notches below IEC’s international long-term corporate credit and senior debt rating level assigned by Moody’s (“IEC’s Moody’s rating”), and the rating level of such Note is not restored by either S&P or Moody’s to the level of IEC’s S&P Rating or IEC’s Moody’s Rating, as applicable, within the three month period beginning on (i) the date of the downgrade (if S&P and Moody’s downgrade such Note on the same date) or (ii) the date of the later downgrade (if S&P and Moody’s downgrade such Note on different dates); provided that the new rating level of such Note assigned by S&P is a level lower than BB+ and assigned by Moody’s is a level lower than Baa3;

• a Change of Control; or

• upon the occurrence of an event or circumstance which could reasonably be expected to have a Material Adverse Effect,

11

each a “Put Event.” If at any time while any Note remains outstanding, a Put Event occurs, then Holders of the Notes will have the option to require the Company to redeem the relevant Notes at the principal amount outstanding of the Notes plus, in certain circumstances, Foregone Margin, together in any case with accrued interest to the put date. See “Description of the Notes — Redemption” for definitions and additional detail.

If at any time while any Note remains outstanding, a Put Event (as defined herein) occurs, then Holders will have the option to require the Company to redeem the relevant Notes at the principal amount outstanding of the Notes plus, in certain circumstances, Foregone Margin (as defined herein), together in any case with accrued interest to the put date. See “Description of the Notes — Redemption” for definitions and additional detail.

Redemption at the Option of the

Company: ..............................................

The applicable Pricing Supplement will indicate whether, under what circumstances, and the terms on which Notes of a particular Series may be redeemed prior to their stated maturity. The Notes may also be redeemed at the option of the Company for taxation reasons as described under “Description of the Notes — Redemption.”

Denominations of Notes: .........................

Such denominations as may be agreed between the Company and the relevant Dealer or Dealers and as indicated in the applicable Pricing Supplement, subject to the restrictions imposed by any applicable law or regulation applicable to the relevant currency and/or the Company. Notes denominated in U.S. Dollars will be in minimum denominations of U.S.$200,000 and in integral multiples of U.S.$1,000 in excess thereof. Notes denominated in pounds Sterling will have a minimum denomination of £200,000 and any integral multiple of £1,000 in excess thereof. Notes in denominations of less than £200,000 will not be available. Notes denominated in Euros will have a minimum denomination of €200,000 and any integral multiple of €1,000 in excess thereof. Notes in denomination of less than €200,000 will not be available.

Notes having a maturity of less than one year will, if the proceeds of the issue are

accepted in the United Kingdom, constitute deposits for the purposes of the prohibition on accepting deposits contained in section 19 of the FSMA unless they are issued to a limited class of professional investors and have a denomination of at least £100,000 or its equivalent.

Fixed Rate Notes: .....................................

Fixed Rate Notes will bear interest at a fixed rate which will be payable in arrears on a specified date or dates in each year (as indicated in the applicable Pricing Supplement) and on redemption. Unless otherwise indicated in the applicable Pricing Supplement, in the case of U.S. Dollar-denominated Notes, interest will be calculated on the basis of a 360-day year consisting of twelve months of 30 days each, and in the case of Euro-denominated Notes, interest will be calculated either on the same basis or on the basis of Actual/Actual (ICMA), as defined under “Description of the Notes — Interest Rates, Calculation of Interest, Business Day — Fixed Rate Note.”

Floating Rate Notes: ................................

Floating Rate Notes will bear interest calculated on the basis of a reference rate appearing on the agreed screen page of a commercial quotation service or on such other basis as may be agreed between the Company and the relevant Dealer or Dealers (as indicated in the applicable Pricing Supplement).

The Spread and Spread Multiplier (if any) (as defined herein) related to such Floating

Rate Notes will be agreed between the Company and the relevant Dealer or Dealers for each issue of Floating Rate Notes. Floating Rate Notes may also have a Maximum Interest Rate, a Minimum Interest Rate or both (as defined herein). See “Description of the Notes — Interest Rates, Calculation of Interest, Business Day — Floating Rate Note.”

Indexed Notes: .........................................

Amounts due on Indexed Notes in respect of principal, premium and interest, if any, and in the case of Original Issue Discount Notes (as defined herein), the Amortized Face Amount (as defined herein) or other amount payable in respect thereof, may

12

be determined by reference to: (a) a currency exchange rate or rates, (b) a securities or commodities exchange index, (c) the value of a particular security or commodity, (d) any other index or indices or (e) formula or formulae. The applicable Pricing Supplement will specify the method by and terms on which such amounts will be determined and other information relating to such Indexed Notes.

Dual Currency Notes: ..............................

All payments of principal, premium, if any, and interest in respect of Dual Currency Notes (which payments would otherwise be made in the Specified Currency (as defined herein)) will be made in the optional payment currency specified in the applicable Pricing Supplement. The applicable Pricing Supplement will specify, among other things, the Specified Currency, the optional payment currency, the optional election dates and the interest payment dates for such Dual Currency Notes. See “Description of the Notes — Dual Currency Notes.”

Zero Coupon Notes: .................................

Zero Coupon Notes will not bear interest; provided, that as from the Maturity Date or any other due date for repayment of such Note, any overdue amount payable on such Note will bear interest at a rate per annum (expressed as a percentage) equal to the Accrual Yield (as defined herein) specified in the applicable Pricing Supplement (computed on the basis of a 360-day year of twelve 30-day months, unless otherwise specified in the applicable Pricing Supplement) until all amounts due in respect of such Notes have been paid. See “Description of the Notes — Zero Coupon Notes and Original Issue Discount Notes.”

Additional Amounts: ................................

Except as required by law or regulation or governmental policy having the force of law, the Company will make payments on the Notes free of withholding or deduction for taxes. In respect of a non-Israeli Holder, if withholding or deduction is required by certain relevant taxing jurisdictions, the Company will, subject to certain exceptions, be required to pay additional amounts so that the net amounts a Holder receives will equal the amount such Holder would have received if withholding or deduction had not been imposed. If, as a result of a change in law, certain revocations or changes of the ruling to the Company by the Israeli Tax Authorities on October 6, 2014 (the “Ruling”) or (in certain circumstances) involuntary delisting of the Notes from the TACT Institutional, the Company is required to pay such additional amounts. See “Description of the Notes — Additional Payment Amounts.”

Restrictive Covenants: .............................

The Notes will contain covenants applicable to the Company, including covenants that limit the ability to incur liens and take actions that could impair the Note Floating Charge and covenants that require the Company to provide periodic reports, maintain public ratings and conduct its business in the ordinary course and in accordance with its constitutive documents. See “Description of the Notes — Certain Covenants.”

Events of Default/Acceleration Events: ...

The Notes will contain provisions, including a cross-default provision, that allow for Holders to accelerate the maturity of the Notes in the case of certain events. See “Description of the Notes — Events of Default and Acceleration Events — Events of Default.”

Use of Proceeds .......................................

Unless otherwise specified in the applicable Pricing Supplement, the Company intends to use the net proceeds of the Notes to finance the Company’s capital investment program, to refinance existing debt and for other corporate purposes as the Company may determine. See “Use of Proceeds.”

Listing: .....................................................

Application has been made to list the Notes issued under the Program on the TACT Institutional.

Holding of Book-Entry Interests in the Notes: .......................................................

The holding of book-entry interests in the Notes will be limited to TASE Members or persons who hold book-entry interests in the Notes through a client of a TASE Member (such as Euroclear and Clearstream) or a participant of such client. Both Euroclear and Clearstream have appointed Citibank, N.A., a TASE Member, as their custodian in respect of securities listed on the TACT Institutional. As a result, holders of book-entry interests in the Notes will be able to hold such interests through participants of Euroclear or Clearstream. Holders of Notes must rely on the relevant

13

provisions of the bylaws of the TASE and the TASECH as well as the relevant procedures of the financial intermediaries, clearing systems (including Euroclear and Clearstream) and participants through which they hold their book-entry interests to transfer such interests or to exercise any rights of Holders of Notes under the Fiscal Agency Agreement (as defined herein). See “Book-Entry, Delivery and Form.”

Secondary Trading and Settlement: .........

Trading of book-entry interests in the Notes may either take place on the TACT Institutional or off the TACT Institutional. Such trades may be executed between TASE Members on behalf of their clients or on behalf of the participants of such clients. On-market trades will only settle ‘‘delivery-versus-payment’’ in NIS. Off-TACT Institutional trades between clients of two different TASE Members (such as trades between a person holding a book-entry interest through a client of Citibank, N.A. (such as Euroclear or Clearstream) on the one hand and a person holding a book-entry interest through a client of another TASE Member on the other) or between two clients of the same TASE Member (such as, with respect to Citibank, N.A. trades between a person holding a book-entry interest through Euroclear on the one hand and a person holding a book-entry interest through Clearstream on the other), will be required to settle either (i) “delivery-versus-payment” in NIS or (ii) “free-of-payment” in the selected currency of the transferring parties where payment for the transferred Book-Entry Interests follows delivery of the Book-Entry Interests (which will transfer through the relevant TASE Member(s), TASE Member clients (including Euroclear and Clearstream) or participants of such clients, as applicable) and must be independently arranged by the transferring parties. Off-TACT Institutional trades between two participants of the same client (such as, in the case of Euroclear, two participants of Euroclear or, in the case of Clearstream, two participants of Clearstream) may be settled “delivery-versus-payment” in the same currency as the relevant Note being traded. See “Risk Factors — Risks Related to the Notes — Certain transfers of book-entry interests in the Notes may be required to settle in a manner that may not be customary for investors holding similar securities and may prove difficult to arrange,” and “Book-Entry, Delivery and Form — Transfers—Secondary Market Trading.”

Transfer Restrictions: ...............................

The Notes are subject to restrictions on resale and transfer except as permitted under the Securities Act and all other applicable securities laws as described under “Plan of Distribution” and “Transfer Restrictions.” In particular, in some cases book-entry interests in the Notes may only be transferred to QIBs or Qualifying Investors and such transfers may be subject to further restrictions. In addition, such transfers may, in certain circumstances, be required to settle in a manner that may not be customary for investors holding similar securities. See “Book-Entry, Delivery and Form” and “Risk Factors — Risks Related to the Notes — Certain transfers of book-entry interests in the Notes may be required to settle in a manner that may not be customary for investors holding similar securities and may prove difficult to arrange” and “— The transfer of Notes is restricted, which may adversely affect their liquidity and the price at which they may be sold.” By purchasing any Notes, you will be deemed to have made certain acknowledgments, representations and agreements as described in “Transfer Restrictions.” You may be required to bear the financial risks of investing in the Notes for an indefinite period of time.

No Prior Market: ......................................

The Notes will be new securities for which there is no existing market. Accordingly, there is no assurance that an active trading market will develop for the Notes. In addition, to the extent any market making activity is commenced, it is not likely to be carried out on the TACT Institutional.

Governing Law: .......................................

The Notes will be governed by, and construed in accordance with, the laws of the State of Israel of New York. The Note Floating Charge will be governed by the laws of the State of Israel.

Risk Factors: ............................................

Prospective investors should carefully consider the information set forth under “Risk Factors.”

14

Summary Financial and Operating Data

The following table presents summary financial and operating data of the Company for the periods and as of the dates indicated. The Company presents its financial statements in New Israeli Shekels that have been adjusted in accordance with the Government Companies Regulations to reflect changes in the purchasing power of the Shekel due to inflation. The NIS financial data as of and for the years ended December 31, 2011, 2012 and 2013 are presented in adjusted December 2013 Shekels. The NIS financial data as of and for the six and three months ended June 30, 2013 and 2014 are presented in adjusted June 2014 Shekels. The statement of financial position data in Shekels as of December 31, 2012 and 2013 and the statement of operation and comprehensive income data for the years ended December 31, 2011, 2012 and 2013 have been derived from the Annual Financial Statements incorporated by reference herein. The statement of financial position data for the year ended December 31, 2011 has been extracted from the Group’s audited annual financial statements for the year ended December 31, 2012, which are not incorporated herein. The statement of financial position data and the statement of operation and comprehensive income data in Shekels as of and for the six and three months ended June 30, 2013 and 2014 have been derived from the Interim Financial Statements incorporated by reference herein.

The U.S. Dollar financial data herein is presented at specified rates solely for the convenience of reference. Such data presented should not be construed as representations that the Shekel amounts actually represent such U.S. Dollar amounts. Unless otherwise indicated, for the year ended December 31, 2013, such U.S. Dollar amounts have been calculated at NIS 3.471 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel for December 31, 2013. Unless otherwise indicated, for the six months ended June 30, 2014, such U.S. Dollar amounts have been calculated at NIS 3.438 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel for June 30, 2014. No representation is made that any amount in Shekels or U.S. Dollars referred to in this Offering Circular has been, could have been or could be converted into U.S. Dollars or Shekels, as the case may be, at any particular rate or at all. See “Exchange Rates” for information regarding the rate of exchange between the Shekel and the U.S. Dollar for the periods specified therein.

The Company prepares its financial statements in accordance with the Government Companies Regulations. Starting from 2008, the Company is presenting its financial statements in conformity with IFRS, as modified by the required adjustments for the changes in the general purchasing power of the Shekel (pursuant to the rules established in Opinion No. 36, including the provisions set forth in Opinions Nos. 40, 50 and 56, of the Institute of Certified Public Accountants in Israel), and the principles of the FASB as set forth in Chapter RE6 with respect to accounting for regulated activities. In accordance with the Government Companies Regulations, the Company will be required to implement full IFRS for the reporting period starting on January 1, 2015.

For further information on the transition to full IFRS, including its potential effects, see Notes 2.a.5 and 2.a.4 to the Interim Financial Statements and the Annual Financial Statements, “Risk Factors — The Company will be required to prepare its financial statements based on full IFRS,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Transition to Full IFRS.”

The summary financial and operating data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the Financial Statements incorporated by reference herein.

15

As of and for the Year Ended December 31,

As of and for the Six Months Ended June 30,

2011 2012 2013 2013(13) 2013 2014 2014(14)

(in millions of adjusted December 2013 Shekels, except ratios and

operating and other data) (NIS)

(in millions of U.S. Dollars, except

ratios and operating and other

data) (U.S.

Dollars)

(in millions of adjusted June 2014 Shekels, except ratios and


(in millions of U.S. Dollars,

except ratios and

operating and other

data) (U.S.

Dollars)

STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME DATA:

Revenues ........................................... 25,386 28,320 27,656 7,968 12,714 12,471 3,627 Cost of operating the electricity system(1) ............................................

20,756

23,442

24,256

6,988

11,639

11,108

3,231

Profit from operating the electricity system ...............................................

4,630

4,878

3,400

980

1,075

1,363

396

Operating expenses(2) ........................ 1,804 3,485 2,038 587 856 1,121 326

Income from current operations ........

2,826

1,393

1,362

392

219

242

70 Financial expenses ............................ 2,744 2,784 2,195 632 1,031 1,841 535 Capitalization of financial expenses ............................................

(207)

(278)

(279)

(80)

(142)

(135)

(39)

Transfer of financial income (expenses) to a regulatory asset/liability due to hedging ............

(277)

185

254

73

153

47

14 Financial expenses, net ..................... 2,260 2,691 2,170 625 1,042 1,753 510 Income (loss) before income taxes .... 566 (1,298) (808) (233) (823) (1,511) (439) Income taxes(3) .................................. 1,399 (294) 126 36 (207) (385) (112) Loss after income tax(4) ..................... (833) (1,004) (934) (269) (616) (1,126) (328) Company’s share of the loss of associated companies, net .................

—

—

(2)

(1)

—

(2)

(1)

Loss for the period ............................ (833) (1,004) (936) (270) (616) (1,128) (328) Other comprehensive income (loss) for the period after tax(5)....................

(627)

(786)

280

81

207

(740)

(215)

Total comprehensive income/(loss) for the period .....................................

(1,460)

(1,790)

(656)

(189)

(409)

(1,868)

(543)

STATEMENT OF FINANCIAL

POSITION DATA:(6)

Fixed assets, net ................................ 63,264 * 64,673 64,721 18,646 64,842 64,529 18,769 Cash and cash equivalents ................ 1,192 4,226 3,401 980 3,569 2,356 685 Other current assets(7) ........................ 10,008 10,821 9,398 2,708 10,618 9,008 2,620 Current liabilities .............................. 9,662 15,241 11,714 3,375 14,787 13,448 3,912 Non-current liabilities(8) .................... 57,955 * 59,012 59,399 17,113 58,777 56,335 16,386 Shareholders’ equity ......................... 17,796 * 15,467 14,811 4,267 15,058 12,944 3,765 Total liabilities and shareholders’ equity ................................................

85,413 * 89,720 85,924 24,755 88,622 82,727 24,063

CASH FLOW DATA: Net cash provided by (used in) operating activities ............................

1,650

(1,053)

5,779

1,665

689

3,006

874

Net cash used in investing activities ............................................

(4,604)

(4,359)

(4,968)

(1,431)

(2,375)

(1,772)

(515)

16

Net cash (used in)/provided by financing activities ............................

754

8,446

(1,636)

(471)

1,029

(2,279)

(663)

OPERATING AND OTHER

DATA:

Aggregate capacity (MW) ................. 12,785 13,248 13,483 — 13,617 Electricity sold (GWh) ...................... 53,062 57,085 53,506 26,265 23,784 Average revenues per KWh (Agorot/Cents per KWh)(9) ................

40.97

47.16

48.98

14.11

46.68

48.73

14.17

FINANCIAL RATIOS: Interest coverage ratio(10) .................. 1.21 0.50 0.68 0.32 (0.21) Earnings to fixed charges ratio(11) ...............................................

1.15 0.47 0.56

0.18 0.13

Net debt/EBITDA(12) ......................... 12.05 32.26 5.17 7.38 5.21

* These figures do not reflect the retrospective implementation of IAS 19 (2011) – see Note (6) below. They are not comparable with the 2012 and 2013 figures, which do reflect the retrospective implementation of IAS 19 (2011). ——————

(1) Cost of operating the electricity system includes wages, fuel, transfer of fuel to regulatory assets, purchases of electricity, transfer of purchases of electricity from regulatory assets, operation of the generation system, operation of the transmission and distribution system, depreciation and amortization.

(2) Operating expenses consist of sales and marketing expenses, administrative and general expenses and expenses (income) resulting from liabilities to pensioners, net. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Sales and Marketing Expenses,” “— Administrative and General Expenses” and “— Expenses (Income) from Liabilities to Pensioners, Net.”

(3) The Company creates deferred taxes for temporary differences between the value for tax purposes of assets and liabilities and their value in the financial statements. Balances of deferred taxes (asset or liability) are computed according to tax rates and tax laws enacted or substantially enacted by the statement of financial position date. See Note 2.t.3 to the Annual Financial Statements.

(4) Net income is affected by increases and decreases in the Company’s liability with respect to deferred taxes which were calculated according to the Economic Efficiency Law 2009. See Note 2.t.3 to the Annual Financial Statements.

(5) Other comprehensive income (loss) for the period after tax includes the remeasurement of a defined benefit plan after tax. See Note 12 to the Annual Financial Statements.

(6) The Company began implementing the guidelines of IAS 19 (2011) starting on January 1, 2013, by way of retrospective implementation from January 1, 2011. The consolidated statements of financial position for the year ended December 31, 2011 included in the Annual Financial Statements do not reflect the implementation of IAS 19 (2011). See Note 37 to the Annual Financial Statements.

(7) Other current assets include short term investments, trade receivables for sale of electricity, fuel inventory, stored inventory and regulatory assets.

(8) Non-current liabilities include loans, debentures and liabilities to banking corporations. See Note 20 to the Annual Financial Statements.

(9) The average revenues per KWh represents the Company’s total revenues from electricity sales (gross) divided by the Company’s total electricity sales (in KWh). For the six months ended June 30, 2013 and 2014, respectively, the Company’s total revenues from electricity sales (net) include NIS 259 million and NIS 575 million, respectively, which represent amounts of provision and collection from customers as part of the rate structure in respect of the regulatory asset/liability and of customers’ participation in fixed assets. For the years ended December 31, 2011, 2012 and 2013, respectively, the Company’s total revenues from electricity sales (net) include NIS 3,379 million, NIS 1,090 million and NIS 1,067 million, respectively, which represent amounts of provision and collection from customers as part of the rate structure in respect of the regulatory asset/liability and of customers’ participation in fixed assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Revenues.”

(10) Interest coverage ratio is determined by dividing the sum of income (loss) before income taxes and other financial expenses by other financial expenses. Other financial expenses exclude the effects of erosion of liabilities, which is included in the financial expenses (income), net line item above. See Note 32 to the Annual Financial Statements and Note 8 to the Interim Financial

17

Statements. The ratios have been calculated as follows:

Year Ended

December 31,

2011 2012 2013

(million NIS) Income (loss) before income taxes .................................................................................. 566 (1,298) (808) Other financial expenses ................................................................................................. 2,658 2,622 2,532 Total ................................................................................................................................ 3,224 1,324 1,724 Interest coverage ratio .................................................................................................. 1.21 0.5 0.68

Six Months Ended

June 30,

2013 2014 (million NIS) Income (loss) before income taxes ................................................................................. (823) (1,511) Other financial expenses ................................................................................................ 1,202 1,252 Total .............................................................................................................................. 379 (259) Interest coverage ratio ................................................................................................. 0.32 (0.21)

(11) Earnings to fixed charges ratio is determined by dividing the sum of income (loss) before income taxes and financial expenses, net by the sum of financial expenses and transfer of financial income to a regulatory asset/liability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Expenses, Net” and Note 32 to the Annual Financial Statements and Note 8 to the Interim Financial Statements. The ratios have been calculated as follows:

Year Ended

December 31,

2011 2012 2013 (million NIS) Income (loss) before income taxes .................................................................................. 566 (1,298) (808) Financial expense, net ..................................................................................................... 2,260 2,691 2,170 Total ................................................................................................................................ 2,826 1,393 1,362 Financial expenses ........................................................................................................... 2,744 2,784 2,195 Transfer of financial income to a regulatory liability ...................................................... (277) 185 254 Total ................................................................................................................................ 2,467 2,969 2,449 Earnings to fixed charges ratio .................................................................................... 1.15 0.47 0.56

Six Months Ended

June 30,

2013 2014

(million NIS) Income (loss) before income taxes ................................................................................. (823) (1,511) Financial expense, net .................................................................................................... 1,042 1,753 Total .............................................................................................................................. 219 242 Financial expenses ......................................................................................................... 1,031 1,841 Transfer of financial income to a regulatory liability .................................................... 153 47 Total .............................................................................................................................. 1,184 1,888 Earnings to fixed charges ratio ................................................................................... 0.18 0.13

(12) Ratio is determined by dividing net debt (credit from banks and other credit providers, short-term debentures and total long-term debt, net, less cash and cash equivalents) by EBITDA (earnings before interest, taxes, depreciation and amortization and regulatory assets, adjusted in 2012 for a onetime expense with respect to pensions linked to the CPI).

For the six months ended June 30, 2013 and 2014, the Company’s EBITDA was NIS 3,610 million and NIS 4,783 million, respectively.

For the six months ended June 30, 2013 and 2014, the Company’s EBITDA, without excluding regulatory assets, was NIS 2,496 million and NIS 2,572 million, respectively.

For the years ended December 31, 2011, 2012 and 2013, the Company’s EBITDA was NIS 3,943 million, NIS 1,610 million and NIS 9,761 million, respectively.

18

For the years ended December 31, 2011, 2012 and 2013, the Company’s EBITDA, without excluding regulatory assets, and without adjusting for the onetime expense with respect to pensions linked to the CPI in 2012, was NIS 7,322 million, NIS 6,077 million and NIS 6,289 million, respectively.

EBITDA for the twelve month period ending June 30, 2014 was calculated by annualizing the EBITDA for the six month period ending June 30, 2014 (NIS 4,783 million) and (2) EBITDA for the twelve month period ending June 30, 2013 was calculated by annualizing the EBITDA for the six month period ending June 30, 2013 (NIS 3,610 million).

The ratios have been calculated as follows:

As of and for the Year Ended

December 31,

2011 2012 2013 (million NIS) Net debt ........................................................................................................................... 47,510 51,945 50,451 EBITDA .......................................................................................................................... 3,943 1,610 9,761 Net debt/EBITDA ratio ................................................................................................... 12.05 32.26 5.17

As of and Annualized for the Twelve Month Period Ended

June 30,

2013 2014 (million NIS) Net debt ........................................................................................................................... 53,287 49,883 EBITDA .......................................................................................................................... 7,220 9,566 Net debt/EBITDA ratio ................................................................................................... 7.38 5.21

(13) U.S. Dollar amounts have been translated at NIS 3.471 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel, for December 31, 2013.


19

RISK FACTORS

Prior to investing in the Notes, potential investors should carefully consider, together with all other information contained in this Offering Circular, the risks described below. Any of these risks could materially and adversely affect the Company and an investment in the Notes. The risks described below are not exhaustive and other considerations, including some which may not be presently known to the Company or which the Company currently deems immaterial, may impact an investment in the Notes. Words and expressions defined elsewhere in this Offering Circular have the same meanings in this section.

Risks Related to the Company

The electricity tariff that the Company charges its customers, which is set by the PUA, sometimes does not cover the Company’s actual costs fully or on a timely basis.

The Company’s revenues are primarily generated from electricity sales in kWh used multiplied by the tariff per kWh that the Company collects from consumers. The PUA is responsible for setting the tariff pursuant to the Electricity Sector Law and therefore the tariff charged to different consumers (which the PUA determines by aggregating the generation, transmission and distribution tariffs) is outside the Company’s control. From time to time the PUA reviews and updates the various components of the costs recognized in the tariffs. For more information on the tariff updates, see “Regulation — Tariffs — Regular Update and Tariff Formula.”

The Electricity Sector Law sets forth the following factors that the PUA must take into account when setting the tariffs: • the principle of recognized cost, in consideration of, among other things, the type and standard of services and including a

fair rate of return on equity; • the cost of the particular service, with no reduction in the cost for one service at the expense of raising the cost for another;

and • the formula set by the PUA, according to which the tariffs are updated from time to time. This updating formula may take

into account the “efficiency coefficients,” which refers to the rate by which the tariffs may be reduced, as decided by the PUA in consultation with the Ministers, in order to promote greater efficiency of an Essential Service Provider such as the Company.

When setting tariffs, the PUA is required, under the Electricity Sector Law, to monitor the expenditures of an Essential Service Provider (the Company is an Essential Service Provider within its meaning under the Electricity Sector Law), and it may ignore some or all of the expenditures that in the PUA’s opinion are not necessary for the fulfillment of the duties of an Essential Service Provider.

The Company believes that the tariffs set by the PUA currently do not, and in the past have not, accurately and timely reflected the Company’s actual costs, and consequently there is often a disparity between the Company’s costs and expenses, on the one hand, and its profitability and liquidity, on the other. The Company’s position regarding the calculation of the tariffs has often differed from that of the PUA, which ultimately sets the tariffs, and these differences often involve significant sums and have generally been determined to ultimately be adverse to the Company’s interests. The PUA’s position is that the electricity tariff is not intended under the provisions of the Electricity Sector Law to provide full recognition of all of the Company’s actual costs if such costs are not necessary (in the PUA’s opinion) to fulfill the Company’s obligations as an Essential Service Provider.

In a 2004 petition to the Supreme Court, the Company requested that the PUA be required to approve tariffs that would maintain the Company’s financial strength and stability and to increase the tariffs in accordance with its financial statements in order to maintain the real CPI adjusted value of its equity. On September 12, 2004, the Supreme Court rejected the Company’s petition and stated in its judgment that it is satisfied that the PUA has examined the Company’s requests and its decisions were within its authority and reasonable and consequently, the Supreme Court would not intervene in the PUA’s process and considerations in setting the tariffs. Additionally, the Supreme Court ruled that consideration of the maintenance of the Company’s financial strength, although relevant for setting the tariffs, only reflects one aspect of the public good which the PUA is charged with providing for according to the Electricity Sector Law.

The Company is exposed to risks where its costs and expenses are not recognized in full for the purpose of setting the tariffs, which the PUA revises periodically, and where the updating formula does not accurately reflect the Company’s exposure to price fluctuations and exceptional expenses, as well as costs and expenses that may conflict with the requirements for greater efficiency as determined by the PUA in consultation with the Ministers. The PUA sets efficiency coefficients for each of the Company’s segments by which the recognized revenues will be reduced annually. This means that the tariffs are set lower than would otherwise be the case to promote efficiency in the Company, and this requires the Company to reduce its costs and expenses in order to maintain profitability and cash flow (although these temporarily have not been applied in the transmission and distribution segment tariffs since April 1, 2012).

In addition, although the tariffs include a mechanism for compensating the Company for the gap between the time the Company incurs certain costs and the time the tariffs are updated and the Company actually receives payment for such costs, it does not, in the Company’s view, sufficiently address the significant liquidity shortfall the Company experiences when its costs increase significantly

20

and unexpectedly.

In February 2010, the PUA set a new tariff base for the generation segment for the years 2010 to 2014. In total, the February 2010 tariff base for the generation segment reflected a reduction of approximately 14% compared to the previous generation tariff that was last set in July 2002.

The Company’s analysis of the February 2010 generation tariff indicated that it would not cover all of the Company’s costs associated with generation activities for the period between 2010 and 2014.

On August 8, 2011, reflecting the Company’s increased fuel costs, the PUA revised the recognized costs for the Company in the tariffs and the costs arising from purchasing electricity from IPPs, in each case retroactive to April 1, 2011, which in turn resulted in the Average Tariff being increased by 9.89%, relative to March 22, 2011 levels, effective as of August 14, 2011. On October 24, 2011, the PUA decided to increase the tariff again, which resulted in an increase in the Average Tariff by 4.72% relative to the August 14, 2011 level. Then, on March 22, 2012, the PUA adopted a resolution outlining the Gradual Tariff Increase, as a result of which the Average Tariff increases 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 to recover the liquidity shortfall the Company has faced due to the higher fuel costs in 2011 and 2012. The PUA indicated that it elected to adopt the Gradual Tariff Increase because it determined that reflecting the entire cost of these additional fuel costs in a single increase would have resulted in too large an increase in the Average Tariff. On May 6, 2013, the PUA announced an increase of 5.5% in the Average Tariff. The PUA’s resolution from May 6, 2013 replaced the resolution from March 22, 2012 with respect to the 4.4% tariff increase in 2013. In its July 10, 2014 decision, the PUA announced that the tariff for consumers will remain unchanged in 2014 from its current level and noted that the third phase of the Gradual Tariff Increase will not be required since the remaining fuel costs will be recovered under the existing tariff. In addition, the PUA clarified that the tariff is expected to be reduced substantially in 2015 due to the completion of the collection of the remaining fuel costs. See “Regulation — Electricity Sector Law — Tariffs — Regular Update and Tariff Formula.”

In addition, the tariff base for the transmission and distribution segments was last set in 2002 (although as part of the PUA’s resolutions of March 22, 2012 and March 6, 2013 for an increase in the Average Tariff, there was an increase in the recognized costs for the transmission and distribution tariffs, and since April 1, 2012, efficiency coefficients have not been applied to these segments). The Company is currently urging and will continue to urge the PUA to set a new tariff base for the transmission and distribution segments. The Company cannot assess the timing or the scope of coverage to be provided by the tariff updates. If the tariff base is not revised to provide sufficient coverage for the Company’s costs or if it is not set in a timely manner, there may be a material adverse impact on the Company’s business, results of operation and financial condition. For more information on the tariff, see “Regulation — Tariffs” and Note 9.e to the Annual Financial Statements.

The Company is subject to reforms in the electricity sector that require structural changes in the Company, the terms or results of which are uncertain.

The Company is subject to the Electricity Sector Law

The goal of the Electricity Sector Law is to regulate the activities in the electricity sector in Israel for the benefit of the public, while creating conditions for competition in the Israeli electricity sector. The Electricity Sector Law, as it currently stands, sets forth a regulatory framework for Sector Reform that imposes certain limitations on the Company’s role within the electricity sector. The Company believes that the provisions of the Electricity Sector Law enable a gradual process through which the Company will be restructured. However, the Electricity Sector Law is complex and the Company believes that it can be implemented in various ways with respect to a number of important matters, thus the Company cannot be sure how the Electricity Sector Law will eventually be implemented. For more information see “Regulation — Electricity Sector Law.”

There is considerable uncertainty relating to the implementation of the Electricity Sector Law and the manner in which the Company and its operations, assets and liabilities will need to be restructured in order to comply with the Electricity Sector Law. For a description of these provisions of the Electricity Sector Law and the Company’s interpretation of such provisions, see “Regulation — Electricity Sector Law.”

Discussions regarding components of the Structural Change and the necessary amendments to applicable laws may take considerable time to complete, and the exact terms of the agreements and legislation may be different from those currently anticipated. If the provisions of the Electricity Sector Law are not modified, the Company will be required to implement the Structural Change as it is currently set out in the Electricity Sector Law.

The Company estimates that the cost of retirement of employees resulting from the Structural Change (to the extent implemented) is not calculable at this time but may be material.

In a February 2007 letter to the Chairman of the Board of Directors, with respect to the enactment of Amendment No. 5, the General Manager of the GCA clarified that in the implementation of Structural Change pursuant the Electricity Sector Law, including Amendment No. 5, consideration will be given to, among other things, the implications of the Structural Change on the Company’s liabilities, with, among other things, the intent that the repayment of loans that the Company took will not be prevented. In addition, the Company believes that the Structural Change cannot be implemented in accordance with the Electricity Sector Law without

21

addressing issues concerning the Company’s creditors, to the extent the rights of such creditors would be affected by the implementation of the Structural Change, subject to any applicable laws. However, the Company cannot be sure what implications, if any, the Structural Change will have for the Company’s creditors. For more information relating to the understandings regarding the Structural Change, see Note 1.e to the Annual Financial Statements.

The Antitrust Authority sent a notice for a hearing, which was received by the Company on January 1, 2014, that the General Director of the Antitrust Authority may instruct the Company to refrain from increasing its electricity production capacity beyond 13,307 MW, so long as the Company’s production capacity exceeds 50% of the entire electricity sector’s production capacity. Any such restriction would not prevent the Company from improving the efficiency of its production stations, but if the efficiency improvement results in increased production beyond 13,307 MW, then the Company must receive approval from the General Director of the Antitrust Authority in advance. In March 2014 and May 2014, the Company presented its objections to the General Director of the Antitrust Authority both in writing and orally. As of the date hereof, a final decision on the matter by the General Director has not yet been received.

The Company may also be subject to the Yogev Team’s recommendations with respect to the Sector Reform and the Structural Change in the Company. The Yogev Team was established in July 2013 by the Minister of Finance and the Minister of Energy and Waters to:





In March 2014, the Yogev Draft Report was published.

On September 8, 2014, the Company received the Yogev Letter. The Yogev Letter set forth a summary of the final proposal to the Company's employees for a Structural Change of the Company acceptable by the Ministers. The letter clarifies that the subject matter of the letter regarding the Company's changes in the electricity sector will require in one part amendments to primary legislation and in another part other regulation. On September 14, 2014, the Chairman of the Histadrut responded to the Yogev Letter indicating, among other things, that the Histadrut and the employee’s union will not stand idle and will take all measures to oppose the final proposal for the Structural Change.

As of the date of hereof there are material differences between the State's position and the Histadrut's position, especially with respect to employees’ rights in the context of the Structural Change, and there are no active negotiations between the parties. The Company's position is that negotiations must resume and that the Sector Reform must be advanced. The Chairman of the Board of Directors of the Company has sent a letter to the Prime Minister and the Ministers stating as much. The Labor Court has also called on the parties to resume negotiations. As of the date hereof, the implementation of the Structural Change has not yet commenced, and there is uncertainty with respect to the final form of the Structural Change, the timing of its implementation and its consequences for the Company and its business affairs and operations.

An English translation of the Yogev Letter is included in Annex C of this Offering Circular. The implementation of the Structural Change, as reflected in the Yogev Letter may have material impact on the Company's business, operations and financial results. For additional information on the Yogev Team, see “Regulation — Structural Change — The Yogev Team” and Notes 1.e and 9.b.6 to the Interim Financial Statements.

The Company’s operations are subject to extensive regulation, including regulations that require the Company to obtain and maintain the Licenses.

The Company and the electricity sector in Israel are subject to extensive regulation, including: • the provisions of the Electricity Sector Law and its regulations, pursuant to which licenses are issued for the Company’s

activity; • the policy and resolutions of the Government, including resolutions of the Minister of Energy and Water and the Minister

of Finance and provisions relating to the Company’s obligation to make major investments in infrastructure development; • the resolutions of the PUA, including with respect to the tariffs; • the provisions of the Government Companies Law and the regulations promulgated thereunder, and the resolutions of the

GCA, including with respect to the conduct of the Company as a corporation, the manner of adoption of resolutions by its corporate organs, the manner of financial reporting, the appointment of directors and special functionaries, wages, allocation of profits, privatizations and structural changes;

22

• the provisions of the Natural Gas Sector Law; • the provisions of the Israeli Antitrust Law, as the Company is deemed a monopoly under the Israeli Antitrust Law; • the provisions of the Israeli Securities Law, as the Company is a reporting corporation; • regulation related to business licensing, planning and construction and environmental protection; and • the provisions of the Law for Promoting Competition and Reducing Centralization. In September 1997, the Company was granted, pursuant to the Electricity Sector Law, a general license for the transmission,

distribution, supply, trade and sale of electricity in Israel. The activity of system management is being conducted by the Company pursuant to its general license and the Company was not granted a separate license for system management. In addition, each generation unit of the Company is independently licensed. The Company is also considered an “Essential Service Provider” under the Electricity Sector Law. The Licenses regulate the Company’s management of its operations and also impose additional obligations on the Company with respect to its status as an Essential Service Provider. For example, the Minister has the authority, in consultation with the PUA, to require the Company, as an Essential Service Provider, to submit for the Minister’s approval development plans covering its activities pursuant to the provisions of the Licenses. If the Company fails to submit such development plans for approval, the Minister may, in consultation with the PUA, impose a development plan which the Company would then be obligated to implement. Failure of the Company to comply with its development plan may expose the Company to criminal sanctions and lead to the cancellation of its licenses. Also, the Licenses may, in certain circumstances, be terminated or amended before their expiration, pursuant to the Electricity Sector Law and the terms of the Licenses. See “Regulation.”

In the past, pursuant to the provisions of the Electricity Sector Law and the orders promulgated thereunder, the Licenses were extended from time to time, usually for a period of one year each time. As of the date hereof, the Company's Licenses have been extended until January 1, 2015. By virtue of Amendment 12 to the Electricity Sector Law and in accordance with section 60(d11) to the Electricity Sector Law, a further extension of the licenses until January 1, 2016 will require an order to be issued by the Ministers, if the Ministers believe that such extension is required for the promotion of the goals of the Electricity Sector Law, after consultation with the PUA and the GCA, as well as the approval of the Economic Affairs Committee of the Knesset. This authority of the Ministers to extend the Licenses by order is limited to one period only, which will not exceed one year. Therefore, an additional extension of the Licenses of the Company to a date later than January 1, 2016 will require a legislative amendment in accordance with the Electricity Sector Law in its present version.

The Company believes that the above mentioned extension by an amendment of the Electricity Sector Law and the Minister's order applies to all of the Licenses; however, the PUA has stated that the extension does not apply to 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 Company’s development plan which was approved up to January 1, 2009. The PUA's position is that it was given the authority to extend these new generation licenses. In view of this position, and for the sake of caution, the Company has applied to the PUA and requested an extension for these new generation licenses. On February 12, 2014, the Minister approved the decision of the PUA of January 23, 2014, within which the validity of these new generation licenses was extended until January 1, 2015.

There is no certainty that the Licenses will be extended or that no changes will be made to the term of the Licenses; however, based on past experience, the Company expects that the Licenses will continue to be extended in the future. In addition, in light of the uncertainty regarding the implementation of the Structural Change, the Company cannot be certain of the length or timing of any future extensions, whether there will be any changes in the terms and conditions of its Licenses or whether they will be extended at all. The Company believes that following the implementation of the Structural Change, the Company will be issued new licenses in conformity with the Sector Reform, but there is an uncertainty as to the terms and conditions of such licenses and there is no assurance that the Company will be issued any licenses at all. See “Regulation — Electricity Sector Law — Licenses — The Company’s Current Licenses.”

The Company manages its activities as separate profit centers as required under its Licenses. However, the Company does not submit audited financial statements for profit centers as is required for most of its licenses, including the new generation licenses, and does not submit audited annual financial statements separately for each area, activity, generation unit or power station. The Company instead submits the audited financial statements for the operations of the Company in its entirety. The Company, under applicable regulations, is exposed to a risk that proceedings may be initiated against it or that its licenses will be revoked due to its failure to comply with this requirement. To the best of the Company’s knowledge, the PUA and the Ministry of Energy and Water are aware of the Company’s abstention from such requirements. As of the date hereof, no sanctions have been imposed on the Company for such abstention. The Electricity Sector Law imposes criminal sanctions (including imprisonment), as well as monetary fines and administrative sanctions, for violations of the Electricity Sector Law or the licenses issued thereunder.

The Yogev Letter addressed the issue of separate profit centers by stating that: “the various sectors of the Company’s operations will be managed as separate and audited profit centers.” Therefore, the Company believes that its obligation to prepare audited financial statements for its profit centers should be resolved as part of the overall Structural Change.

The Electricity Sector Law has been amended 12 times, most recently in December 2013. There can be no certainty as to the nature or extent of the structural changes to the Company that will be set forth in any future amendments. As a result, the Company

23

cannot predict what changes, if any, will be made with respect to licensing and other regulatory matters when the Licenses expire or otherwise. If the Licenses or other regulatory provisions are changed, or if the Licenses are not extended, the Company’s business, results of operations and financial condition may be adversely affected. See “Regulation — Electricity Sector Law.”

The costs of complying and penalty for non-compliance with such extensive regulation cannot be predicted and may have an adverse effect on the Company’s business, results of operations and/or financial condition, especially if such regulations change. 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 of the Company, the commencement of criminal indictments against some of them, as well as severe damage to the Company’s public image and reputation. If the costs of compliance or non-compliance are not fully recognized in the tariffs in a timely manner, failure by the Company to comply with extensive regulations may adversely affect the Company’s business, result of operations and financial condition. See “Regulation.”

The Company is dependent on a limited number of suppliers of natural gas and fuels, the failure of which may cause shortages in the supply of natural gas and liquidity challenges.

The increasing dependence of the Company on the generation of electricity using natural gas exposes the Company to the risk as there are a limited number of natural gas suppliers and restrictions related to the natural gas transmission system. As of the date hereof, the sources of natural gas consist of the Tamar reservoir and liquefied natural gas (LNG) supplied through a regasification vessel connected to a buoy offshore Hadera (together, the “Gas Suppliers”). At present, a shortage in the supply of natural gas can be caused by any of the Gas Suppliers not supplying the contractual quantities, failure in the transmission system of natural gas from the Tamar reservoir that currently has only a single pipeline, or any failure in the national transmission system.

These risks are compounded by the fact that natural gas cannot be stored by the Company. A shortage in the supply of natural gas caused by any of the above would force the Company to use more expensive and pollutant alternative fuels for generating electricity to satisfy the electricity demand. Disruptions in the transmission of natural gas, whether from the field to shore and/or in the national gas transmission systems, the repair of which may take a long time, are estimated to be of low probability by the Company. However, the expected financial damages caused by using expensive alternative fuels as a result of these events may be high since the cost of these fuels are expected to be significantly higher than the fuel costs approved within the electricity tariff. Although the Company believes that it will be able to recover most of the high fuel costs through the updated electricity tariff, the time gap between the date on which the Company bears the expense of purchasing higher cost fuels and the actual compensation for such costs within the electricity tariff will cause material impairment to the cash flow of the Company and thus may require the Company to find short-term liquidity sources to bridge the gap, especially if the Company’s liquidity cushion cannot make up for any shortfall.

As a result of a February 2014 Board of Directors decision, the Company maintains a liquidity cushion of approximately NIS 3 billion in monetary value. This cushion may not make up for the shortfall caused by higher fuel costs. Failure by the Company to find short-term liquidity sources to bridge any gap may have a material adverse effect on the Company’s business, results of operation and financial condition.

The Company will be required to prepare its financial statements based on full IFRS.

The Company prepares its financial statements in accordance with the Government Companies Regulations. Starting from 2008, the Company has presented its financial statements in conformity with IFRS, as modified by the required adjustments for the changes in the general purchasing power of the Shekel (pursuant to the rules established in Opinion No. 36, including the provisions set forth in Opinions Nos. 40, 50 and 56, of the Institute of Certified Public Accountants in Israel), and the principles of the FASB as set forth in Chapter RE6 with respect to accounting for regulated activities.

IFRS was adopted in Israel on January 1, 2008 and applies to public companies. These standards do not allow the Company to prepare its financial statements according to changes in the relevant purchasing power of the Shekel unless high inflationary conditions exist (which existed in Israel until December 31, 2003). As a result, the adoption of full IFRS, rather than the Government Companies Regulations currently applicable to the Company, will require the Company to recognize changes in the CPI (in relation to nominal NIS and not adjusted NIS) in its financial statements with regard to net financial liabilities which are not currently denominated in nominal NIS.

In accordance with the Companies Regulations, the Company will be required to implement full IFRS for the reporting period starting on January 1, 2015. The Company received a special exemption from the obligation to include comparative data for the past two years in its first financial statements under IFRS (i.e., the Company's 2015 financial statements), and the Company is permitted to include comparative data for only one year (i.e., 2014) in its 2015 financial statements. In addition, January 1, 2014 was set as the transition date.

Pursuant to IFRS 14, Regulatory Deferral Accounts, first-time adopters of the IFRS may continue to implement the existing practices with respect to recognition of regulatory assets and liabilities. Therefore, the Company will continue to recognize deferred regulatory accounts in its financial statements after the full implementation of IFRS. See Note 2.c.3 to the Interim Financial Statements.

The Company is utilizing the relief provided under IFRS 1, First-time Adoption of International Financial Reporting Standards,

24

to determine the “deemed cost” of the fixed assets and other assets that were presented in the Annual Financial Statements.

According to the Company’s estimates, which were presented to the GCA and the PUA, the termination of CPI adjustments to the financial statements, without a suitable solution for preventing the expected damage to the Company’s equity, will erode the Company's profitability, such that with respect to each percentage increase in inflation, the equity of the Company will be eroded by approximately (on an after tax basis) NIS 490 million based on the Annual Financial Statements and NIS 480 million based on the Interim Financial Statements. The Company is conducting ongoing discussions with the PUA in order to resolve the issue.

For additional information about the effects of the transition to full IFRS, see Note 2.a to the Annual Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Transition to Full IFRS – Impact of the Transition to IFRS.”

Under the instructions of the Israeli Securities Authority, as of each reporting date, the Company will prepare estimates regarding the impact of the transition from principles under the Government Companies Regulations to IFRS standards, which will occur pursuant to section 36a(b) of the Securities Law, 1968. These estimates will be completed and included in the Company’s financial statements as of December 31, 2014, along with a quantitative note, addressing the stated transition. See "Management’s Discussion and Analysis of Financial Condition and Results of Operations — Impact of the Transition to IFRS”.

For information regarding further potential changes which may come into effect before the actual transition date to full IFRS, see Note 2.a.5 to the Annual Financial Statements and Note 2.a.4 to the Interim Financial Statements.

The Company requires substantial additional financing. The Company requires substantial external financing in 2014 primarily in order to fund its development plans and to refinance its

existing debt, of which NIS 7.3 billion is due in 2014. The Company’s development plans are funded primarily through external financings, internal resources and, to a lesser extent, revenues. The Company raises debt primarily through loans from Israeli and foreign financial institutions (including loans with the guarantee or insurance of export credit agencies), as well as private and public issuances of debt in Israel and abroad.

The Company’s ability to obtain such external financing and the cost of such financing are dependent on numerous factors, including: general economic and capital market conditions in local and global markets, interest rates, credit availability from banks or other lenders (including limitations on the credit exposure a local bank or institutional investor can have to a single borrower like the Company or a specific sector like the electricity sector), investor confidence in the Company, the Company’s credit ratings, the success of the Company’s business and its financial condition (including its leverage), the status and terms of the Structural Change, the economic, security, legal and political conditions in the State of Israel, the privatization policy of the Government.

The Company is currently highly leveraged and has set targets to strengthen its financial position. The major financial targets of the Company are as follows:

• Attaining a ratio of financial debt to EBITDA of 6.5 (based on data of the last four quarters as of June 30, 2014, the ratio without excluding regulatory assets is 7.84 and the ratio before regulatory assets is 4.56).

• Attaining a total debt to total assets ratio of 81% (as of June 30, 2014, this ratio was approximately 84%).

• Maintaining the ‘BBB-’ international rating from S&P and the ‘Baa3’ international rating from Moody’s.

• Cash balance of not less than NIS 2.2 billion. Pursuant to the decision of the Board of Directors, the Company is preserving a liquidity safety cushion with a financial value of not less than NIS 3 billion, consisting of at least NIS 2.2 billion in cash and up to NIS 800 million in diesel and crude oil surplus inventory (as of June 30, 2014, the cash balance was approximately NIS 2.4 billion).

• Decreasing financial debt by NIS 0.5 billion per year for the next five years. There is no assurance that the Company will be able to obtain all future financings required by it or that the terms of such

financings will be favorable for the Company. If the Company fails to raise all the financings it requires, or if the terms of such financings will not be favorable for the Company, this may have a material adverse effect on the Company’s business, financial conditions and results of operations.

As an Essential Service Provider the Company is required to execute development plans that require substantial funding.

The Company has long-term development plans to expand its generation, transmission and distribution capacity which are based on the projected needs of the Israeli electricity sector. In addition, the Company is required to maintain its existing facilities and equipment.

In devising its development plans, the Company is faced with uncertainty as to certain key elements, including future demand for electricity, fuel prices, competitive and economic factors and new technologies that may become available for developing the generation and other segments. As a result, the development plans are subject to change over time and any such changes may have an impact on the Company.

The Company’s current development plans provide for the construction of a gas/coal operated power station (Project D), 25

consisting of two thermal steam generation units, with an aggregate capacity of 1,524 MW, expected to be completed in 2020 (first unit) and 2021 (second unit). However, on October 2, 2014, the Board of Directors of the Company resolved to freeze all activities related to the building of Project D and to exclude this project from the Company’s working plans and budget for 2015. In addition, the Board of Directors resolved not to include investments in the project in the Company’s five-year financial plans and to instruct the Company's management to approach the Minister with a request to modify the development plans accordingly.

The Company’s current development plans, as approved by the Minister, also include the construction of an additional combined cycle plant at Alon Tavor site, with a capacity of about 400 MW. As of the date hereof, there is a high degree of uncertainty regarding the date of completion of the project. The project was initially included in the Emergency Plan (discussed below), and is scheduled to be completed by 2020. Although incorporated into the development plans, there is an uncertainty with respect to the implementation schedules of this project.


The Company’s development plans, which are often prescribed by the authorities, require significant capital expenditures. The Company has short-term (one year) and medium-term (up to five years) capital investment plans that correspond to its development plans. Based on its most recently published forecasts, the forecasted cost for the Company’s capital expenditure plans for the years 2015 through 2018 is an average of NIS 4.2 billion annually.

The Company’s development plans are primarily funded through external financings, internal resources and, to a lesser extent, revenues. The Company historically has financed, and in the future expects to finance, its development plans primarily from loans from Israeli and foreign financial institutions (including loans guaranteed or insured by export credit agencies), as well as public and private offerings of debt in Israel and abroad. However, as provided above, there is no assurance that the Company will be able to successfully fund its development plans from external sources.

In the Company’s budget, which was approved in 2013, for its development plans, it has allocated an aggregate amount of approximately NIS 5.6 billion for reducing emissions (as an initial estimate) for the years 2011 to 2018. For more information, see “Regulation — Environment.”

In the past in response to the urgent need for constructing additional generation units to meet the projected needs of the electricity sector, the Minister has required the Company to construct several projects under the framework of the Emergency Plan (the “Emergency Plan”). The Company cannot be sure the Minister will not require the Company to undertake additional projects and if it does, that the costs of such projects, or a portion thereof, will be recognized by the tariffs. To the extent the Company is required to finance these projects outside of its regularly budgeted capital investment plans, the Company’s business, results of operations and financial condition could be materially adversely affected.

The Company’s development plans are subject to permissions and approvals for establishing projects, and the timing of receiving such permissions and approvals affects the planning and execution of such plans. In establishing a new facility, the Company is required by planning and zoning laws and other laws to obtain a series of approvals such as construction and environmental permits. Various permits affect the scope of activities of the Company and its ability to meet its objectives and pose obstacles to activities that are necessary to increase production capacity. The Company undertakes various strategies to seek to mitigate the risks associated with obtaining permits for its projects, including resource allocation at the project planning stage to remove obstacles to approval and alternative action plans in case of unexpected delays in obtaining approvals, but there can be no assurance that these strategies will be successful in mitigating the risks. The Company cannot be certain that it will be able to receive the necessary approvals and permits to implement its development plans, that such approvals or permits will be timely obtained, or that it will be able to complete the expansion of its generating capacity or development plans in other activity segments on time or on budget. As electricity demand continues to increase, the Company may be required to incur additional costs to further increase its capacities. If the Company is required to commit to further expenditures there can be no assurance that these will be fully or timely covered by increased tariffs or that the Company will be able to raise the required financing to increase its capacities as needed.

A downgrade in the Company’s credit ratings could increase the Company’s borrowing costs and adversely affect the availability of new financing, as well as the value of the Notes.

On July 3, 2014, the international rating company Standard & Poor’s Ratings Services (“S&P”) and the local rating company Standard and Poor’s Maalot (“S&P Maalot”) announced that they were changing the Company’s local credit rating to ‘ilAA’ with a stable outlook and the Company’s international credit rating to ‘BBB-’ with a stable outlook.

On December 5, 2013, the local rating company Midroog announced that the Company’s local credit rating remains ‘Aa3’ but changed the outlook from negative to stable for the Series 22 and 2022 debentures and removed the Company from its CreditWatch Negative list which it has been on since May 24, 2012. On December 5, 2013, Midroog also announced that the rating for the State of Israel guaranteed debentures remains ‘Aaa’ with a stable outlook.

On December 11, 2013, the international rating company Moody’s Investors Service, Inc. (“Moody’s”) announced that the 26

Company’s international credit rating remains ‘Baa3’ but changed the outlook from negative to stable and removed the Company from its CreditWatch Negative list which it has been on since November 2, 2011.

There can be no assurance that any of the Company’s current ratings will remain at current levels in the future or that a rating will not be lowered. Any downgrade or negative action by one or more of the rating agencies could adversely affect the market value of the Notes and the Company’s outstanding debt securities, the Company’s existing financings and the availability of other new financing on favorable terms (if at all), which would increase the Company’s borrowing costs and have a material adverse effect on its business, results of operations and financial condition.

The Company may be obligated to acquire from the Government certain assets. The Electricity Sector Law provides that certain assets held by the Company are to be acquired by the Company from the

Government for their fair value (the “Assets Arrangement”). The Electricity Sector Law does not specify which particular assets are to be so acquired or the method by which value is to be determined. Consequently, the assets to be so acquired may or may not constitute a significant portion of the Company’s assets, and the cost to the Company, if any, may or may not be material.

Pursuant to the Electricity Sector Law, since no agreement was reached by March 4, 1997 between the Ministers and the Company, the terms of the Assets Arrangement are to be determined by the Ministers. However, to the best of the Company’s knowledge, as of the date hereof, no such determination has been made, and in view of the time that has passed, the Company cannot assess if or when the Ministers will make a determination with respect to the Assets Arrangement and how it will be implemented.

In February 2000, the Company received a letter from the Deputy Budgets Commissioner of the Ministry of Finance, indicating that a governmental team reached an opinion of the State of Israel with respect to the Asset Arrangement, which included an economic/accounting analysis and a legal opinion. The letter further stated that, according to the provisions set forth in the opinion of the State of Israel, the implementation of the Asset Arrangement in accordance with the Electricity Sector Law might have a material effect on the Company.

The terms of the Assets Arrangement are to be determined by the Ministers, and the amounts that the Company could be obligated to pay are very substantial. Based on the Government’s model, the Company has calculated an aggregate book value of the assets to be acquired to be NIS 7.5 billion (in adjusted December 2013 Shekels), although the Company materially disputes the Government’s model and believes that this amount does not reflect the real value of the assets to be acquired under the Assets Arrangement. Given the significant uncertainty related to this matter, there can be no assurance that the Assets Arrangement, if implemented, will not have a material adverse effect on the Company’s business, results of operations or financial condition.

In October 2013, the Company raised the issue of the Assets Arrangement with the Yogev Team as an issue that requires regulation, and the Yogev Draft Report addressed the Assets Arrangement. In addition, the Yogev Letter addresses certain issues related to the Company’s assets. For additional information regarding the Yogev Team, the Yogev Draft Report and the Yogev Letter, see “Regulation — Structural Change — The Yogev Team.”

For further details, see “Relationship with the State of Israel — The Assets Arrangement” and Note 1.f to the Annual Financial Statements. The Company is subject to increased competition.

The Government has set a target of increasing the installed generating capacity of electricity by IPPs to 20% of Israel’s installed generating capacity by 2020. In addition, the Government has set a target of increasing the share of electricity generated from sources of renewable energy by IPPs to 5% of Israel’s electricity by 2014 and 10% by 2020. As of June 30, 2014 and December 31, 2013, the IPPs’ share of Israel’s total installed generating capacity was approximately 13.2 % and 7.5%, respectively (including IPPs that produce electricity for self-consumption and not for sale), and the IPPs’ share of renewable energy capacity was approximately 1.5% and 0.8%, respectively, of Israel’s installed generating capacity.

Tenders and conditional generation licenses have been granted to a number of IPPs. As of June 30, 2014 and December 31, 2013, the capacity of tender winners and/or conditional license holders for private electricity production was 5,262 MW and 6,281 MW, respectively, which includes renewable energy. As of June 30, 2014 and December 31, 2013, the capacity of tender winners and/or conditional license holders for private electricity production without renewable energy was 3,887 MW and 4,786 MW, respectively, which is approximately 20% and 23%, respectively, of Israel’s expected generating capacity (taking into account the Company’s existing generation capacity, future and existing producers, Emergency Plan B, Alon Tavor and Project D but excluding renewable energy). In addition, as of June 30, 2014 and December 31, 2013, tenders and conditional licenses have been granted to IPPs using renewable energy technologies for an aggregate production capacity of about 1,375 MW and 1,500 MW, respectively. As of June 30, 2014 and December 31, 2013, the capacity of IPPs who were granted generation licenses to sell electricity to the Company was approximately 1,913 MW and 885 MW, respectively, which is approximately 12.0% and 6.0%, respectively, of Israel’s total installed generating capacity. Some of the IPPs that hold conditional licenses and/or those that won tenders are in advanced building stages (for example, Dalia Power Energies Ltd., which is licensed to have a generating capacity of 870 MW) and others are in advanced planning stages (for example, Dead Sea Works Ltd., which is licensed to have a generating capacity of 327 MW). As of June 30, 2014 and December 31, 2013, the aggregate generating capacity of IPPs in advanced building and planning stages was approximately 2,314 MW and 2,670 MW, respectively, for ultra-high voltage and high voltage, which equals to 14.9% and 18.5% of

27

Israel’s generating capacity as of June 30, 2014 and December 31, 2013, respectively. The rest of the conditional license holders which are conventional IPPs, are at the feasibility stage. Due to the uncertainty involved with these IPP projects, whose completion is outside the Company’s control, the Company cannot predict how many projects will be completed or when any such projects will be completed. See “Business — Competition.”


The Company expects a considerable increase in the scope of generation by IPPs, including generation using renewable energy. The Company estimates that an increase in the electricity generation by IPPs may impact the Company in several ways including the following:

• The Company expects a significant increase in the installed generation capacity of IPPs in the upcoming years. Part of the electricity currently produced by the Company and part of the increased demand for electricity will be satisfied by IPPs, resulting in a decrease of electricity generation by the Company. As a result there will be a decrease in revenues in the Company’s generation segment and a potential loss of strategic consumers. However, there is considerable uncertainty with respect to the entry of IPPs and the Company cannot accurately predict how many IPPs will enter into the market and when;

• Since the majority of IPPs will use the transmission and/or the distribution grid of the Company, and since IPPs are billed for the use of the Company’s infrastructure, the Company expects that revenues in the transmission and distribution segments will not materially decrease and may even increase;

• The increase in the generation capacity in the Electricity Sector and the increased usage by IPPs of the Company’s transmission and distribution infrastructure may require the Company to direct considerable investments to the transmission and distribution grids;

• The Company is required to serve as a back-up source of electricity in case of a failure by IPPs to provide their customers with electricity, which will require the Company to maintain higher levels of generating capacity; the Company anticipates that once IPPs comprise a large portion of the generating capacity in the market, the PUA will update the tariffs to compensate the Company, at least partially, for the costs derived from the need to maintain such higher levels of generation for reserve;

• The Company must purchase electricity from IPPs at a rate set by the PUA (the period for such purchase and the amount of electricity vary according to the type of IPPs);

• In order to meet the State of Israel policy, the PUA has established arrangements to allow the renewable energy IPPs to be paid a higher tariff than that paid to the Company. However, any increase in the costs of the Company as a result of payments required from the Company to the renewable energy IPPs will be recognized in the framework of the tariff. Accordingly, the expenses for the transition to “green electricity” will be included in the framework of the tariff. Notwithstanding, there may be a time gap until such costs will be covered by the tariff. Since April 1, 2012, the Company has received advance payments for power purchases from IPPs and PV facility owners. The gap created between the actual purchasing costs and the advance payments will be returned to the Company or consumers, including interest and CPI adjustments;

• Within the framework of implementing the provisions of the law and government resolutions, the PUA encourages the entry of IPPs into the electricity sector. Within this framework, the IPPs were given a safety net and preferential conditions in connection with, among other things, the use of the Company’s transmission and distribution systems and the Company’s commitment as a backup source in case of a failure of the IPPs to provide electricity to the consumers; and

• The expected increase in competition poses financial risks to the Company, as it creates uncertainty with respect to the amount of electricity that the Company will be required to purchase and generate in the future.

The Electricity Sector Law provides for the separation of the various generation, transmission, distribution and system management activities in the electricity sector among several entities through the decentralization of the electricity sector in the State of Israel. The implementation of the Electricity Sector Law will result in competition among the Company, the entities that will result from the implementation of the Electricity Sector (some of which could be subsidiaries of the Company) and IPPs as they enter the market. For more information on the Sector Reform, see “Regulation — Electricity Sector Law — Structural Change.” Since it is unclear how the Company will be structured and the extent to which IPPs may continue to receive preferential treatment on similar or different terms in the future, there can be no certainty that the Company will be able to compete with IPPs on equal terms or be treated by the PUA in a similar manner as compared to IPPs. See “Business — Competition.”

The Antitrust Authority sent a notice for a hearing, which was received by the Company on January 1, 2014, that the General 28

Director of the Antitrust Authority may instruct the Company to refrain from increasing its electricity production capacity beyond 13,307 MW, so long as the Company’s production capacity exceeds 50% of the entire electricity sector’s production capacity. Any such restriction would not prevent the Company from improving the efficiency of its production stations, but if the efficiency improvement results in increased production beyond 13,307 MW, then the Company must receive approval from the General Director of the Antitrust Authority in advance. In March 2014 and May 2014, the Company presented its objections to the General Director of the Antitrust Authority both in writing and orally. As of the date hereof, a final decision on the matter by the General Director has not yet been received.

The Company has significant obligations in respect of pension contributions.

The deposits made into the pension fund of the Company for first generation and second generation employees are based on a forecast of expected cash flows in the future and a number of actuarial assumptions (the pension fund for third generation employees is an accumulating pension fund).There is a risk that the actual pension liabilities of the Company will differ from those that are forecasted by it. Therefore, to the extent that the deposits and their proceeds do not cover liabilities, the Company may be required to make additional deposits for the pension period which may be significant. In addition, the actuarial model for the calculation of the deposits made into the pension fund may change in the future in accordance with, among other things, changes in life expectancy, regulatory issues, the economic climate and changes in the actuarial model as set forth above, which may require the Company to make additional deposits, in significant amounts, into the pension fund.

In addition, the investment policy of the pension fund for deposits made by the Company, as well as differences between the maturity and return of Government bonds in which most of the assets of the pension fund are invested and the maturity and return of linked Government bonds by which the pension liabilities of the Company are calculated, may result in the total assets of the pension fund being less than the liabilities of the pension fund, in which case the Company will be responsible for the gap between the assets and liabilities of the pension fund, which may be significant.

Under the guidelines of IAS 19, the capitalization rate for post-employment benefits liabilities will be determined by using the market returns of high-quality corporate debentures at the end of the reporting period. The market returns for government debentures should be used in countries that do not have a "deep market" (i.e., a liquid corporate debenture market). On September 1, 2014, the Israeli Securities Authority published a draft staff's accounting position indicating that there is a deep market in Israel for CPI-linked high quality corporate debentures denominated in Israel Shekels. It is still unclear when the final staff position of the Israeli Securities Authority will be published and when the corresponding changes will be made in the Company's financial statements, but it is possible that such changes could be made in the Company’s interim financial statements for the nine months ended September 30, 2014. The draft staff’s accounting position noted that the implementation will be prospective, and that the Israeli Securities Authority will not intervene when companies apply the change in the capitalization rate for post-employment benefits in the financial statements for 2014.

As of June 30, 2014, the pension fund had a deficit of NIS 1.8 billion. So long as the pension fund has such a deficit, the Company will need to make payments to reduce such deficit.

The difference between the actuarial liability in the financial statements of the pension fund as of June 30, 2014 and the actuarial liability in the financial statements of the Company as of June 30, 2014 derives from a difference in calculation methodology used by the Company and the pension fund. The Company calculates the actuarial liability in accordance with the accounting rules applied to the Company (in accordance with IFRS, including IAS 19), while the pension fund acts in accordance with the instructions of the Capital Market, Insurance and Savings Division Officer. The main difference between the assumptions used by the Company and pension fund derives from the real increase in salary assumption, rate of employee promotion, seniority increment, labor agreements, salary erosion, etc. The difference in these assumptions results in a difference of NIS 2.8 billion. If, however, the Israeli Securities Authority staff’s draft accounting position that the Israeli market for high quality debentures is a “deep” market is adopted, the difference will increase significantly. See Note 2.a.7 to the Interim Financial Statements.

In addition, the Board of Directors and Management determined that the internal controls of financial reporting of the Company for the year ended December 31, 2013, were not effective due to a material weakness in the internal controls over financial reporting, as set forth below:

• The Company did not maintain effective controls to ensure that the rights and benefits according to which payroll and pension payments are paid and actuarial obligations are included, are authorized in conformity with requirements of the law.

The external auditors of the Company, who audited the Annual Financial Statements, also issued an opinion on the effectiveness of the internal controls over the financial reporting of the Company and identified the same material weakness. A material weakness is a deficiency, or combination of deficiencies, in internal controls over the financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

29

The Company may experience labor disruptions.

Almost all of the Company’s employees are unionized and the Company is a party to several collective bargaining agreements with the employees’ union. The Company seeks to maintain good labor relations at all organizational levels, communicate regularly with the employees’ union and comply with all employment agreements in order to prevent any interruptions in labor relations. The Company’s current wage agreement expired on June 30, 2012 and included an undertaking by the employees’ union not to announce labor disputes until December 31, 2012. The Company has been engaged in recent negotiations with the employees’ union and the Histadrut to extend the agreement. Any extension of the agreement requires the approval of the wages commissioner in the Ministry of Finance. There can be no assurance that there will not be strikes or disruptions upon or in connection with the expiration of this agreement. There can be no assurance that future changes in labor relations, including as a result of the implementation of the Structural Change, will not lead to labor disputes. In the past, labor disputes have led to labor disruptions, which have adversely affected the Company’s business. Although there has never been a material interruption in the supply of power as a result of a labor dispute, in the future, general and prolonged labor disruptions could lead to such an interruption in the supply of power, which may have a material adverse effect on the Company’s business, results of operations and financial condition. The employees’ lack of cooperation with respect to the connection of the IPPs to the electricity grid may cause the General Director of the Israel Antitrust Authority to take actions against the Company. For more information see “Regulation – Declaration of the Company as a Monopoly by the General Director of the Israel Antitrust Authority.” For a discussion of certain material labor disputes with the Company, see “Business — Employees — Labor Disputes and Pension Plan Disputes,” Note 34.c to the Annual Financial Statements and Note 9.d to the Interim Financial Statements. For additional information regarding collective bargaining agreements, see “Business — Employee — Employment Agreements.”

The Company generally holds discussions with the Histadrut and with the governmental authorities so that changes in the labor relations in the Company, including in the framework of the Structural Change, organizational changes and efficiency plans will be carried out with the consents and approvals of the relevant parties. Insofar as such changes will be implemented without the employee’s union’s consent, it may lead to labor disputes, employees' sanctions and/or strikes, that may adversely affect the Company and its activities.

On September 16, 2014, in connection with an ongoing labor dispute regarding the Structural Change, the Labor Court ruled that given the State of Israel is not willing to continue negotiations with the Company’s employees regarding the potential implications of a massive introduction of IPPs into the electricity sector on the Company’s employees’ rights and job security, the Company’s employees may take unionized action and may strike, after submitting an outline of the strike they intent to take. With respect to a strike and its scope, there will be a separate hearing to be held shortly. Both the Histradrut and the State of Israel filed motions for leave to appeal this decision. In addition, the Labor Court ruled that until a further decision is rendered, its previous decision, prohibiting the Company’s employees from taking certain sanctions against IPPs and other private entities that operate, or are supposed to operate in the electricity sector, will continue to remain in effect. On October 19, 2014, the national labor court ruled that the State of Israel, through its various branches, is not prohibited from granting conditional and new licenses to IPPs and connecting IPPs to the electricity grid, and therefore previous rulings of the Labor Court will not prevent the State of Israel from doing so.

The Company is subject to environmental laws. The Company’s operations are subject to various environmental laws and regulations relating to air, electromagnetic field and

non-ionizing radiation, water and noise pollution, asbestos and the storage, transportation and disposal of toxic, volatile or otherwise hazardous substances. A substantial portion of these laws and regulations are well established while others are in various stages of development. The Company is studying the implications on its operations of pending and proposed environmental laws and regulations. The Company is acting to prevent or minimize the environmental risks of its operations and is preparing for the economic, legal and operational ramifications of these rules and regulations and allocates funds out of its budget in order to comply with the environmental rules and regulations that apply, or may apply to it in the future.

In recent years, the environmental standards applicable to the Company’s activity have intensified. Recently, several proposed environmental bills and regulations were brought before the Knesset and are in various stages of approval. See Note 1.g to the Annual Financial Statements. 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 anticipates that current environmental laws and regulations may become more stringent in the future and that additional related laws and regulations will be adopted. There can be no assurance that the Company’s costs of compliance and liabilities under existing and new laws and regulations, or any changes to existing laws or regulations, will not be substantial or will be fully recognized by the tariff and, in any event, full or partial recognition may be delayed, all of which could have a material adverse effect on the Company’s financial condition. For further information, see “Business — Environment.”

The Company is exposed to currency, index and interest fluctuations.

Substantially all of the Company’s revenues are denominated in Shekels. However, as of December 31, 2013, 53% of the Company’s long-term financial liabilities (excluding foreign hedging transactions and Perpetual Debentures issued to the State of Israel) were denominated in or linked to currencies other than Shekels, such as U.S. Dollars, Euro and Yen. The majority of the Company’s financial liabilities are at a fixed interest rate. As of December 31, 2013, the Company’s financial debt denominated in

30

currencies other than NIS amounted to NIS 23,565 million, of which NIS 19,080 million was denominated in U.S. Dollars, NIS 2,005 million was denominated in Euros, and NIS 2,480 million was denominated in Yen. As a result, fluctuations in foreign currency exchange rates may cause the Company’s expenses (financial and otherwise) to fluctuate, which could affect the Company’s financial performance. The Company has financial expenses relating to CPI-linked interest rates, but these expenses have been relatively stable due to index linkage mechanisms in the tariff, resulting in less financial exposure to the Company than those linked to foreign currencies and subject to currency fluctuations. Because of the considerable amount of debt denominated in foreign currencies, the Company’s results of operations have historically reflected substantial gains and losses attributable to fluctuations in rates of exchange between the Shekel and such foreign currencies.

When it set the tariff for the generation segment, the PUA determined a new hedging mechanism for all segments of the electricity chain, whereby the Company’s liabilities denominated in foreign currencies that were recognized by the PUA were gradually decreased according to the phase-out plan published by the PUA, until the complete phase out of the hedging mechanism in April 2013. On May 6, 2013, the PUA, in response to the Company’s request, decided to freeze the current hedging mechanism until November 1, 2013. On September 16, 2013, the PUA decided that the hedging rate will be maintained at 9% of the foreign capital set in the tariff base until the next annual tariff update. In the meantime, the Company will review its policy with respect to hedging its foreign currency exposure, taking into consideration the costs and the risks involved in hedging and the effects of hedging on the Company's financial statements and cash flow. In addition, the Company is exposed to the difference between the interest rate recognized in the tariff base (in foreign currency and Shekels), that only changes upon the annual tariff update, and the actual interest rate it pays on its loans (in foreign currency and Shekels), which may have a material adverse effect on the Company’s results of operations and financial condition.

The Company has taken a number of steps designed to mitigate the effects of fluctuations in rates of exchange between the Shekel and such foreign currencies, including seeking to limit its foreign currency exposure through hedging transactions (with instruments such as swap and forward contracts). There can be no assurance, however, that there will not be a material adverse effect on the Company’s business, results of operations and financial condition in the future as a result of exchange rate fluctuations. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Foreign Currency Risk Exposure” and Notes 2.b and 27 to the Annual Financial Statements. The Company’s outstanding loans and notes (including the Notes) are subject to mandatory prepayment, repurchase or redemption, cross-default and cross-acceleration provisions.

Certain of the Company’s outstanding loans and notes (including the Notes) contain provisions that allow the lenders and Holders to demand immediate prepayment, repurchase or redemption upon the occurrence of certain specified events or circumstances. There are a variety of events that trigger mandatory prepayment, repurchase or redemption under the Company’s outstanding loans and notes. The circumstances under which these events are triggered may be difficult to ascertain as certain of the definitions and terms associated with the triggering events do not always have precise meanings. Such prepayments, repurchases or redemptions may constitute, in and of themselves, an event of default under certain cross-default provisions included in the Company’s financing arrangements. In addition, the Company may incur additional loans or issue additional notes that contain similar or different triggers. The Company may not have, or be able to obtain, sufficient funds to make any required prepayments or repurchases upon such trigger events (including with respect to the Notes), and the failure of the Company to make these payments could constitute a cross-default under the Company’s other financing arrangements, all of which could have a material adverse effect on the Company’s business, results of operations and financial condition.

As of December 31, 2013 and June 30, 2014, financing contracts of the Company that include a cross-default provision totaled NIS 21,165 million and NIS 20,957 million, respectively. In addition, 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, then another lender, whose contract has not been violated, will be granted the right to demand immediate repayment (cross-acceleration). As of December 31, 2013 and June 30, 2014, financing contracts of the Company that include a cross-acceleration provision, not already included in a cross-default provision, totalled NIS 4,618 million and NIS 5,447 million, respectively. The Company is currently owned by the State of Israel.

The State of Israel currently owns 99.846% of the Company’s outstanding shares. So long as the State of Israel continues to own more than 50% of the Company’s outstanding shares, no director can be appointed unless the State of Israel votes in support of its election and, consequently, the State of Israel will have effective control over the Company. Pursuant to the Companies Law, the appointment of external directors to the Board of Directors requires (A) the vote of the majority of the shareholders, and (B) one of the following: (i) the vote of the majority of the shareholders that are not affiliated with the controlling shareholder or (ii) less than 2% of the shareholders of the Company object to the appointment. However, due to the fact that less than 2% of the Company shares are not owned by the State of Israel, the requirement set forth in clause (B) above is not expected to impact the election process of external directors, who are effectively appointed by the State of Israel. The Government Companies Law requires that the Company (as a Government Company) act in accordance with the business considerations by which a non-Government Company is normally guided, unless the Government, with the consent of the Finance Committee of the Knesset, directs that it act otherwise. The Company believes it has always acted in accordance with business considerations and that the Government, in exercising its authority pursuant to the

31

Government Companies Law over the Company, has never directed the Company to act otherwise. However, there can be no assurance that in the future the Government will not direct the Company to act in a manner other than in accordance with business considerations.

As a Government Company, the Company is required to seek approval from the Government before assuming any liability that may directly or indirectly restrict the ability of the Government in its governmental functions or in its position as a shareholder of the Company, including in connection with effecting a privatization of the Company or certain other structural changes. There can be no assurance that the Government will provide such consents or approvals on a timely basis or at all, which could have a material adverse effect on the Company’s business, results of operations and financial condition.

The State of Israel is not obligated to maintain its ownership of the Company. The Company has existing financings which include, among other things, mandatory prepayment provisions where there is a change of control. On October 5, 2014, the Government approved a long term plan to conduct public offerings of minority interests in government companies during the years 2015 to 2017. For government companies in which the State of Israel has an interest in maintaining control over the long term, the government holdings will be sold through public offerings of equity interests listed on the TASE, alone or in combination with equity financing, in the range of 25% to 49% of the share capital of each such company on a fully diluted basis. For governmental companies in which the State of Israel has no interest in maintaining control over the long term, the privatizations will be effected through one or more offerings, private sales, or a combination thereof.


If the Government privatizes the Company, or if the Company is subject to other unanticipated structural changes, the Company’s business, results of operations and financial condition may be adversely affected. There can be no assurance as to what impact, if any, there would be if the Government lowers its percentage of ownership in the Company. In addition, there can be no assurance that the Government will not subject the Company to new structural changes, accelerate the structural changes that are currently contemplated under the Electricity Sector Law, or implement any other anticipated or unanticipated structural changes in a manner adverse to the Company’s interests.

The activities of the Company are directly impacted by the economic, political and military conditions in the State of Israel and the Middle East.

Substantially all of the Company’s assets are located in the State of Israel. Consequently, the Company’s operations are directly affected by the economic, political and military conditions in State of Israel. The Company could be materially adversely affected if major hostilities break out or escalate in the Middle East, or if trade between the State of Israel and its present significant trading partners is curtailed. The State of Israel has from time to time experienced political volatility and has been subject to ongoing security concerns. Since the establishment of State of Israel in 1948, a number of conflicts have occurred between the State of Israel and Arab countries or terrorist organizations in the Middle East, and a number of terrorist attacks have targeted the State of Israel. Hostilities against the State of Israel, such as in Gaza in 2011, 2012 and the summer of 2014, and regional conflicts such as in Egypt in 2011 and currently in Syria, may worsen and potentially affect Israel’s economic condition and the Company’s business, results of operations and financial condition. For more information regarding conditions in the State of Israel, see “Annex A — Conditions in the State of Israel.” In addition, the Company’s facilities and infrastructure may be damaged as a result of such hostilities.

Due to the national and political environment in the State of Israel and its relationship with and the conditions existing in its neighboring countries, there is no back-up to the Company’s electricity grid or alternative electricity supplies in the event of disasters or other disruptions. In light of the critical importance of the Company and the services it provides to the State of Israel, the Company may be at risk of being the target of hostilities. The Company maintains extensive security over its facilities and is guided on various security matters by authorized bodies, such as the Israel Defense Forces Home Front Command. The Company has conducted an assessment concerning current threats and is taking protective measures for those working at its plants and facilities. However, there can be no assurance that future attacks will not damage the Company’s facilities in a material way. The insurance policies purchased by the Company normally exclude damages resulting from acts of terrorism or war.

32

The Company is dependent on foreign sources for a substantial amount of fuel and equipment and disruptions in the supply from those sources may adversely affect the Company.

A substantial amount of the fuels used by the Company (with the exception of natural gas from the Tamar reservoir), as well as a large proportion of the equipment required by the various Company facilities, are purchased, either directly or indirectly, from foreign sources. Since the Company is dependent on foreign sources, it is exposed to numerous risks, such as delayed fuel supplies or equipment that may result from political instability, embargos, port strikes, security tensions, sabotage and other such occurrences. Any disruption in the supply of fuel or equipment used by the Company will have an adverse effect on the Company’s business, results of operations and financial condition.

There can be no assurance that the Company’s dependence on foreign fuel (other than natural gas) and equipment will end in the foreseeable future or at all or that disruptions to the supply of fuels and equipment from foreign sources will not occur. If such disruptions occur, they may have a material adverse effect on the Company’s business, results of operation and financial condition.

The Company is subject to a number of class action lawsuits and other litigation.

As of June 30, 2014, ten petitions (one of which was submitted as an expansion of an existing claim) are pending against the Company for recognition of actions as class actions, two of which have been recognized as class actions. The sum of nine of the actions mentioned above amounts to a sum of NIS 25.2 billion (U.S.$7.3 billion) and another action has been assessed by the plaintiffs in the amount of several tens of millions of NIS. The Company has determined, in reliance on the opinion of its legal advisors with respect to these claims, that based on current information, such claims and proceedings will not materially affect the financial position of the Company. Based on the opinion of its legal counsel, the Company has not made any provision for these class actions, beyond a negligible amount that is attributed in its Annual Financial Statements, but to the extent that these petitions are accepted in part or in full, this may have a material adverse effect on the Company. For further information regarding legal proceedings pending against the Company, see “Business — Legal Proceedings” and Note 34.b to the Annual Financial Statements.

Risks Related to the Notes

Certain transfers of book-entry interests in the Notes may be required to settle in a manner that may not be customary for investors holding similar securities and may prove difficult to arrange.

The holding of book-entry interests in the Notes will be limited to Qualified Institutional Buyers, Qualified Israeli Investors and Qualified European Investors that have accounts with TASE Members or persons who hold interests through a client of a TASE Member (such as Euroclear and Clearstream) or a participant of such client. Both Euroclear and Clearstream have appointed Citibank, N.A., a TASE Member, as their custodian in respect of securities listed on the TACT Institutional. As a result, holders of book-entry interests in the Notes will be able to hold such interests through participants of Euroclear or Clearstream.

Holders of Notes must rely on the relevant provisions of the bylaws of the TASE and the TASECH as well as the relevant procedures of the financial intermediaries, clearing systems and participants through which they hold their book-entry interests to transfer such interests or to exercise any rights of Holders of Notes under the Fiscal Agency Agreement. Such procedures will require that trades in book-entry interests between clients of two different TASE Members (such as trades between a person holding a book-entry interest through a client of Citibank, N.A. (such as Euroclear or Clearstream) on the one hand and a person holding a book-entry interest through a client of another TASE Member on the other) or between two clients of the same TASE Member (such as, with respect to Citibank, N.A., trades between a person holding a book-entry interest through Euroclear on the one hand and a person holding a book-entry interest through Clearstream on the other) to either settle (i) “delivery-versus-payment” in NIS or (ii) “free-of-payment” in the selected currency of the transferring parties, where payment for the transferred Book-Entry Interests follows delivery of the Book-Entry Interests (which will transfer through the relevant TASE Member(s), TASE Member clients (including Euroclear and Clearstream) or participants of such clients, as applicable) and must be independently arranged by the transferring parties. Arranging such transactions may prove difficult. In addition, trades in book-entry interests between clients of different TASE Members could require certain certifications relating to the status of the transferee as a Qualifying Investor. The foregoing may limit an active trading market for the Notes from developing. If no active trading market develops, you may not be able to resell your holding of the Notes at a fair value, if at all. For more information, see “Book-Entry, Delivery and Form — Transfers — Secondary Market Trading.”

In the event that the Company is required to pay additional amounts with respect to Israeli withholding taxes, the Company’s interest expense would increase significantly and would adversely affect the Company’s business, financial condition and results of operations, and the Company will generally be entitled to redeem the Notes without premium.

According to the Israeli Tax Ordinance, subject to certain exceptions, an exemption from Israeli tax is generally available to non-Israeli resident holders that receive interest income on Israeli debt securities traded on the TASE. We have obtained a ruling from the Israel Tax Authority that such exemption will be applicable to the Notes, based on the listing of the Notes on the TACT Institutional and subject to the fulfillment of certain conditions. For more information, see “Taxation — Certain Israeli Tax Considerations—Non-Israeli Holders.” Under the terms of the tax ruling, which we are advised will remain in effect until October 6, 2015, such exemption will not be applicable in the event the Notes are no longer traded on the TACT Institutional or in certain other circumstances. Under the terms of the Notes, if the Company is required to withhold Israeli taxes from payments on the Notes, the Company will generally be required, subject to certain exceptions, to pay additional amounts with respect to Israeli taxes withheld by the issuer from payments

33

on the Notes. In such case, the Company’s interest expense would increase significantly, which would adversely affect the Company’s business, financial condition and results of operations.

The transfer of Notes is restricted, which may adversely affect their liquidity and the price at which they may be sold.

The Notes have not been registered under, and we are not obliged to register the Notes under, the Securities Act or the securities laws of any other jurisdiction and, unless so registered, the Notes may not be offered or sold except pursuant to an exemption from, or a transaction not subject to, the registration requirements of the Securities Act and any other applicable laws. In addition, we have not agreed to or otherwise undertaken to register the Notes with the SEC (including by way of an exchange offer). The Notes are not being offered for sale in the United States except to QIBs in accordance with Rule 144A and the Notes are only being offered outside the United States to non-U.S. persons (within the meaning of Regulation S) in compliance with Regulation S. Notwithstanding anything in this Offering Circular to the contrary, the Israeli Securities Law exempts the offer, sale, disposition or other transfer of the Notes conducted on the TACT Institutional by and between QIBs and Qualifying Investors from the general requirement to publish a prospectus. Thus, notwithstanding the fact that the Notes may be transferable pursuant to an applicable exemption from the Securities Act, all transactions involving the Notes conducted on the TACT Institutional or placed by a broker acting in its capacity as a TASE Member must be by and between QIBs and Qualifying Investors. In addition, prior to the Resale Restriction Termination Date, offers, sales, dispositions or other transfers of the Notes between two different brokers each of which is acting in its capacity as a TASE Member may only be conducted on the TACT Institutional. See “Transfer Restrictions.” As a result of the foregoing, you may be required to bear the risk of your investment in the Notes for an indefinite period of time.

We have also not registered the Notes under any other country’s securities laws. It is your obligation to ensure that your offers and sales of the Notes within the United States and other countries comply with applicable securities laws. For more information, see “Transfer Restrictions.”

The Notes will initially be held in book-entry form, and therefore you must rely on the procedures of the relevant clearing systems to exercise any rights and remedies.

Unless and until Notes are issued in definitive registered form, or definitive registered notes are issued in exchange for book-entry interests (which may occur only in very limited circumstances), owners of book-entry interests will not be considered registered owners or Holders of Notes. The Depositary will be the sole registered holder of the Global Registered Notes (as defined herein). Payments of principal, premium (if any) and interest, and all other amounts payable in U.S. dollars under the Notes will first be made by the Issuer, acting as paying agent, to the Depositary and then by the Depositary, through the TASECH, to the payment accounts of the TASE Members who are credited with Notes. Payment will thereafter be credited by such TASE Members to the accounts of their clients who hold the Notes in their individual securities accounts with such TASE Members and, where such clients are not the ultimate beneficial owners of the Notes, as in the case of Euroclear and Clearstream, the relevant amounts shall be further credited by such TASE Member clients (including Euroclear and Clearstream) to the ultimate beneficial owner (or participant of such client through which such ultimate beneficial owner holds its interest in the Notes) for whom such TASE Member clients hold the Notes, subject to their operations, procedures, any applicable agreements or applicable laws. After payment to the Depositary, we will have no responsibility or liability for the payment of principal, interest or other amounts to the owners of book-entry interests.

Investors holding book-entry interests through TASE Member clients (including Euroclear and Clearstream) must rely on the TASE Bylaws, the procedures of the TASE Member and the TASE Member client (including Euroclear or Clearstream) through which they hold their book-entry interests as well as the procedures of any participants of a TASE Member client (including participants of Euroclear or Clearstream) through which they hold book-entry interests, to transfer their interests or to exercise any rights of Holders of Notes under the Fiscal Agency Agreement. Accordingly, subject to any applicable laws, recourse of any such person in respect of its rights to the relevant securities may be limited to the relevant financial intermediary through whom such person holds the relevant securities.

Unlike Holders themselves, owners of book-entry interests will not have any direct rights to act upon any solicitations for consents, requests for waivers or other actions from Holders of the Notes. Instead, clients of TASE Members that hold book-entry interests in the Notes can take any action permitted to be taken by a Holder (including the presentation of Notes for exchange as described below) in accordance with the TASE Bylaws, which, in some cases, involve receipt of a proxy from the Depositary, through the relevant TASE Member, for the purpose of exercising rights attached to the Notes. If you hold a book-entry interest through a participant of Euroclear and/or Clearstream, you will be permitted to act only to the extent you have received appropriate proxies to do so from Euroclear and Clearstream or, if applicable, from a participant. There can be no assurance that procedures implemented for the granting of such proxies will be sufficient to enable you to vote on any matters or on a timely basis.

Similarly, if an Event of Default (as defined herein) or an Acceleration Event (as defined herein) has occurred and is continuing with respect to the Notes represented by a Global Registered Note, interests in such Global Registered Note will be exchanged for Definitive Registered Notes (as defined herein) only if such exchange is effected in accordance with the Applicable Procedures and complies with the terms of the Fiscal Agency Agreement (as defined herein). “Applicable Procedures” means (i) the bylaws of the TASE and the regulations promulgated thereunder that apply to securities listed for trading on the TACT Institutional, including the relevant provisions of the bylaws of the TASECH, and (ii) any instructions received by the Company from the TASE with respect to the Notes. For more information, see “Book-Entry, Delivery and Form.”

34

The Company may sell or transfer a significant amount of the collateral securing the Notes to subsidiaries or to third parties that are not subject to the Note Floating Charge and are not required to comply with restrictive covenants of the Notes.

The Notes are secured by a floating charge on the present and future assets of the Company that are charged under any other floating charge created by the Company, whether now existing or hereafter created.

The Company is permitted under the terms of the Notes and the Note Floating Charge to transfer collateral to existing or new subsidiaries or to third parties in the ordinary course of business or in connection with the implementation of the Company’s restructuring contemplated by the Electricity Sector Law. Moreover, the ability of such subsidiaries and third party transferees, to use, pledge, sell or otherwise transfer such assets is not limited by the terms of the Notes. Because the Note Floating Charge relates only to assets of the Company and not to assets of the Company’s subsidiaries or to third party transferees, collateral that the Company transfers to its subsidiaries or third parties, will thereafter cease to be collateral securing the Company’s obligations under the Notes. Any consideration received by the Company in exchange for such transferred assets will constitute collateral securing the Notes. There can be no assurance as to the amount of or form any such consideration will take or that such consideration, when taken together with the other collateral securing the Notes, will be sufficient to fully satisfy any claims the Holders of the Notes may have against the Company. See “Description of the Notes.”

The terms of the Notes are different in material ways for Notes issued prior to June 10, 2013 and such differences may result in Notes issued prior to June 10, 2013 becoming structurally senior to Notes issued after the date hereof in connection with the implementation of Structural Change.

Terms included in issuances of Notes under the Program prior to June 10, 2013 relating to the substitution of the Company as the obligor under the Notes by the successor to its transmission business in connection with Structural Change will not be included in issuances of Notes under the Program after June 10, 2013. As a result, Notes issued after the date hereof will be “structurally subordinated” to Notes issued prior to June 10, 2013 to the extent a successor to the transmission business of the Company is a subsidiary of the Company. In that case, Notes issued prior to June 10, 2013 will have a direct claim on the assets of such a transmission subsidiary that will rank effectively ahead of Notes issued after June 10, 2013, including Notes issued after the date hereof.

An active trading market for the Notes may not develop.

The Notes constitute a new tranche of securities, for which there is no existing market. There can be no assurance that a trading market for the Notes will develop, that Holders will be able to sell their Notes or at what price Holders may be able to sell their Notes. If no active trading market develops, you may be unable to resell your Notes at any price or at their fair market value.

The Notes may not be a suitable investment for all investors.

Each potential investor in the Notes must determine the suitability of that investment in light of such investor’s own circumstances. In particular, each potential investor should:

• have sufficient knowledge and experience to make a meaningful evaluation of the merits and risks of investing in the Notes;

• have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of their particular financial situation, an investment in the Notes and the impact such investment will have on their overall investment portfolio;

• have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including where the currency for principal or interest payments is different from the potential investor’s currency;

• understand thoroughly the terms of the Notes and be familiar with the behavior of any relevant indices and financial markets; and

• be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect their investment and their ability to bear the applicable risks.

A potential investor should not invest in the Notes unless such potential investor has the expertise (either alone or with the help of a financial adviser) to evaluate how the Notes will perform under changing conditions, the resulting effects on the value of such Notes and, the impact this investment will have on the potential investor’s overall investment portfolio. The investment activities of certain investors are subject to investment laws and regulations, or review or regulation by certain authorities and each potential investor should consult their legal advisers or the appropriate regulators. Notwithstanding the fact that the Notes may be transferable pursuant to an applicable exemption from the Securities Act, all transactions involving the Notes conducted on the TACT Institutional or placed by a broker acting in its capacity as a TASE Member must be by and between QIBs and Qualifying Investors. In addition, prior to the Resale Restriction Termination Date, offers, sales, dispositions or other transfers of the Notes between two different brokers each of which is acting in its capacity as a TASE Member may only be conducted on the TACT Institutional. See “Transfer Restrictions.”

35

The trading market for debt securities may be volatile and may be adversely impacted by many events.

The market for debt securities is influenced by economic and market conditions, interest rates and currency exchange rates. Global events may lead to market volatility which may have an adverse effect on the price of the Notes.

The Company may be able to incur substantially more debt in the future.

The Company may incur substantial additional indebtedness in the future, some of which may be structurally senior in right of payment to the Notes, including in connection with future acquisitions some of which may be secured by some of or all the Company’s assets. See “Description of the Notes — Certain Definitions — Permitted Security Interests.” The terms of the Notes will not limit the amount of indebtedness the Company may incur. Any such incurrence of additional indebtedness could exacerbate the related risks that the Company now faces.

The Notes may be subject to optional redemption, which may limit their market value.

If so stated in the applicable Pricing Supplement, the Company may redeem the Notes. The optional redemption feature of the Notes is likely to limit their market value. During any period when the Company may elect to redeem the Notes, the market value of those Notes generally will not rise substantially above the price at which they can be redeemed. This also may be true prior to any redemption period. We may be expected to redeem Notes when our cost of borrowing is lower than the interest rate on the Notes. At those times, an investor generally might not be able to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the Notes being redeemed and may only be able to do so at a significantly lower rate. Potential investors should consider reinvestment risk in light of other investments available at that time.

A holder's effective yield on the Notes may be diminished by the tax impact on that holder of its investment in the Notes.

Payments of interest on the Notes, or profits realized by the holder upon the sale or repayment of the Notes, may be subject to taxation in its home jurisdiction or in other jurisdictions in which it is required to pay taxes. However, the tax impact on an individual holder may differ from the situation described for holders generally. We advise all investors to contact their own tax advisers for advice on the tax impact of an investment in the Notes. See “Taxation.”

Exchange rate risks and exchange controls may adversely impact currency conversions of principal and interest paid on the Notes.

We will pay principal and interest on the Notes in U.S. Dollars or such other currency as the Notes are issued (the “Specified Currency”). This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the “Investor’s Currency”) other than the Specified Currency. These include the risk that exchange rates may significantly change (including changes due to devaluation of the Specified Currency or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the Specified Currency would decrease the Investor’s Currency-equivalent yield on the Notes, the Investor’s Currency equivalent value of the principal payable on the Notes and the Investor’s Currency-equivalent market value of the Notes. Economic measures taken by the Bank of Israel or the Ministry of Finance may adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.

Credit ratings may not reflect all risks, are not recommendations to buy or hold securities and may be subject to revision, suspension or withdrawal at any time.

One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time.

Your rights as a Holder of the Notes may be altered without your consent.

The terms of the Notes contain provisions for calling meetings of Holders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Holders of the Notes, including Holders who did not attend and vote at the relevant meeting and Holders who voted in a manner contrary to the majority. The terms of the Notes also provide that the Fiscal Agent (as defined below) may, without the consent of Holders of the Notes, agree to any modification (not being a modification requiring the approval of a meeting of Holders of the Notes) of any provision of the Notes which is not materially prejudicial to the interests of the Holders of the Notes or any modification of the Notes which is of a formal, minor or technical nature or is made to correct a manifest error, in the circumstances described in “Description of the Notes — Meetings of Holders and Modification.”

You may have difficulties enforcing a U.S. judgment against us or our executive officers and directors or in asserting U.S. securities laws claims in the State of Israel.

A significant portion of our assets and the assets of our directors and executive officers are located outside the United States. Therefore, a judgment obtained in the United States against us or any of our executive officers or directors, including one based on the civil liability provisions of the U.S. federal securities laws, may not be collectible in the United States and may not be enforced by an

36

Israeli court. Further, if a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency. It may also be difficult for you to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. For more information regarding the enforceability of civil liabilities against us and our directors and executive officers, please refer to the section in this Offering Circular entitled “Service of Process and Enforcement of Civil Liabilities.”

Any judgment obtained against us in Israeli courts in respect of any payment obligations under the Notes may be payable in Israeli currency.

If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency, which can then be converted into non-Israeli currency and transferred out of Israel. The usual practice in an action before an Israeli court to recover an amount in a non-Israeli currency is for the Israeli court to issue a judgment for the equivalent amount in Israeli currency at the rate of exchange in force on the date of filing the action, but the judgment debtor may make payment in foreign currency. Pending collection, the amount of the judgment of an Israeli court stated in Israeli currency ordinarily will be linked to the Israeli consumer price index plus interest at the annual statutory rate set by Israeli regulations prevailing at the time. Judgment creditors must bear the risk of unfavorable exchange rates.

37

RELATIONSHIP WITH THE STATE OF ISRAEL

General

The State of Israel owns 99.846% of the Company’s share capital and approximately 120 individuals and corporate entities own the remaining 0.154% of the Company’s share capital. As a result of the State of Israel holding a majority interest in the Company, the Company is subject to the Government Companies Law, and is considered a Government Company. The Government Companies Law requires that a Government Company act in accordance with the business considerations by which a non-Government Company is normally guided unless the Government, with the consent of the Finance Committee of the Knesset, otherwise directs. To date, the Company has not been required to operate on the basis of any considerations other than those which a non-Government Company would be subject to. The Company is also a public company as defined by the Israeli Companies Law — 1999 and as such is subject to reporting requirements under the Securities Law — 1968 and to certain obligations that apply to public companies under Israeli laws.

For more information, see Note 1 to the Annual Financial Statements, “Annex A — Conditions in the State of Israel” and “Regulation.”

The Company as a Government Company

As a Government Company, certain actions of the Company may require the approval of one or more of the following: the Government, the GCA or the Ministers. The actions requiring one or more of these approvals include, among others, changing the Company’s objectives, increasing its authorized share capital, a reorganization of the Company, the issuance of shares or convertible debentures, acquisition of other companies (under certain circumstances), the granting of any right that could, directly or indirectly, restrict the Government (including in connection with carrying out structural changes, privatization or promoting competition), the allocation of profits of the Company, and the determination of wages, benefits and other aspects of employment of certain officers and other employees of the Company. As a Government Company, the Company is also subject to certain Government regulations with respect to contracts it enters into. For example, the Company is subject to laws and regulations governing tenders, Section 29 of the Budget Foundations Law, and to regulations that relate to giving priority to certain locally produced products over imports as long as the prices of such locally produced products meet certain criteria specified by the Government. In addition, in certain cases, the Company is required to obtain commitments from foreign suppliers to make offset purchases or investments in Israel, in an amount equal to a specified percentage of the value of their contracts with the Company, or to take other actions. To date, compliance with such regulations has not adversely affected the Company’s operations.

The members of the Board of Directors are appointed by the Ministers after consultation with the Appointments Review Committee. External director candidates are nominated after consultation with the Appointments Review Committee and appointed by the General Meeting. The Company’s Chief Executive Officer is appointed by the Board of Directors subject to the approval of the Ministers, after consultation with the Appointments Review Committee. The Government may also appoint the Company’s Chief Executive Officer if it believes it is necessary. Further, the allocation of the Company’s profits or distributions is subject to GCA approval, and in cases of disagreement – the decision is subject to the approval of the Government. The description above of the Government Companies Law is partial and not exhaustive.

The Public Utilities Authority

The Company plays an important role in the implementation of the Government’s national energy policy, including with respect to energy supply, market liberalization, environmental protection, safety, technological development and energy conservation. The Company’s primary regulators are the Minister and the PUA. The PUA is empowered under the Electricity Sector Law to issue licenses for all activities in the electricity sector. In order to take effect, licenses must be approved by the Minister. The PUA also sets the electricity tariffs. The members of the PUA are appointed by the Government after nomination by the Ministers.

The Assets Arrangement

The Electricity Sector Law includes 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 Ordinance (March 4, 1996).

Section 62 of the Electricity Sector Law provides that: (A) 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 Electricity Concessions Order, will remain in the possession of the Company (that is, would not pass to the State of Israel) and no compensation will be paid for them ( “Compensable Assets” ); and (B) the rights and assets for which the Company is not entitled to compensation, 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, will be purchased by 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 (“Non-Compensable Assets”).

The Electricity Sector Law further provides that until the time the Assets Arrangement is completed, the rights and assets referred to above will remain in the possession of the Company, as they were at the time of expiration of the concession and that if the parties had not reached an arrangement within a year of the date of expiration of the concession (i.e., March 1997), the Ministers

38

would make determinations with respect to the acquisition of such rights and assets. In the first year after the expiration of the concession, no negotiations were held between the parties and the parties did not reach a settlement, but, to the best of the Company's knowledge, as of the date hereof, no such determination has been made by the Ministers.

The Electricity Sector Law does not specify which assets and rights are Compensable Assets and which rights and assets are Non-Compensable Assets. Moreover, the Electricity Sector Law does not define the manner and method for calculating the value of the assets and rights for purposes of the Asset Arrangement. As a result, and in view of the time that has passed, the Company cannot estimate when and if at all the Ministers will make determinations with respect to the Asset Arrangement and how it will be implemented.

In February 2000, the Company received a letter from the Deputy Budgets Commissioner of the Ministry of Finance, indicating that a governmental team reached an opinion of the State of Israel with respect to the Asset Arrangement, which included an economic/accounting analysis and a legal opinion. The letter further stated that, according to the provisions set forth in the opinion of the State of Israel, the implementation of the Asset Arrangement in accordance with the Electricity Sector Law might have a material effect on the Company.

In accordance with the opinion of the State of Israel, the Company is not entitled to compensation with respect to investments that have already been returned to it through depreciation, which would not qualify as Compensable Assets. The Company, on the other hand, based on the opinion of its legal advisers, believes that most of its assets as of the time of expiration of the concession (e.g., 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 Assets.

The economic opinion of the State of Israel includes a broader breakdown of the Non-Compensable Assets which are subject to the Asset Arrangement and of Compensable Assets and provides for criteria and an economic model (including calculation formulas) for the classification of such properties.

In total, in accordance with the calculation that was made by the Company, based on the opinion of the State of Israel, the book value of the Non-Compensable Assets which the Company will be required to purchase from the State of Israel is approximately NIS 4.5 billion, as of March 31, 1996, and approximately NIS 7.5 billion as of June 30, 2014.

In March 2000, following the receipt of the State of Israel's opinion, the Manager of the Electricity Administration in the Ministry of Energy and Water, requested in writing, in accordance with the instructions of the Minister of Energy and Water that the Company refrain from responding to the letter of the Deputy Budgets Commissioner at the Ministry of Finance, so long as the Asset Arrangement has not been discussed between Ministries and between the Company and the Ministry of Energy and Water. Accordingly, during that period the Company did not respond to the letter of the Deputy Budgets Commissioner at the Ministry of Finance. To the best of the Company's knowledge this matter was discussed by a government team but there was no progress in this matter. The Company has been informed that the need to address the Asset Arrangement has been referred to in the past in the discussions of various government authorities. In the draft interim report of the Regulators Team, the Regulators Team proposes to examine the implications of the Asset Arrangement in light, among other things, of the legal and economic opinions on the subject and the implications of such arrangement on the implementation of the Structural Change.

In the opinion of the Company, the book value of the Non-Compensable Assets does not reflect the economic value of these assets, which may be lower or higher, and which the Company may be required to pay to the State of Israel as part of the Asset Arrangement.

In the opinion of the legal advisers of the Company (in the absence of details with respect to the classification of the assets under Section 62(A) of the Electricity Sector Law, the absence of case law on the matter, and based on the purpose of the Electricity Sector Law and intent of the Knesset, as expressed in the discussions held prior to the passing of the Electricity Sector Law), the view that all of the depreciable assets, even if fully depreciated at the time of expiration of the concession, should constitute Compensable Assets, should be preferred over the view of the State of Israel that all assets of the Company that at the time of expiration of the concession were fully depreciated and recognized in the tariffs through a provision for depreciation constitute Non-Compensable Assets, while assets that have not been fully depreciated constitute Non-Compensable Properties up to the amount depreciated less liabilities.

Based on the opinion of its legal advisers with respect to the proper interpretation of the Asset Arrangement, the Company classifies 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 of minor scope) as Compensable Assets and as such are to remain in the Company’s ownership, without the Company being required to purchase them from the State of Israel in the framework of the Assets Arrangement. The Assets Arrangement will therefore apply, in the opinion of the Company, to used properties that are Non-Compensable Assets, and these properties did not constitute the majority of the properties of the Company at the time of the expiration of the concession.

Based on the above on the legal opinion that the Company received, the Company believes that the implementation of the Asset Arrangement does not currently have any material effect on the Company's business, results of operations or financial condition and

39

that the Company. However, given the significant uncertainty related to this matter, there can be no assurance that the Asset Arrangement, if implemented, will not have a, material adverse effect on the Company’s business results of operations or financial conditions. See “Risk Factors — The Company may be obligated to acquire from the Government certain assets.”

Since the Asset Arrangement is subject, among other things, to the determination of the Ministers, it is possible that the Company will eventually be required to pay material amounts to acquire the assets with respect to which the Asset Arrangement will apply. In addition, there is no certainty as to what monetary or other arrangement will apply to part of the rights and assets or if they will remain in the possession of the Company or will be returned to the State of Israel.

In addition, the Yogev Letter addresses certain issues related to the Company’s assets. For additional information regarding the Yogev Team, the Yogev Draft Report and the Yogev Letter, see “Regulation — Electricity Sector Law — The Yogev Team” and Annexes C and D to this Offering Circular.

For further details regarding the Asset Arrangement, including the opinion of the State of Israel and the Company's assessment regarding the Asset Arrangement, see Note 1.f to the Annual Financial Statements.

Borrowings and Guarantees from the State of Israel

The Company has outstanding loans from the State of Israel in the amount of NIS 5.7 billion and has received State guarantees for NIS 8.2 billion (16% of its total debt) of its borrowings as of December 31, 2013. The NIS 5.7 billion in borrowings includes NIS 3.1 billion of loans to the Company from the Israel Industrial Bank Ltd. (which is no longer operational) that were assigned to the State of Israel in 2009. The most recent direct borrowings from the State of Israel were in 1985, and the most recent guarantees from the State of Israel were given in 2013. As of June 30, 2014, the Company has borrowed directly from the State of Israel NIS 5.5 billion and has received the State of Israel’s guarantee for NIS 6.1 billion (13% of its total debt) of its borrowings.

Out of the NIS 8.2 billion of debt guaranteed by the State of Israel, NIS 7.5 billion was guaranteed in connection with the Company’s increased fuel costs arising from disruptions in the supply of natural gas. During 2012, the Company raised debt (debentures and loans) secured by State guarantees in an aggregate amount of NIS 8.9 billion. This debt was partially refinanced in 2013 in the amount of NIS 2.4 billion. The outstanding debt secured by State guarantees is for the financing of the Company’s increased fuel costs as of December 31, 2013 was NIS 7.5 billion.

The State of Israel’s guarantees were provided because of the Company’s liquidity shortfall caused by severe disruptions in the supply of natural gas in 2011 and 2012.

During 2011 and 2012, the Company experienced a significant reduction in the supply of natural gas as a result of the stoppage of natural gas supplied by companies in Egypt initially due to interruptions from explosions along the natural gas pipeline from Egypt beginning in February 2011, and subsequently due to the termination of supply by the Egyptian companies in April 2012. Additionally, the extraction rate from the Company’s other primary source of natural gas, the Yam Tethys reservoir, had decreased significantly due to the depletion of this reservoir such that the partnership that operates the reservoir has notified the Company that the supply volume will be approximately one-fifth of the maximum contractual volume.

Due to these developments, the Company was required to use alternative and more expensive fuels, including diesel oil, in order to produce electricity, the use of which has been reduced following the commencement of the supply of natural gas from the Tamar reservoir on March 31, 2013. The tariff updates during 2011 and 2012 did not provide immediate compensation for the full effect of the increased fuel costs

Representatives of the Ministry of Finance clarified to the Company that the guarantees were an extraordinary action that was taken because of the severe disruptions in the supply of natural gas that caused the significant increase in fuel costs.

In September 2014, the Company requested that the State of Israel guarantee a line of credit, but the State of Israel's Accountant General refused to provide such a guarantee, noting that such a guarantee would be a limited measure not intended to reduce the Company's routine financing costs. During 2014, the improvement in the financial position of the Company continued due to several factors, including the continued collection of fuel costs resulting from the shortage in the supply of natural gas.

The State of Israel’s guarantee includes provisions with respect to the State of Israel’s entitlement to receive information from the Company, the approvals that must be obtained from the State of Israel for making changes to the terms of the debentures or loans and the fee that is payable to the State of Israel by the Company for the provision of the guarantee. Moreover if the guarantee is forfeited, in whole or in part, or a payment is made by the State of Israel in lieu of the Company to the holders of the debentures or the lenders of the loans, such amount will be deemed as a loan that was extended to the Company by the State of Israel on such date, which will be repaid with additional interest as set out under the provisions of the guarantee. Such loans will be secured by a floating charge on the Company’s assets.

On May 21, 2013, a Senior Deputy of the Accountant General’s office notified the Company that, according to the Minister of Finance’s letter to the Finance Committee of the Knesset, a request would be made to the Finance Committee of the Knesset for the refinancing of State of Israel guaranteed debt in the amount of NIS 2.4 billion. The remainder of the loans secured by a State of

40

Israel guarantee that were repaid by the Company in 2013 (in the amount of NIS 1.5 billion) will not be refinanced with a State of Israel guarantee at this time, and the Company will not be able to include them in its cash flow projections. On June 4, 2013 the Finance Committee of the Knesset approved the refinancing of State of Israel guaranteed debt in the amount of a NIS 2.4 billion.

The Regulators Team

A government resolution dated May 2009 established a regulators team composed of representatives of various government branches in order to increase the coordination and efficiency of the regulation of the Company and the transparency of the work of the various governmental branches supervising the Company (the “Regulators Team”). The Regulators Team is currently composed of the Director General of the Ministry of Energy and Water, the Head of the Budget Department at the Ministry of Finance, the Director General of the GCA (who is heading the Regulators Team), the Commissioner of the Electricity Administration in the Ministry of Energy and Water, the PUA, the Wage and Labor Agreements department at the Ministry of Finance, the Accountant General of the Ministry of Finance, the Capital Market, Insurance and Savings Department and the Ministry of Finance, and the Deputy Attorney General (Economic-Fiscal) or each of these parties' representatives. The Regulators Team, which reports to the Ministerial Committee for Social and Economic Affairs, was instructed to focus on material issues related to the operations of the Company, including with respect to pension, wages and activities permitted under the law in accordance with the authority of the regulatory authorities.

The Regulators Team was instructed to examine the following matters:

• Recovery of surplus funds, to the extent that there were any surplus funds, that have been transferred by the Company to third parties (the Central Pension Fund or other accounts that are referred to in the Financial Statements of the Company), with respect to recurring and non-recurring pension components.

• The manner of dealing with differences between the Company's assessment of its actuarial liabilities as reflected in its financial statements and the Central Pension Fund’s assessment of such liabilities.

• 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 funds.

• The factors that led to errors in the pension clauses that have been corrected in the financial statements of the Company for the period ending on June 30, 2009.

• The reasons for delays in the publication of the quarterly and annual Financial Statements of the Company.

• Aspects related to the reserve funds 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 Fund.

• Coordination between the various regulators and the Company, to the extent necessary with respect to the items set forth above, shall be conducted via the GCA, including with respect to additional checks and the learning process that will be conducted by the Board of Directors and the committees of the Board of Directors for identifying the parties responsible for the factors described above.

In March 2011 the Company was provided with a draft of an interim report of the Regulators Team that instructed the Company to provide explanations with respect to accounting, actuarial, corporate governance, decision-making processes and other matters. The interim draft report also addressed the Assets Arrangement, the trust account and other matters referred to in the government resolution stated above. For more information on the Assets Arrangement, see Note 1.f to the Annual Financial Statements. For more information on the trust account, see “Business — Employees — Trust Account.” In March 2012, the Company was provided with the recommendations of the Regulators Team with respect to amounts deposited by the Company in the trust account to cover non-recurring pension liabilities. The Regulators Team concluded that certain funds deposited into the trust account were deposited without an obligation to make such deposits, and determined, among other things, that the Company should take the necessary actions in accordance with any laws, including actions vis-a-vis the trustee or the beneficiaries of such account, to release funds that the Company is not required to deposit in the trust account. The recommendations also state that the resolution of the Board of Directors to transfer NIS 600 million out of the trust account was a first step towards the implementation of the recommendations because, among other things, there are no grounds and there have been no grounds to make deposits for the "free electricity" component since it is a benefit granted in kind to employees of the Company. The Regulators Team is of the opinion that the arrangement presented by the Company following the resolution of the Board of Directors from March 2012 stands in contrast to the Regulators Team's recommendations. Therefore, the Board of Directors should discuss the Regulators Team’s recommendations and act in accordance with those recommendations with respect to the rest of the funds that are in the trust account. On March 21, 2013, the Board of Directors resolved to direct the trustee to transfer funds in the trust account, except for certain funds that are intended to cover non-recurring components of pension benefits for certain employees, to the Central Pension Fund or the Company, subject to court approval. On May 20, 2013, the Company filed its motion with court to instruct the trustee accordingly. This motion is currently pending.

In addressing the matter of the trust account, the Yogev Letter stated the following: “The Company will take measures to release funds from the trust account at a volume of no less than NIS 1 billion; the remaining amount will finance the non-recurring components on an ongoing basis. The legal proceeding in this matter will continue.”

41

For additional information with respect to the trust account, see Note 12.m to the Annual Financial Statements. For additional information with respect to the Yogev Letter, see “Regulation — Structural Change — The Yogev Team.”

Privatization

On October 5, 2014, the Government approved a long term plan to conduct public offerings of minority interests in government companies during the years 2015 to 2017. For government companies in which the State of Israel has an interest in maintaining control over the long term, the government holdings will be sold through public offerings of equity interests listed on the TASE, alone or in combination with equity financing, in the range of 25% to 49% of the share capital of each such company on a fully diluted basis. For governmental companies in which the State of Israel has no interest in maintaining control over the long term, the privatizations will be effected through one or more offerings, private sales, or a combination thereof.


Recent Developments

Economy and Gross Domestic Product

Israel had a moderate 3.3% rate of growth in 2013, similar to the 2012 growth rate of 3.4%. The plateau in growth during this period can be attributed to exogenous factors including the contraction of economies around the world, which caused a slowdown in exports. The overall strength of the domestic economy in 2013 was reflected in a solid labor market, as the unemployment rate remained at a relatively low level of 6.2% throughout the year.

GDP in 2013 amounted to NIS 1.052 trillion and business sector product amounted to NIS 780.8 billion (in each case, at current prices). Business sector product is calculated as GDP less certain general government services (government operations executed through private companies are included in the business sector product), services of private non-profit institutions housing services (representing the imputed value of the use of owner-occupied residential property). This methodology is applied by the Central Bureau of Statistics according to international and national accounts practices. In 2013, government output and product of services of private non-profit institutions amounted to NIS 152.3 billion, and housing services amounted to NIS 118.9 billion. Housing services grew by 3.2% in 2013, below the average of 4.0% over the previous five years (2008 to 2013). Government output and the product of private non-profit institutions increased by 2.4% in 2013, below the average of 3.0% over the previous five years (2008 to 2013).

42

USE OF PROCEEDS

Unless otherwise specified in the applicable Pricing Supplement, the Company intends to use the net proceeds of the Notes to finance the Company’s capital investment program, to refinance existing debt and for other corporate purposes as the Company may determine. For additional information with respect to the Company’s capital investment program and the anticipated funding for such program, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and “Business — Development and Capital Investment Plans.”

EXCHANGE RATES

The following table sets forth the representative rate of exchange published by the Bank of Israel based on U.S. Dollar-Shekel transactions for the periods and dates indicated.

Year Ended December 31 Rate

Average High Low End

Period

(Shekels per U.S.$1.00) 2009 ........................................................ 3.9273 3.690 4.256 3.775 2010 ........................................................ 3.7318 3.549 3.894 3.549 2011 ........................................................ 3.5815 3.363 3.821 3.821 2012 ........................................................ 3.8438 3.700 4.084 3.733 2013 ........................................................ 3.6008 3.471 3.791 3.471 2014 (through June 30, 2014) ................. 3.4811 3.432 3.549 3.438

For a discussion of the impact of exchange rate movements on the Company’s financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

43

CAPITALIZATION

The following table sets forth the consolidated capitalization of the Company as at June 30, 2014 on an actual basis. You should read this table together with the Interim Financial Statements incorporated by reference herein.

in millions of adjusted

June 2014 Shekels

in millions of U.S. Dollars(1)

As at June 30, 2014 Cash and cash equivalents ....................................................................................................... NIS 2,356 U.S.$ 685 Credit from banks and other credit providers(2)........................................................................ 9,136 2,657 Short-term investments ............................................................................................................ 414 120 Long-term debt, net

Debentures ............................................................................................................................ 31,204 9,076 Liabilities to banks ................................................................................................................ 6,668 1,939 Debentures to the State of Israel ........................................................................................... 2,532 736 Liability to the State of Israel ................................................................................................ 2,699 785 Total long-term debt, net(3) .................................................................................................... 43,103 12,536

Shareholders’ equity Share capital .......................................................................................................................... 1,137 331 Capital reserves ..................................................................................................................... 1,030 300 Capital remeasurement reserve(4) .......................................................................................... (1,764) (513) Retained earnings .................................................................................................................. 12,541 3,648 Total shareholders’ equity ..................................................................................................... 12,944 3,766

Total capitalization(5) ............................................................................................................... NIS 56,047 U.S.$ 16,302

——————


(2) The balance sheet herein excludes the following material borrowing after the date of the statement of financial position: in September 2014, the Company obtained short-term committed credit lines from two Israeli banks in an aggregate amount of NIS 800 million. The Company drew down NIS 200 million from these short-term committed credit lines, which has been repaid as of the date hereof.

(3) Excludes the following payments after the date of the statement of financial position: (i) on August 20, 2014, additional negotiable debentures of series 22 in the amount of NIS 500 million par value (a total of NIS 630.5 million including linkage differentials were paid); and (ii) on September 8, 2014, payment for short-term loans in the amount of NIS 400 million were made to two Israeli banks.

(4) The capital remeasurement reserve reflects the retrospective implementation of IAS 19. For further information, see Note 37 to the Annual Financial Statements.

(5) Total capitalization is calculated as the sum of current maturities of long-term debt, long-term debt, net and total shareholders’ equity.

44

SELECTED FINANCIAL DATA

The following table presents certain financial data of the Company for the periods and as of the dates indicated. The Company presents its financial statements in Shekels that have been adjusted to reflect changes in purchasing power of the Shekel due to inflation. The statement of financial position data in Shekels as of December 31, 2012 and 2013 and the statement of operation and comprehensive income data for the years ended December 31, 2011, 2012 and 2013 have been derived from the Annual Financial Statements incorporated by reference herein. The statement of financial position data for the year ended December 31, 2011 has been extracted from the Group’s audited financial statements for the year ended December 31, 2012, which are not incorporated herein. The statement of financial position data and the statement of operation and comprehensive income data in Shekels as of and for the six and three months ended June 30, 2013 and 2014 have been derived from the Interim Financial Statements incorporated by reference herein.

The U.S. Dollar financial data herein is presented at specified rates solely for convenience of reference. Such data presented should not be construed as representations that the Shekel amounts actually represent such U.S. Dollar amounts. Unless otherwise indicated, for the year ended December 31, 2013, such U.S. Dollar amounts have been calculated at NIS 3.471 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel for December 31, 2013. Unless otherwise indicated, for the six months ended June 30, 2014, such U.S. Dollar amounts have been calculated at NIS 3.438 to U.S.$1.00, the representative rate of exchange published by the Bank of Israel for June 30, 2014. No representation is made that any amount in Shekels or U.S. Dollars referred to in this Offering Circular has been, could have been or could be converted into U.S. Dollars or Shekels, as the case may be, at any particular rate or at all. See “Exchange Rates” for information regarding the rate of exchange between the Shekel and the U.S. Dollar for the periods specified therein.

The Company’s financial statements for the years ended December 31, 2011, 2012 and 2013 have been prepared in accordance with the Government Companies Regulations, which require conformity with IFRS as modified by adjustments for the changes in the general purchasing power of the Shekel and the principles of the FASB as set forth in Chapter RE6 with respect to accounting for regulated activities.

The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the Financial Statements.


December 31, As of and for the Six Months Ended

June 30, 2011 2012 2013 2013(13) 2013 2014 2014(14)

(in millions of adjusted December 2013 Shekels, except ratios and


(in millions of U.S. Dollars, except

ratios and operating and other

data) (U.S.

Dollars)

(in millions of adjusted June 2014 Shekels, except ratios and


(in millions of U.S. Dollars,

except ratios and

operating and other

data) (U.S.

Dollars)

STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME DATA:

Revenues ........................................... 25,386 28,320 27,656 7,968 12,714 12,471 3,627 Cost of operating the electricity system(1) ............................................

20,756

23,442

24,256

6,988

11,639

11,108

3,231

Profit from operating the electricity system ...............................................

4,630

4,878

3,400

980

1,075

1,363

396

Operating expenses(2) ........................ 1,804 3,485 2,038 587 856 1,121 326

Income from current operations ........

2,826

1,393

1,362

392

219

242

70 Financial expenses ............................ 2,744 2,784 2,195 632 1,031 1,841 535 Capitalization of financial expenses ............................................

(207)

(278)

(279)

(80)

(142)

(135)

(39)

Transfer of financial income (expenses) to a regulatory asset/liability due to hedging ............

(277)

185

254

73

153

47

14 45

Financial expenses, net ..................... 2,260 2,691 2,170 625 1,042 1,753 510 Income (loss) before income taxes .... 566 (1,298) (808) (233) (823) (1,511) (439) Income taxes(3) .................................. 1,399 (294) 126 36 (207) (385) (112) Loss after income tax(4) ..................... (833) (1,004) (934) (269) (616) (1,126) (328) Company’s share of the loss of associated companies, net .................

—

—

(2)

(1)

—

(2)

(1)

Loss for the period ............................ (833) (1,004) (936) (270) (616) (1,128) (328) Other comprehensive income (loss) for the period after tax(5)....................

(627)

(786)

280

81

207

(740)

(215)

Total comprehensive income/(loss) for the period .....................................

(1,460)

(1,790)

(656)

(189)

(409)

(1,868)

(543)

STATEMENT OF FINANCIAL

POSITION DATA:(6)

Fixed assets, net ................................ 63,264 * 64,673 64,721 18,646 64,842 64,529 18,769 Cash and cash equivalents ................ 1,192 4,226 3,401 980 3,569 2,356 685 Other current assets(7) ........................ 10,008 10,821 9,398 2,708 10,618 9,008 2,620 Current liabilities .............................. 9,662 15,241 11,714 3,375 14,787 13,448 3,912 Non-current liabilities(8) .................... 57,955 * 59,012 59,399 17,113 58,777 56,335 16,386 Shareholders’ equity ......................... 17,796 * 15,467 14,811 4,267 15,058 12,944 3,765 Total liabilities and shareholders’ equity ................................................

85,413 * 89,720 85,924 24,755 88,622 82,727 24,063

CASH FLOW DATA: Net cash provided by (used in) operating activities ............................

1,650

(1,053)

5,779

1,665

689

3,006

874

Net cash used in investing activities ............................................

(4,604)

(4,359)

(4,968)

(1,431)

(2,375)

(1,772)

(515)

Net cash (used in)/provided by financing activities ............................

754

8,446

(1,636)

(471)

1,029

(2,279)

(663)

OPERATING AND OTHER

DATA:

Aggregate capacity (MW) ................. 12,785 13,248 13,483 — 13,617 Electricity sold (GWh) ...................... 53,062 57,085 53,506 26,265 23,784 Average revenues per KWh (Agorot/Cents per KWh)(9) ................

40.97

47.16

48.98

14.11

46.68

48.73

1

FINANCIAL RATIOS Interest coverage ratio(10) .................. 1.21 0.50 0.68 0.32 (0.21) Earnings to fixed charges ratio(11) ...............................................

1.15 0.47 0.56

0.18 0.13

Net debt/EBITDA(12) ......................... 12.05 32.26 5.17 7.38 5.21

* These figures do not reflect the retrospective implementation of IAS 19 (2011) – see Note (6) below. They are not comparable with the 2012 and 2013 figures, which do reflect the retrospective implementation of IAS 19 (2011). ——————

(1) Cost of operating the electricity system includes wages, fuel, transfer of fuel to regulatory assets, purchases of electricity, transfer of purchases of electricity from regulatory assets, operation of the generation system, operation of the transmission and distribution system, depreciation and amortization.

(2) Operating expenses consist of sales and marketing expenses, administrative and general expenses and expenses (income) resulting from liabilities to pensioners, net. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Sales and Marketing Expenses,” “— Administrative and General Expenses” and “— Expenses (Income) from Liabilities to Pensioners, Net.”

(3) The Company creates deferred taxes for temporary differences between the value for tax purposes of assets and liabilities and their value in the financial statements. Balances of deferred taxes (asset or liability) are computed according to tax rates and tax laws enacted or substantially enacted by the statement of financial position date. See Note 2.t.3 to the Annual Financial Statements.

46

(4) Net income is affected by increases and decreases in the Company’s liability with respect to deferred taxes which were calculated

according to the Economic Efficiency Law 2009. See Note 2.t.3 to the Annual Financial Statements.

(5) Other comprehensive income (loss) for the period after tax includes the remeasurement of a defined benefit plan after tax. See Note 12 to the Annual Financial Statements.

(6) The Company began implementing the guidelines of IAS 19 (2011) starting on January 1, 2013, by way of retrospective implementation from January 1, 2011. The consolidated statements of financial position for the year ended December 31, 2011 included in the Annual Financial Statements do not reflect the implementation of IAS 19 (2011). See Note 37 to the Annual Financial Statements.

(7) Other current assets include short term investments, trade receivables for sale of electricity, fuel inventory, stored inventory and regulatory assets.

(8) Non-current liabilities include loans, debentures and liabilities to banking corporations. See Note 20 to the Annual Financial Statements.

(9) The average revenues per KWh represents the Company’s total revenues from electricity sales (gross) divided by the Company’s total electricity sales (in KWh). For the six months ended June 30, 2013 and 2014, respectively, the Company’s total revenues from electricity sales (net) include NIS 259 million and NIS 575 million, respectively, which represent amounts of provision and collection from customers as part of the rate structure in respect of the regulatory asset/liability and of customers’ participation in fixed assets. For the years ended December 31, 2011, 2012 and 2013, respectively, the Company’s total revenues from electricity sales (net) include NIS 3,379 million, NIS 1,090 million and NIS 1,067 million, respectively, which represent amounts of provision and collection from customers as part of the rate structure in respect of the regulatory asset/liability and of customers’ participation in fixed assets. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Revenues.”

(10) Interest coverage ratio is determined by dividing the sum of income (loss) before income taxes and other financial expenses by other financial expenses. Other financial expenses exclude the effects of erosion of liabilities, which is included in the financial expenses (income), net line item above. See Note 32 to the Annual Financial Statements and Note 8 to the Interim Financial Statements. The ratios have been calculated as follows:

Year Ended

December 31,

2011 2012 2013

(million NIS) Income (loss) before income taxes .................................................................................. 566 (1,298) (808) Other financial expenses ................................................................................................. 2,658 2,622 2,532 Total ................................................................................................................................ 3,224 1,324 1,724 Interest coverage ratio .................................................................................................. 1.21 0.5 0.68

Six Months Ended

June 30,

2013 2014 (million NIS) Income (loss) before income taxes ................................................................................. (823) (1,511) Other financial expenses ................................................................................................ 1,202 1,252 Total .............................................................................................................................. 379 (259) Interest coverage ratio ................................................................................................. 0.32 (0.21)

(11) Earnings to fixed charges ratio is determined by dividing the sum of income (loss) before income taxes and financial expenses, net by the sum of financial expenses and transfer of financial income to a regulatory asset/liability. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Financial Expenses, Net” and Note 32 to the Annual Financial Statements and Note 8 to the Interim Financial Statements. The ratios have been calculated as follows:

47

Year Ended

December 31,

2011 2012 2013 (million NIS) Income (loss) before income taxes .................................................................................. 566 (1,298) (808) Financial expense, net ..................................................................................................... 2,260 2,691 2,170 Total ................................................................................................................................ 2,826 1,393 1,362 Financial expenses ........................................................................................................... 2,744 2,784 2,195 Transfer of financial income to a regulatory liability ...................................................... (277) 185 254 Total ................................................................................................................................ 2,467 2,969 2,449 Earnings to fixed charges ratio .................................................................................... 1.15 0.47 0.56

Six Months Ended

June 30,

2013 2014

(million NIS) Income (loss) before income taxes ................................................................................. (823) (1,511) Financial expense, net .................................................................................................... 1,042 1,753 Total .............................................................................................................................. 219 242 Financial expenses ......................................................................................................... 1,031 1,841 Transfer of financial income to a regulatory liability .................................................... 153 47 Total .............................................................................................................................. 1,184 1,888 Earnings to fixed charges ratio ................................................................................... 0.18 0.13

(12) Ratio is determined by dividing net debt (credit from banks and other credit providers, short-term debentures and total long-term debt, net, less cash and cash equivalents) by EBITDA (earnings before interest, taxes, depreciation and amortization and regulatory assets, adjusted in 2012 for a onetime expense with respect to pensions linked to the CPI).

For the six months ended June 30, 2013 and 2014, the Company’s EBITDA was NIS 3,610 million and NIS 4,783 million, respectively.

For the six months ended June 30, 2013 and 2014, the Company’s EBITDA, without excluding regulatory assets, was NIS 2,496 million and NIS 2,572 million, respectively.

For the years ended December 31, 2011, 2012 and 2013, the Company’s EBITDA was NIS 3,943 million, NIS 1,610 million and NIS 9,761 million, respectively.

For the years ended December 31, 2011, 2012 and 2013, the Company’s EBITDA, without excluding regulatory assets, and without adjusting for the onetime expense with respect to pensions linked to the CPI in 2012, was NIS 7,322 million, NIS 6,077 million and NIS 6,289 million, respectively.

EBITDA for the twelve month period ending June 30, 2014 was calculated by annualizing the EBITDA for the six month period ending June 30, 2014 (NIS 4,783 million) and (2) EBITDA for the twelve month period ending June 30, 2013 was calculated by annualizing the EBITDA for the six month period ending June 30, 2013 (NIS 3,610 million).

The ratios have been calculated as follows:


December 31,

2011 2012 2013 (million NIS) Net debt ........................................................................................................................... 47,510 51,945 50,451 EBITDA .......................................................................................................................... 3,943 1,610 9,761 Net debt/EBITDA ratio ................................................................................................... 12.05 32.26 5.17

As of and Annualized for the Twelve Month Period Ended

June 30,

2013 2014 (million NIS) Net debt ........................................................................................................................... 53,287 49,883 EBITDA .......................................................................................................................... 7,220 9,566 Net debt/EBITDA ratio ................................................................................................... 7.38 5.21

48

(13) U.S. Dollar amounts have been translated at NIS 3.471 to U.S.$1.00, the representative rate of exchange published by the Bank of

Israel, for December 31, 2013.


49

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Offering Circular contains forward-looking statements that involve risks and uncertainties. Such statements are based on Management’s current expectations and are subject to a number of factors and uncertainties which could cause the Company’s performance and the other matters discussed in the forward-looking statements to differ significantly from that discussed in the forward-looking statements. Factors that could cause such differences include, but are not limited to, those discussed in “Risk Factors” and elsewhere in this Offering Circular. The Company assumes no obligation to update its forward-looking statements or to advise of changes in the assumptions and factors on which they are based.

Introduction The following discussion of the years ended December 31, 2011, 2012 and 2013 and the six months ended June 30, 2013 and

2014 is based on and should be read in conjunction with the Financial Statements and the notes thereto incorporated by reference herein. The Company’s financial statements have been prepared in accordance with the Government Companies Regulations, which require conformity with IFRS as modified by adjustments for the changes in the general purchasing power of the Shekel and the principles of the FASB as set forth in Chapter RE6 with respect to accounting for regulated activities. In 2011, 2012 and 2013, the State of Israel’s rate of inflation was 2.17%, 1.63% and 1.82%, respectively. In accordance with the Government Companies Regulations, all year-end financial data presented herein (unless otherwise indicated) has been stated in adjusted December 2013 Shekels and all quarter-end financial data presented herein (unless otherwise indicated) has been stated in adjusted June 2014 Shekels. See Notes 2.a and 2.x to the Annual Financial Statements and Note 2.a to the Interim Financial Statements.

Overview The Company’s revenues are dependent upon the Average Tariff that the Company is permitted to charge its customers, which is

set by the PUA. The Electricity Sector Law requires the PUA to set tariffs for each segment of activity on the basis of recognized cost (as determined by the PUA), taking into account the type and level of services, and to provide for a “fair rate of return” on equity to be decided upon by the PUA and, if the PUA so determines, an efficiency factor to promote increased productivity and economies of scale in the generation, transmission and distribution of electricity. See “Regulation — Tariffs.” Current expenses (including fuel costs) are recognized by the PUA during the year of the expense and capital investments are recognized by the PUA gradually over the lifetime of the assets usually commencing on the date the assets become operational. Consequently, significant capital investments require the Company funding by way of borrowings from Israeli and foreign financial institution as well as public and private offerings of debt in Israel and abroad.

The Company’s development plans are funded through net cash generated by operating activities and by financings. The Company historically has financed, and in the future expects to finance, its development plans primarily from loans from Israeli and foreign financial institutions (including loans guaranteed by export credit agencies), as well as public and private offerings of debt in Israel and also abroad. See “Business — Development and Capital Investment Plans” and “— Liquidity and Capital Resources — Developments in the Company’s Financings and Funding.”

Results of Operations Seasonality The Company’s results of operations are seasonal. The Company’s revenues are substantially higher during the cold winter

months (December to February) and the warm summer months (July to August) than other months. These seasonal increases are partially offset by an increase in fuel costs during those periods.

The electricity demand is greater in the summer (because of the use of air conditioners) and in the winter (because of the use of heating devices), compared with the transitional seasons. In the winter and summer, average electricity consumption is greater than that in the transitional seasons and is also characterized by days of high demand due to extreme conditions of cold or heat.

In addition, the Company’s revenues in the different seasons are affected by the change in tariffs for customers paying by load and time of use (“TOU”), which represents approximately 60% of electricity consumption because the TOU tariffs are higher on average in the summer compared with the TOU tariffs in the transitional seasons and winter.

TOU tariffs apply to high voltage, medium voltage and low voltage customers. The total number of customers paying TOU tariffs as of the year ended December 31, 2013 was 77,836, which means that only 3% of customers represent approximately 60.3% of total electricity consumption. The following table sets forth electricity revenues by quarter for the years ended December 31, 2011, 2012 and 2013.

50

Q1 Q2 Q3 Q4 Total (in millions of adjusted December 2013 Shekels) Year Ended December 31, 2013 .............................................................................. 6,320 6,199 8,398 6,359 27,276 2012 .............................................................................. 6,653 6,345 8,455 6,560 28,013 2011 .............................................................................. 5,309 5,225 8,301 6,283 25,118

Revenues

The Company receives almost all of its revenues from electricity sales. The average selling price of electricity for the years 2008 to 2013 in Agorot per KWh are presented in the table below:

2008 2009 2010 2011 2012 2013 Average rate (Agorot/ per KWh) 50.69 46.76 40.60 40.97 47.16 48.98

For a description of the tariff mechanism, which governs the price the Company charges its customers per KWh, see “Regulation — Tariffs.”

The following table sets forth revenues (in millions of adjusted June 2014 Shekels), in each case for the six months ended June 30, 2013 and 2014:

Six Months

Ended June 30, 2013 2014 Change

(in millions of adjusted

June 2014 Shekels) % Revenues from the sale of electricity, gross ............... 12,260 11,589 (5.5) %

In addition: Collection and provision for regulatory assets ........... 259 575 122.1 % Various income .......................................................... 195 307 57.4 % Revenues .................................................................... 12,714 12,471 (1.9) %

The following table sets forth, by type of customer, revenues (in millions of adjusted December 2013 Shekels and as a percentage of total sales), in each case for the years ended December 31, 2011, 2012 and 2013: Year Ended December 31, 2011 2012 2013

(in millions of adjusted December 2013

Shekels, except %) Domestic .................................................................... 7,311 34 % 8,914 33 % 8,386 32 % Public, commercial, East Jerusalem and Palestinian

Authority .................................................................

8,761

40 %

10,918

41 %

11,120

42 % Agricultural ................................................................ 668 3 % 833 3 % 916 3 % Industrial .................................................................... 4,026 19 % 5,040 19 % 4,549 17 % Water pumping .......................................................... 973 4 % 1,218 5 % 1,238 5 % Revenues from the sale of electricity, gross ............... 21,739 100 % 26,923 100 % 26,209 100 %

In addition: Collection and provision for regulatory assets net ..... 3,379 1,090 1,067 Various income .......................................................... 268 307 380 Revenues .................................................................... 25,386 28,320 27,656

The following tables set forth electricity sales of the Company (in KWh and as a percentage of total sales) by type of customer and average tariff (in Agorot/KWh), in each case for the years ended December 31, 2011, 2012 and 2013:

51

Year Ended December 31, (1) Year Ended December 31, 2011 2012 2013 2011 2012 2013 (in KWh, except percentages) Average revenues per KWh

(in Agorot/KWh)

Domestic .................................... 15,909 30.0 % 17,245 30.2 % 15,662 29.3 % 45.96 51.69 53.54 Public, commercial, East

Jerusalem and Palestinian Authority .................................

21,421

40.4 %

22,980 40.3 %

22,429

41.9 %

40.90

47.51

49.58 Agricultural ................................ 1,730 3.3 % 1,836 3.2 % 1,935 3.6 % 38.61 45.37 47.34 Industrial .................................... 10,987 20.7 % 11,849 20.8 % 10,372 19.4 % 36.64 42.54 43.86 Water pumping .......................... 3,015 5.7 % 3,175 5.6 % 3,108 5.8 % 32.27 38.36 39.83

Total ...........................................

53,062

100 %

57,085 100 %

53,506

100 % Average revenues per KWh(2) .... 40.97 47.16 48.98 Average revenues per KWh

(net)(3) ......................................

47.34 49.07

50.98 —————— (1) Due to rounding differences, columns may not sum up to the numbers presented in the table.

(2) The average revenues per KWh represent the Company’s total revenues from electricity sales (gross) divided by the Company’s total electricity sales (in KWh).

(3) The average revenues per KWh (net) represent the Company’s reported revenues including collection and provision of the regulatory asset/liability and customers’ participation in fixed assets divided by total electricity sales (in KWh). See Note 28 to the Annual Financial Statements.

Domestic

The Company serves approximately 2.3 million households, representing almost all households within Israel.

For the year ended December 31, 2013, the Domestic sector accounted for approximately 29.3% of the total electricity consumption by the Company’s customers, compared with 30.2% for the year ended December 31, 2012. Gross revenues from this sector amounted to NIS 8,386 million for the year ended December 31, 2013, compared with NIS 8,914 million for the year ended December 31, 2012, decrease of NIS 528 million as a result of decrease in electricity consumption. Electricity consumption in this sector decreased in 2013 by approximately 9.2%.

Public Commercial, East Jerusalem and Palestinian Authority

The public commercial and bulk sector `includes electricity consumption by department stores, shopping centers, various businesses and authorities of the public sector, such as local authorities, government offices and schools.

For the years ended December 31, 2013 and, 2012, the Public Commercial, East Jerusalem and Palestinian Authority sector accounted for approximately 41.9% and 40.3%, respectively, of the total electricity consumption by the Company’s customers. Gross revenues from this sector amounted to NIS 11,120 million for the year ended December 31, 2013, compared with NIS 10,918 million for the year ended December 31, 2012, an increase of NIS 202 million as a result of an increase in tariffs. Electricity consumption in this sector decreased in 2013 by approximately 2.4%.

Industrial Sector

For the year ended December 31, 2013, the industrial sector accounted for approximately 19.4% of the total electricity consumption by the Company’s customers, compared with 20.8% for the year ended December 31, 2012. Gross revenues from this sector amounted to NIS 4,549 million for the year ended December 31, 2013, compared with NIS 5,040 million for the year ended December 31, 2012 as a result of a decrease in electricity consumption. Electricity consumption in this sector decreased in 2013 by approximately 12.5%.

Water Pumping

Water pumping is required in order to provide all parts of Israel with drinking water, water for irrigation and for other purposes.

For the year ended December 31, 2013, the water pumping sector constituted approximately 5.8% of total electricity consumption by the Company’s customers, compared with 5.6% for the year ended December 31, 2012. Gross revenues from this sector amounted to NIS 1,238 million for the year ended December 31, 2013, compared with NIS 1,218 million for the year ended December 31, 2012 as a result of an increase in tariffs. Electricity consumption in this sector decreased in 2013 by approximately 2.1%.

Agriculture For the year ended December 31, 2013, the agriculture sector accounted for approximately 3.6% of the total electricity

52

consumption by the Company’s customers compared with 3.2% for the year ended December 31, 2012. Gross revenues from this sector amounted to NIS 916 million for the year ended December 31, 2013 compared with NIS 833 million for the year ended December 31, 2012 as a result of an increase in electricity consumption and charge rates. Electricity consumption in this sector grew in 2013 by approximately 5.4%

Revenues for the Six Months Ended June 30, 2013 Compared to Revenues for the Six Months Ended June 30, 2014. Revenues decreased by NIS 243million or 1.91%, from NIS 12,714 million for the six months ended June 30, 2013 to NIS

12,471 million for the six months ended June 30, 2014, due to a 9.5% decrease in electricity sales, which was partially offset by an 7.3% increase in the average revenues per KWh, net. “Average revenues per KWh, net” includes adjustments such as collections in respect of regulatory assets/liabilities and consumers’ participation in fixed assets.

Gross revenues from the sale of electricity decreased by NIS 671 million or 5.5%, from NIS 12,260 million for the six months ended June 30, 2013 to NIS 11,589 million for the six months ended June 30, 2014, primarily due to a decrease in electricity sales of 9. 5% which was partially offset by a 4.4% increase in the average revenues per KWh gross.

Electricity sales for the six months ended June 30, 2014 were 23,784 million KWh, compared to 26,265 million KWh for the six months ended June 30, 2013. This was primarily due to a decrease in consumption and the entry of IPPs.

Revenues for the Year Ended December 31, 2012 Compared to Revenues for the Year Ended December 31, 2013. Revenues decreased by NIS 664 million or 2.3%, from NIS 28,320 million for the year ended December 31, 2012 to NIS

27,656 million for the year ended December 31, 2013. Gross revenues from the sale of electricity decreased by NIS 714 million or 2.6%, from NIS 26,923 million for the year ended December 31, 2012 to NIS 26,209 million for the year ended December 31, 2013. The decrease was primarily due to a 6.3% decrease in electricity sales primarily due to decrease in economic growth in the Israeli economy and mild weather. This decreased in revenues was partially offset by a 3.9% increase in the average revenues per KWh gross, compared to 2012.

Electricity sales in 2013 were 53,506 million KWh, compared to 57,085 million KWh in 2012. This was primarily due to a decrease in demand and entry of private electricity producers.

Revenues for the Year Ended December 31, 2011 Compared to Revenues for the Year Ended December 31, 2012. Revenues increased by NIS 2,934 million or 11.6%, from NIS 25,386 million for the year ended December 31, 2011 to NIS

28,320 million for the year ended December 31, 2012, due to a 7.6% increase in electricity sales and a 3.7% increase in the average revenues per KWh, net. Gross revenues from the sale of electricity increased by NIS 5,184 million or 23.9%, from NIS 21,739 million for the year ended December 31, 2011 to NIS 26,923 million for the year ended December 31, 2012, primarily due to an increase of 15.1% in the average revenues per KWh gross, compared to 2011. The increase in the electricity tariffs was primarily due to the impact of the fuel basket recognized in the tariff during 2012 which had a higher cost of coal, diesel and crude oil compared to the fuel basket recognized during 2011.

Electricity sales in 2012 were 57,085 million KWh, compared to 53,062 million KWh in 2011. This was primarily due to an increase in economic growth.

Cost of Operating the Electricity System Cost of operating the electricity system consists of variable costs (including fuel costs and purchases of electricity) and fixed

costs (including the costs of operation of the generation, transmission and distribution systems, and the financing and depreciation of generating assets). The following table set forth information with respect to the components of the cost of operating the electricity system for the six months ended June 30, 2013 and 2014:

Six Months Ended June 30,

Change

2013 2014 2014 (in millions of adjusted

June 2014 Shekels) (%)

Variable costs Fuel costs (including wages and transfer of fuel costs to

regulatory assets) .................................................................

7,526

6,658

(11.5)% Purchases of electricity (including transfer of purchase of electricity costs to regulatory assets) ...............................

590

784

32.9%

Total variable costs .............................................................. 8,116 7,442 (8.3)%

Fixed costs Operation of generation, transmission and distribution systems (including wages) ...................................................

1,376

1,468

6.7%

Depreciation and amortization ............................................ 2,147 2,198 2.4% Total fixed costs .................................................................. 3,523 3,666 4.1%

Total cost of operating the electricity system .......................... 11,639 11,108 (4.6)%

53

Cost of operating the electricity system decreased by NIS 531 million or 4.6%, from NIS 11,639 million for the six months

ended June 30, 2013 to NIS 11,108 million for the six months ended June 30, 2014. This decrease was due to a decrease in the cost of fuels consumed in the six months ended June 30, 2014 to NIS 3,756 million from NIS 6,283 million for the six months ended June 30, 2013, was due to:

• A change in the fuels mix as a result of the commencement of the supply of natural gas from the Tamar reservoir in the second quarter of 2013.

• A decrease in demand and the entry of IPPs during 2014. This decrease was partly offset by: • An increase of NIS 92 million in costs relating to the operation of power stations and the operation of transmission and

distribution segments. • An increase of NIS 51 million in depreciation and amortization expenses. • An increase in transfer of expenses in an amount of NIS 1,659 million to a regulatory asset from NIS 1,243 million for the

six months ended June 30, 2013 to NIS 2,902 million for the six months ended June 30, 2014, with respect to the difference between the actual fuel components charged and the expected fuel basket that was recognized retroactively mainly due to the use of a cheaper fuel mix.

• An increase of NIS 194 million in the purchase of electricity from IPPs. The following table sets forth information regarding changes in aggregate consumption and price by fuel type for the six months

ended June 30, 2014:

Six Months Ended June 30, 2014 Change in

Consumption

Change in Price

Total

(in millions of adjusted June 2014 Shekels)

Fuel Type: Crude Oil (237) 17 (220) Coal (265) (290) (555) Diesel oil (1,082) 4 (1,078) Natural gas (246) (428) (674) Total (1,830) (697) (2,527)

The decrease in aggregate consumption by NIS 1,830 million for the six months ended June 30, 2014 was primarily due to:

• A decrease in the quantity of crude oil consumed of approximately NIS 237 million, partly offset by an increase in the real price amounting to approximately NIS 17 million (a decrease of approximately 314% in the average cost per ton compared to the corresponding period last year, deriving mainly from significant loading related expenses on a small quantity).

• A decrease in the quantity of coal consumed of NIS 265 million and a decrease in the real price amounting to approximately NIS 290 million (a decrease of approximately 12% in the average cost per ton compared to the corresponding period last year).

• A decrease in the quantity of diesel fuel consumed of approximately NIS 1,082 million, partly offset by an increase in the real price amounting to approximately NIS 4 million (an increase of 10% in the average cost per ton compared to the corresponding period last year, deriving mainly from significant loading related expenses on a small quantity).

• A decrease in the quantity of natural gas consumed of approximately NIS 246 million and a decrease in the real price amounting to approximately NIS 428 million (a decrease of approximately 21% in the average cost per ton compared to the corresponding period last year).

The following table sets forth information with respect to the components of the cost of operating the electricity system for the years ended December 31, 2011, 2012 and 2013:

54

Year Ended December 31. Change 2011 2012 2013 2012 2013 (in millions of adjusted

December 2013 Shekels) (%)

Variable costs Fuel costs(1) (including wages and transfer of fuel

costs to regulatory assets) .....................................

13,293

14,808

15,449

11.4%

4.3% Purchases of electricity ............................................. 486 879 1,317 81.0% 49.8% Total variable costs ................................................... 13,779 15,687 16,766 13.8% 6.9%

Fixed costs Operation of generation, transmission and distribution systems (including wages) .....................

2,752

3,347

2,828

21.7%

(15.5)%

Depreciation and amortization .................................. 4,225 4,408 4,662 4.3% 5.8% Total fixed costs ........................................................ 6,977 7,755 7,490 11.2% (3.4)%

Total cost of operating the electricity system............... 20,756 23,442 24,256 12.9% 3.5%

——— (1) Fuel costs (including wages) for the years 2008, 2009 and 2010 are NIS 14,059 million, NIS 9,539 million, NIS 9,432 million

respectively, in each case, adjusted to December 2013 shekels.

Cost of operating the electricity system increased by NIS 814 million or 3.5%, from NIS 23,442 million for the year ended December 31, 2012 to NIS 24,256 million for the year ended December 31, 2013. This increase was primarily due to:

• In the reporting period, expenses in an amount of NIS 4,333 million were transferred from a regulatory asset, compared to income of NIS 5,269 million which were transferred to a regulatory asset during the same period in the previous year.

• An increase of NIS 438 million in the purchase of electricity from IPPs.

• An increase of NIS 254 million in depreciation and amortization expenses. The increase in depreciation expenses mainly derives from the provision for impairment in accordance with the provisions of FAS 90 with respect to Project D and the generator at Gezer.

This increase was partly offset by:

• A decrease in the cost of fuels consumed in 2013 to NIS 11,116 million from NIS 20,077 million in 2012, mainly as a result of the commencement of the supply of natural gas from the Tamar reservoir in the second quarter of 2013.

• A decrease in of NIS 519 million in costs relating to the operation of power stations and the operation of transmission and distribution segments, derives mainly from a decrease in the salary costs compared to these expenses in 2012, in which a one-off expense was recorded with respect to linking pensions to the CPI.

The following table sets forth information regarding changes in aggregate consumption and price by fuel type for the year ended December 31, 2013:

Year Ended December 31, 2013 Change in

Consumption

Change in Price

Total

(in millions of adjusted December 2013 Shekels)

Fuel Type: Crude Oil (2,868) 7 (2,861) Coal (1,092) (1,134) (2,226) Diesel oil (7,017) (10) (7,027) Natural gas 2,729 424 3,153 Total (8,248) (713) (8,961)

The decrease in aggregate consumption by NIS 8,248 million for the year ended December 31, 2013 was primarily due to:

• A decrease in the quantity of crude oil consumed of approximately NIS 2,868 million, partly offset by an increase in the real price amounting to approximately NIS 7 million (a decrease of approximately 2.5% in the average cost per ton compared to the corresponding period last year).

• A decrease in the quantity of coal consumed of NIS 1,092 million and a decrease in the real price amounting to approximately NIS 1,134 million (a decrease of approximately 19.1% in the average cost per ton compared to the corresponding period last year).

• A decrease in the quantity of diesel fuel consumed of approximately NIS 7,017 million and a decrease in the real price amounting to approximately NIS 10 million (a decrease of 0.7% in the average cost per ton compared to the

55

corresponding period last year, deriving mainly from significant loading related expenses on a small quantity).

• An increase in the quantity of natural gas consumed of approximately NIS 2,729 million and an increase in the real price amounting to approximately NIS 424 million (an increase of approximately 9.8% in the average cost per ton compared to the corresponding period last year).

Cost of operating the electricity system increased by NIS 2,686 million or 12.94%, from NIS 20,756 million for the year ended December 31, 2011 to NIS 23,442 million for the year ended December 31, 2012. This increase was primarily due to:

• An increase in the cost of fuels consumed in 2012 to NIS 20,077 million from NIS 13,293 million in 2011, mainly due to an increase in the use of expensive fuels such as diesel oil and crude oil due to the disruption of supply of gas from Egypt and the depletion of the Yam Tethys reservoir.

• An increase of NIS 393 million in the purchase of electricity from IPPs.

• An increase of NIS 595 million in costs relating to the operation of power stations and the operation of transmission and distribution segments, mainly due to the implementation of the agreement linking pensions to the CPI.

• An increase of NIS 183 million in depreciation and amortization expenses with respect to a decrease in the provision of non-recognition of fixed assets construction cost.

This increase was partly offset by the transfer of income in an amount of NIS 5,269 million to a regulatory asset, with respect to the difference between the actual fuel components charged and the expected fuel basket that was recognized retroactively for 2012 mainly due to the use of a more expensive fuel mix, a large increase in the consumption of diesel oil and crude oil due to a shortage in natural gas caused by depletion of the Yam Tethys natural gas reserve and the lack of supply of gas from Egypt and the provisions of the lateral order by the Ministry of Environmental Protection.

The following table sets forth information regarding changes in aggregate consumption and price by fuel type for the year ended December 31, 2012:

Year Ended December 31, 2012 Change in

Consumption

Change in Price

Total


Fuel Type: Crude Oil 2,073 381 2,455 Coal 649 (266) 383 Diesel oil 6,433 (1,229) 5,204 Natural gas (1,533) 274 (1,259) Total 7,622 (839) 6,783

The increase in aggregate consumption by NIS 7,622 million for the year ended December 31, 2012 was primarily due to:

• An increase in the quantity of crude oil consumed of approximately NIS 2,073 million and an increase in the real price amounting to approximately NIS 381 million (an increase of approximately 13.9% in the average cost per ton compared to the corresponding period last year).

• An increase in the quantity of coal consumed of NIS 649 million, partly offset by a decrease in the real price amounting to approximately NIS 266 million (a decrease of approximately 3.6% in the average cost per ton compared to the corresponding period last year).

• An increase in the quantity of diesel fuel consumed of approximately NIS 6,433 million, partly offset by a decrease in the real price amounting to approximately NIS 1,229 million (a decrease of 12.9% in the average cost per ton compared to the corresponding period last year).

• A decrease in the quantity of natural gas consumed of approximately NIS 1,533 million, partly offset by an increase in the real price amounting to approximately NIS 274 million (an increase of approximately 21.1% in the average cost per ton compared to the corresponding period last year).

Sales and Marketing Expenses

Sales and marketing expenses consist of the cost of sales and marketing (including wages and customer services) and related depreciation.

The following table sets forth information with respect to sales and marketing expenses for the six months ended June 30, 2014:

56

Six Months Ended June 30, Change 2013 2014 2014



Sales and marketing expenses (including wages and customer

services) ..................................................................................

378

390

3.2 % Depreciation and Amortization .................................................. 69 71 2.9 % Total sales and marketing expenses ............................................ 447 461 3.1 %

Sales and marketing expenses increased by NIS 14 million or 3.1%, from NIS 447 million for the six months ended June 30, 2013 to NIS 461 million for the six months ended June 30, 2014.

The following table sets forth information with respect to sales and marketing expenses for the years ended December 31, 2011, 2012 and 2013:

Year Ended December 31, Change 2011 2012 2013 2012 2013


December 2013 Shekels) (%)

Sales and marketing expenses (including wages and customer

services) ...................................................................................

769

924

763

20.16 %

(17.4) % Depreciation and Amortization ................................................... 141 143 142 1.42 % 0.69 % Total sales and marketing expenses ............................................ 910 1,067 905 17.25 % (15.18) %

Sales and marketing expenses decreased by NIS 162 million or 15.2%, from NIS 1,067 million for the year ended December 31, 2012 to NIS 905 million for the year ended December 31, 2013. The decrease derives mainly from a decrease in the salary costs attributed to sale and marketing expenses compared to these expenses in 2012, in which a one-off expense was recorded with respect to linking pensions to the CPI in 2012.

Sales and marketing expenses increased by NIS 157 million or 17.3%, from NIS 910 million for the year ended December 31, 2011 to NIS 1,067 million for the year ended December 31, 2012. This increase was due to an increase in the salary component.

Administrative and General Expenses

Administrative and general expenses consist of wages, provisions for doubtful debts, depreciation and amortization of assets used in the management of the Company and certain other expenses. The following table sets forth information with respect to administrative and general expenses for the six months ended June 30, 2013 and 2014:

Six Months Ended June 30, Change 2013 2014 2014



Wages and other expenses .......................................................... 339 595 75.5 % Depreciation and amortization.................................................... 61 61 0.0 % Total administrative and general expenses ................................. 400 656 64.0 %

Administrative and general expenses increased by NIS 256 million or 64.0% from NIS 400 million for the six months ended June 30, 2013 to NIS 656 million for the six months ended June 30, 2014 The increase derives, among other things, from an increase in provision for doubtful debts. For more information, see Note 4.a to the Interim Financial Statements.

The following table sets forth information with respect to administrative and general expenses for the years ended December 31, 2011, 2012 and 2013:

Year Ended December 31, Change 2011 2012 2013 2012 2013


December 2013 Shekels) (%) Wages and other expenses ........................................................... 609 738 990 21.2 % 34.1 % Depreciation and amortization .................................................... 130 133 123 2.3 % (7.5) % Total administrative and general expenses ................................. 739 871 1,113 17.9 % 27.8 %

Administrative and general expenses increased by NIS 242 million or 27.8%, from NIS 871 million for the year ended December 31, 2012 to NIS 1,113 million for the year ended December 31, 2013. The increase derives mainly from an increase in provision for doubtful debts.

57

Administrative and general expenses increased by NIS 132 million or 17.9%, from NIS 739 million for the year ended December 31, 2011 to NIS 871 million for the year ended December 31, 2012. The increase was primarily due to the implementation of the agreement linking pensions to the CPI.

Expenses (Income) from Liabilities to Pensioners, Net

Expenses (income) from liabilities to pensioners, net includes the discount rate calculation on the surplus/shortfall of pension liability less the assets of the Central Pension Fund, actuarial gain/loss on termination benefits, and others.

Expenses from liabilities to pensioners, net was an expense of NIS 4 million for the six months ended June 30, 2014, representing a decrease of NIS 5 million, net, compared with an expense of NIS 9 million for the six months ended June 30, 2013. The decrease was primarily due to change in rate of capitalization.

Expenses from liabilities to pensioners, net was an expense of NIS 20 million in 2013, representing a decrease of NIS 1,527 million, net, compared with an expense of NIS 1,547 million in 2012. The decrease is mainly due to the implementation of the agreement linking pensions to the CPI in 2012.

Expenses from liabilities to pensioners, net was an expense of NIS 1,547 million in 2012, representing an increase of NIS 1,392 million, net, compared with an expense of NIS 155 million in 2011. The increase is mainly due to the implementation of the agreement linking pensions to the CPI in 2012.

Financial Expenses, Net

Financial expenses, net consist of: (a) loss (gain) from the erosion of liabilities, net (i.e., resulting from exchange rate gains or losses associated with monetary assets and liabilities denominated in or linked to foreign currencies, net of the effect of changes in the CPI on the value of such assets and liabilities), (b) capitalization of financial expenses (income) related to loans and debt securities which are intended to finance the investments under construction, (c) transfer of financial expenses (income) to a regulatory asset/liability and (d) other financial expenses (primarily interest expenses).

The following table sets forth information with respect to financial expenses (income), net for the six months ended June 30, 2013 and 2014:


2013 2014 2014


June 2014 Shekels) Change Loss (gain) from the erosion of liabilities, net(1) ........................................... (171) 589 760 Other financial expenses/(income) (2) .......................................................... 1,202 1,252 50 Financial expenses (3) .................................................................................... 1,031 1,841 810 Capitalization of financial (income) expenses .............................................. (142) (135) 7 Transfer of financial expenses (income) to a regulatory asset/liability ........ 153 47 (106) Financial expenses, net ................................................................................. 1,042 1,753 711

——— (1) Includes loss/(gain) from the erosion of debentures, loans, hedging transactions and loans and accounts receivables. For more

information, see Note 8 to the Interim Financial Statements. (2) Includes primarily interest of debentures, loans, hedging transactions and loans and accounts receivables. (3) Includes expenses of debentures, loans, hedging transactions and loans and accounts receivables.

Financial expenses, net increased by NIS 711 million or 68.2%, from NIS 1,042 million for the six months ended June 30, 2013 to NIS 1,753 million for the six months ended June 30, 2014.

This increase was due to: • An increase in losses from erosion of NIS 760 million, resulting from a NIS 1,400 million decrease in gains from erosion

related to loans, debentures and loans and account receivables, mainly due to the difference of (0.7)% during the six months ended June 30, 2014 between the rate of inflation (0%) and the revaluation of the Shekel (0.7%) against the exchange rates for the currencies in which the Company’s loans, debentures and loans and account receivables were denominated, compared to a difference of (6.5)% during the six months ended June 30, 2013. This decrease was partially offset by a decrease in losses from a revaluation to fair value of NIS 640 million related to hedging transactions.

• An increase of NIS 50 million in other financial expenses mainly due to an interest expenses. • A decrease in the gains from capitalization of financial income of NIS 7 million. The increase in financial expenses, net was partially offset by a decrease of NIS 106 million from the transfer of financial

expenses, related to a portion of the Company’s loans and debentures in foreign currency, to a regulatory liability due to the difference 58

between inflation and devaluation of the Shekel against the “Determining Basket” (which is defined by the PUA as 75% U.S. Dollars and 25% Euro) during the six months ended June 30, 2014, as compared to the six months ended June 30, 2013.

For further information, see Note 8 to the Interim Financial Statements. The following table sets forth information with respect to financial expenses (income), net for 2011, 2012 and 2013:

Year Ended December 31, 2011 2012 2013 2012 2013


December 2013 Shekels) Change Loss (gain) from the erosion of liabilities, net(1) ......................... 86 162 (337) 76 (499) Other financial expenses/(income) (primarily interest expenses) (2) 2,658 2,622 2,532 (36) (90) Financial expenses(3) ................................................................... 2,744 2,784 2,195 40 (589) Capitalization of financial (income) expenses ............................ (207) (278) (279) (71) (1) Transfer of financial expenses (income) to a regulatory

asset/liability ............................................................................ (277) 185 254 462 69 Financial expenses, net ............................................................... 2,260 2,691 2,170 431 (521)

———

(1) Includes loss/(gain) from the erosion of debentures, loans, hedging transactions and loans and accounts receivables. For more information, see Note 32 to the Annual Financial Statements.

(2) Includes primarily interest of debentures, loans, hedging transactions and loans and accounts receivables.

(3) Includes expenses of debentures, loans, hedging transactions and loans and accounts receivables.

Financial expenses, net decreased by NIS 521 million or 19.4% from NIS 2,691 million for the year ended December 31, 2012 to NIS 2,170 million for the year ended December 31, 2013. This decreased was due to:

• An increase in gains from erosion of NIS 499 million, resulting from a NIS 1,305 million increase in gains from erosion related to loans, debentures and loans and account receivables mainly due to the difference during 2013 of (11)% between the rate of inflation (1.8%) and the revaluation of the Shekel (9.2%) against the exchange rate of the currencies in which the Company’s loans, debentures and loans and account receivables were denominated, compared to a difference of (5.2)% during 2012. This increase in gains from erosion was partially offset by an increase in losses from a revaluation to fair value of NIS 806 million related to hedging transactions.

• A decrease of NIS 90 million in other financial expenses mainly due to interest expenses.

The decrease in financial expenses, net was partially offset by:

• An increase in losses of NIS 69 million from the transfer of financial expenses, related to a portion of the Company’s loans and debentures in foreign currency, to a regulatory liability due to the difference between inflation and the devaluation of the Shekel against the Determining Basket during 2013, as compared to 2012

Financial expenses, net increased by NIS 431 million or 19.1%, from NIS 2,260 million for the year ended December 31, 2011 to NIS 2,691 million for the year ended December 31, 2012. This increase was due to:

• An increase in losses of NIS 462 million from the transfer of financial expenses, related to a portion of the Company’s loans and debentures in foreign currency, to a regulatory liability due to the difference between inflation and the devaluation of the Shekel against the Determining Basket during 2012, as compared to 2011.

• An increase in losses from erosion of NIS 76 million, resulting from an increase in losses from erosion related to hedging transactions of NIS 2,565 million. This increase in losses from erosion was partially offset by an increase of NIS 2,489 million in gains from revaluation to fair value related to loans, debentures and loans and account receivables mainly due to the difference during 2012 of (5.2)% between the rate of inflation (1.63%) and the revaluation of the Shekel (3.6%) against the exchange rate of the currencies in which the Company’s loans, debentures and loans and account receivables were denominated, compared to a difference of 5.2% during 2011.

The increase in financial expenses, net was partially offset by:

• A decrease of NIS 36 million in other financial expenses mainly due to interest income relating to a fuel regulatory asset.

• An increase in the gains from capitalization of financial expenses of NIS 71 million, mainly due to the increase in the rate of progress of investments in projects in the generation segment which caused an increase in the recognized costs for capitalization.

For further information, see Note 32 to the Annual Financial Statements.

59

Income Taxes

The Company creates deferred taxes for temporary differences between the value for tax purposes of assets and liabilities and their value in the financial statements. Balances of deferred taxes (asset or liability) are computed according to tax rates and tax laws enacted or substantially enacted by the statement of financial position date. Changes in the deferred taxes balance are recorded in the statement of operations in that period. The Company does not expect to pay income taxes for the foreseeable future.

Income taxes for the six months ended June 30, 2014 was an income of NIS 385 million compared with an income of NIS 207 million for the six months ended June 30, 2013. The decrease in income taxes is due to different loss before tax between the periods.

Income taxes for the year ended December 31, 2013 was an expense of NIS 126 million compared with an income of NIS 294 million for the year ended December 31, 2012. The increase in income taxes is due to the periodic cumulative effect of the statutory increase in tax rates and a different loss before tax between the periods.

On August 5, 2013, the Change in National Priorities (Legislation Amendments for Achieving Budgetary Goals) 5773-2013 Law was published in the Official Gazette, determining, among other things, the increase of the Company’s tax rate in 2014 to a rate of 26.5% (instead of 25%). As a result of the legislation, an increase occurred in the deferred tax provision of the Company as of December 31, 2013 in the amount of NIS 302 million which was recorded against tax expenses in the amount of NIS 329 million and against other comprehensive income of NIS 26 million. For more information regarding the change in deferred tax balance, see Note 22 to the Annual Financial Statements.

Income taxes for the year ended December 31, 2012 was an income of NIS 294 million compared with an expense of NIS 1,399 million for the year ended December 31, 2011. The decrease in income taxes is due to an increase in the Company’s tax rate described below.

On December 6, 2011, the law on changing the tax burden (the “2011 Amendment”) took effect and cancelled the outline for decreasing the Company’s tax rate that was determined within the Economic Efficiency Law, and set the Company’s tax rate at 25% from the year 2012 onwards. As a result of the 2011 Amendment, an increase occurred in the Company’s deferred tax liabilities as of December 31, 2011, in an amount of NIS 1,248 million that was credited against tax expenses in the Company’s Statement of Operations/Comprehensive Income.

Comprehensive Income (Loss)

Comprehensive loss increased by NIS 1,459 million from a comprehensive loss of NIS 409 million for the six months ended June 30, 2013 to a comprehensive loss of NIS 1,868 million for the six months ended June 30, 2014. The decrease was primarily the result of:

• An increase in financial expenses, net from NIS 1,042 million for the six months ended June 30, 2013 to NIS 1,753 million for the six months ended June 30, 2014 deriving mainly from a decrease in revenues from the erosion of foreign currency financial liabilities which was partially offset by the change in the fair value of hedging transactions.

• An increase in other comprehensive loss for the period, after taxes.

Comprehensive loss decreased by NIS 1,134 million or 63.4%, from a comprehensive loss of NIS 1,790 million for the year ended December 31, 2012 to a comprehensive loss of NIS 656 million for the year ended December 31, 2013. The decrease in loss was primarily due to:

• A decrease in financial expenses, net from NIS 2,691 million for the year ended December 31, 2012 to NIS 2,170 million for the year ended December 31, 2013 deriving mainly from an increase in revenues from the erosion of foreign currency financial liabilities which was partially offset by the change in the fair value of hedging transactions.

• A decrease in expenses with respect to liabilities to pensioners which derives mainly from the implementation of the agreement linking pensions to the CPI which was implemented in 2012.

• An increase in other comprehensive income after taxes for the year ended December 31, 2013 compared to the year ended December 31, 2012.

This decreased in loss was partially offset by a decrease in profit from operating the electricity system due to a decrease in demand and the entry of IPPs.

Comprehensive loss increased by NIS 330 million or 22.6%, from a comprehensive loss of NIS 1,460 million for the year ended December 31, 2011 to a comprehensive loss of NIS 1,790 million for the year ended December 31, 2012. This increase in loss was primarily the result of increase in salary cost as a result of the Salary Agreement and the agreement linking pensions to the CPI causing expenses of NIS 1.9 billion for the year ended December 31, 2012. This increase was partially offset as a result of an increase in income from the sale of electricity, an increase in the gross profit rate resulting mainly from profit in the fuels basket at a rate of NIS 0.6 billion and a decrease in income tax resulting from the periodic cumulative effect of the statutory reduction in tax rates as described above.

60

Liquidity and Capital Resources

The Company historically has met its working capital and other capital investment requirements from net cash generated by operating activities, loans from Israeli financial institutions (including loans guaranteed by the State of Israel), loans from foreign financial institutions (including loans guaranteed by export credit agencies and, in certain cases, by the State of Israel), public and private offerings of debt in the State of Israel and abroad and loans from provident funds.

During 2014, the improvement in the financial position of the Company continued due to several factors, including the continued collection of fuel costs resulting from the shortage in the supply of natural gas.

Pursuant to the decision of the Board of Directors, the Company is preserving a liquidity safety cushion with a financial value of not less than NIS 3 billion, consisting of at least NIS 2.2 billion in cash and up to NIS 800 million in diesel and crude oil surplus inventory. As of June 30, 2014, the cash balance was approximately NIS 2.4 billion.

In order to meet the minimum liquidity reserve, in June 2014, the Company raised a sum of NIS 400 million from two Israeli banks which was repaid in September 2014.

In September 2014, the Company obtained short-term committed credit lines from two Israeli banks in an aggregate amount of NIS 800 million. The Company drew down NIS 200 million from these short-term committed credit lines, which has been repaid as of the date hereof.

In the six month period ended June 30, 2014, the Company raised NIS 1.1 billion in long-term private debt offerings in Israel and loans abroad. The Company needs to refinance certain maturing debt in the second half of 2014 in an amount of NIS 7.3 billion, of which NIS 5.2 billion is expected to mature by October 2014. The Company expects that its current cash balance and expected cash flow for the remainder of 2014 is sufficient to repay the remaining NIS 2.1 billion in debt that is expected to mature in 2014.

The following table sets forth the Company’s cash flows for the six months ended June 30, 2013 and 2014:

Six Months Ended

June 30, 2013 2014


June 2014 Shekels) Net cash provided by operating activities .......................................................................... 689 3,006 Net cash used in investing activities .................................................................................. (2,375) (1,772) Net cash provided by/(used in) financing activities........................................................... 1,029 (2,279) Decrease in cash and cash equivalents .............................................................................. (657) (1,045)

Cash and cash equivalents decreased by NIS 1,045 million, from NIS 3,401 million as of December 31, 2013 to NIS 2,356 million as of June 30, 2014. This decrease is due to the following changes in the Company’s cash flow components:

Net cash provided by operating activities increased by NIS 2,317 million, from NIS 689 million for the six months ended June 30, 2013 to NIS 3,006 million for the six months ended June 30, 2014. This increase was primarily due to commencement of collection of the fuels debt from 2012 (as a result of the gas crisis that began during 2011 and caused high fuels costs in 2012) in excess of the regulator costs collected from consumers starting from April 2013 and in accordance with the decision of the PUA, and from increase of value of the loans, debentures and hedging transactions.

Cash used for investment activities in the six months ended June 30, 2013 was NIS 2,375 million, compared to NIS 1,772 million in the six months ended June 30, 2014. This decrease is primarily a result of a decrease in investment in fixed assets during the six months ended June 30, 2014 compared to the corresponding period in 2013.

Net cash provided by (used in) financing activities decreased by NIS 3,308 million, from a positive flow of NIS 1,029 million for the six months ended June 30, 2013 to a negative flow of NIS 2,279 million for the six months ended June 30, 2014. This decrease is primarily due to the issuance of debentures in the second quarter of 2013 and the repayment of long-term loans and debentures during the six months ended June 30, 2014.

The following table sets forth the Company’s cash flows for the years ended December 31, 2012 and 2013:

Year Ended

December 31, 2012 2013


December 2013 Shekels) Net cash (used in)/provided by operating activities .......................................................... (1,053) 5,779 Net cash used in investing activities .................................................................................. (4,359) (4,968) Net cash provided/(used in) by financing activities .......................................................... 8,446 (1,636) Increase/(decrease) in cash and cash equivalents .............................................................. 3,034 (825)

Cash and cash equivalents decreased by NIS 825 million, from NIS 4,226 million as of December 31, 2012 to NIS 3,401 million 61

as of December 31, 2013. This decrease is due to the following changes in the Company’s cash flow components:

Net cash provided by operating activities increased by NIS 6,832 million, from NIS (1,053) million for the year ended December 31, 2012 to NIS 5,779 million for the year ended December 31, 2013. This increase was primarily due to the commencement of collection of 2012 fuel costs (resulting from the shortage in the supply of natural gas) from consumers beginning in April 2013 and from the earlier than expected supply of natural gas from the Tamar reservoir and the transition to a cheaper fuel mix.

The Company’s investing activity in 2013 includes investment in the following main fixed assets: NIS 2,800 million in power stations, cycle gas turbines and buildings, NIS 830 million in inventory and NIS 766 million in grids. Net cash used in investing activities increased by NIS 609 million, from NIS 4,359 million for the year ended December 31, 2012 to NIS 4,968 million for the year ended December 31, 2013. This increase is primarily due to the deposit of sums during 2013 compared to withdrawal of deposits in 2012.

Net cash provided by financing activities decreased by NIS 10,082 million, from NIS 8,446 million for the year ended December 31, 2012 to NIS (1,636) million for the year ended December 31, 2013. This decrease is primarily due to the Company’s higher repayments of debentures that occurred during 2013 compared to higher issuances of debentures in 2012.

For the six months ended June 30, 2013 and 2014, the Company raised in private debt offerings in Israel and abroad NIS 4,003 million and NIS 939 million, respectively. In 2012 and 2013, the Company raised in long-term public and private debt offerings in Israel and abroad NIS 5,173 million and NIS 5,101 million, respectively. In addition, in 2012, the Company raised NIS 4,784 million in short-term debt offerings in Israel and abroad.

The following table provides information on the sources of long-term financing, net, other than operating activities, for the years ended December 31, 2012 and 2013 and the six months ended June 30, 2013 and 2014:

Year Ended December 31,


2012 2013 2013 2014


(in millions of adjusted June 2014 Shekels)

Loans from Israeli and foreign financial institutions(1) ........... 2,036 3,378 881 132 Public and private debt offerings in Israel and abroad ........... 5,173 5,101 4,003 939 Total(2) .................................................................................... 7,209 8,479 4,884 1,071

——— (1) Includes loans guaranteed by export credit agencies.

(2) NIS 5,097 million and NIS 2,405 million of long-term financing in 2012 and 2013, respectively, is guaranteed by the State of Israel.

The Company raised long-term financing, net of NIS 4,884 million and NIS 1,071 million for the six months ended June 30, 2013 and 2014, respectively. The Company raised long-term financing, net of NIS 7,209 million and NIS 8,479 million in 2012 and 2013, respectively. Net cash provided by financing activities have been used primarily for the purchase of fixed assets. For the six months ended June 30, 2013 and 2014, the Company’s cash investments for the purchase of fixed assets were NIS 2,556 million and NIS 1,842 million, respectively. In 2012 and 2013, the Company’s cash investments for the purchase of fixed assets were NIS 5,405 million and NIS 4,703 million, respectively.

The Company’s total long-term and extended-term liabilities (including perpetual debentures issued to the State of Israel), net decreased by 6.7% from NIS 46,902 million to NIS 43,741 million as of June 30, 2013 and 2014, respectively. The Company’s total long-term and extended-term liabilities (including perpetual debentures issued to the State of Israel), net increased by 2.6% from NIS 46,220 million to NIS 47,425 million as of December 31, 2012 and 2013, respectively.

The Company expects to incur capital expenditures in order to fund and implement its development plans. See “Business — Development and Capital Investment Plans” and “Business — Generation — Future Electricity Demand.”

In addition to the Company’s funding requirements relating to its capital investment plans, the Company has significant principal and interest payment obligations over the short and long-term. The scheduled maturities of the Company’s outstanding debt in the consecutive years starting June 30, 2014 and thereafter are set forth in the table below:

First Year Second Year Third Year

Fourth Year

Fifth Year and

thereafter

Local bonds, private bonds and non-bank loans ........... 4,072 2,427 5,585 5,866 19,557 Loans from local and foreign banks .............................. 4,372 501 468 349 2,077 Total .............................................................................. 8,444 2,928 6,053 6,215 21,634

62

During 2014, debt in an aggregate amount of NIS 7.3 billion will become due. In accordance with the recent cash flow forecast which reflects the actual needs of the Company’s liquidity level, the Company expects to refinance an aggregate amount of NIS 1.8 billion of such debt from the following sources:

• A private issuance to Israeli institutional investors in an amount of approximately NIS 1.5 billion; and

• Long-term bank debt for equipment financing in an amount of approximately NIS 0.3 billion.

As a result, during 2014, the Company expects to reduce its outstanding debt in an amount of approximately NIS 5.5 billion.

In 2012 and 2013 and the six month period ended June 30, 2014, the Company did not pay dividends on its ordinary shares. For more information, see “— Dividend Policy.”

The Company expects to fund its capital investment plans from net cash generated by operating activities and from long-term financing. It is anticipated that a substantial portion of such financing will be obtained through public and private offerings of debt in Israel and abroad.

The Company’s ability to obtain external financing and the cost of such financing are dependent on numerous factors, including: general economic and capital market conditions in local and global markets, interest rates, credit availability from banks or other lenders (including limitations on the credit exposure a local bank can have to a single borrower like the Company and limitations on funds to hold notes of a single issuer), investor confidence in the Company, the Company’s credit ratings, the success of the Company’s business, the status and terms of the Structural Change, the Company’s financial performance (including its leverage), the economic, security, legal and political conditions in the State of Israel, the privatization policy of the Government and the Government’s willingness to provide funding or other support. The availability of bank financing in Israel also is subject to certain Israeli regulations limiting the amount a bank can lend to a particular borrower (an Israeli bank may not lend in excess of 15% of its equity to any one borrower) or a specific sector such as the electricity sector.

In connection with the issuance of a substantial portion of its debt, the Company has granted floating charges on substantially all of its assets to holders of such debt. The outstanding principal balance of the debt secured by such floating charges as of June 30, 2013 and 2014 was NIS 37,762 million and NIS 35,385 million, respectively. The outstanding principal balance of the debt secured by such floating charges as of December 31, 2012 and 2013 was NIS 35,860 million and NIS 36,698 million, respectively. See “Description of the Notes — Note Floating Charge.” In addition, the Company has granted fixed charges on its assets. The outstanding principal balance of the debt secured by such fixed charges as of June 30, 2013 and 2014 was NIS 1,693 million and NIS 1,815 million, respectively. The outstanding principal balance of the debt secured by such fixed charges as of December 31, 2012 and 2013 was NIS 754 million and NIS 1,755 million, respectively.

Pursuant to an arrangement with the Ministry of Finance, during the period from 1983 through 1985, the Company issued perpetual debentures to the State of Israel for an aggregate consideration of NIS 15.5 million. Certain of these perpetual debentures bear interest at a rate of 5% per annum and the others bear interest at a rate of 5.75% per annum, in each case with the interest linked to the CPI. The principal amount of the perpetual debentures is not linked to the CPI. The perpetual debentures are secured by fixed charges on certain deposits of the Company, the real value of which is negligible. Other than in respect of these fixed charges, the perpetual debentures do not have priority over other debt of the Company. As a result of their terms, the perpetual debentures were treated until December 31, 2005 as equity under Israeli GAAP. Following the implementation of the Israeli Accounting Standard 22, commencing January 1, 2006 and subsequently according to IAS 32, the perpetual debentures are treated as an extended-term liability (NIS 2,532 million as of June 30, 2014 and NIS 2,536 million as of December 31, 2013).

The comprehensive loss of NIS 1,868 million for the six months ended June 30, 2014 decreased the Company’s total shareholders’ equity from NIS 14,811 million as of December 31, 2013 (after retrospective implementation of IAS 19) to NIS 12,944 million as of June 30, 2014. The comprehensive loss of NIS 656 million for 2013 decreased the Company’s total shareholders’ equity from NIS 15,467 million as of December 31, 2012 to NIS 14,811 million as of December 31, 2013.

The breakdown of the debt as of June 30, 2014 by categories is as follows:

By currency: NIS USD Euro Other 50% 40% 5% 5% By type of instrument:

Private bonds and non-bank loans

Israeli bank loans

ILS bonds

Non-Israeli bank loans

73% 10% 10% 7% By type of interest rate:

Fixed

Floating

86.8% 13.2%

63

Recent Developments Relating to the Company’s Credit Rating

On July 3, 2014, the international rating company S&P and the local rating company S&P Maalot announced that they were changing the Company’s local credit rating to ‘ilAA’ with a stable outlook and the Company’s international credit rating to ‘BBB-’ with a stable outlook.

On December 5, 2013, the local rating company Midroog announced that the Company’s local credit rating remains ‘Aa3’ but changed the outlook from negative to stable for the Series 22 and 2022 debentures and removed the Company from its CreditWatch Negative list which it has been on since May 24, 2012. On December 5, 2013, Midroog also announced that the rating for the State of Israel guaranteed debentures remains ‘Aaa’ with a stable outlook.

On December 11, 2013, the international rating company Moody’s announced that the Company’s international credit rating remains ‘Baa3’ but changed the outlook from negative to stable and removed the Company from its CreditWatch Negative list which it has been on since November 2, 2011.

The current ratings given to the Company by each of the rating agencies covering the Company are set forth in the tables below:

International Rating Agencies

Rating Agency Type of Rating Rating Outlook S&P Foreign currency corporate credit rating; Senior

secured debentures in foreign currency BBB- Stable

Moody’s Company Baa3 Stable Moody’s GMTN Program P Baa3 Stable

Israeli Rating Agencies

Rating Agency Type of Rating Rating Outlook S&P Maalot Issuer and debt issued prior to June 30, 2010 ilAA Stable Midroog Series 22 and 2022 debentures Aa3 Stable Midroog All State of Israel guaranteed debentures Aaa Stable

The Company assumes no responsibility or liability for the ratings of the rating agencies or their analysis or commentary. The Company expresses no view as to the reliance, if any, investors should place on these ratings and any use of the ratings information by investors is entirely at their own risk. The information with respect to ratings is included in this Offering Circular solely for informational purposes in the context of the impact of ratings and rating downgrades on the Company’s ability to raise financing and the cost of such financing and the Company undertakes no obligation to update this information.

Impact of Inflation and Price-Level Adjustment

Under the Company’s financial reporting principles as based on the Government Companies Regulations, the Company applies the provisions of Opinions No. 36, 40, 50 and 56 of the Institute of Certified Public Accountants in Israel with regard to the preparation of financial statements adjusted by changes to the general purchasing power of the Shekel, which are similar in substance to the provisions of IAS 29. However, according to IFRS, the financial statements may not be prepared according to the changes to the general purchasing power of the currency except under conditions of high inflation (which existed in Israel until December 31, 2003).

Statement of Financial Position

The amounts for the non-monetary items (items for which the amounts appearing in the statement of financial position reflect their historical values when purchased or incurred) are adjusted according to the changes in the CPI from the month in which each transaction was carried out to the CPI for the month ending the reporting period. The following items were treated as non-monetary items: fixed assets, advance land leasing payments, intangible assets and accumulated amortization, expenses to raise capital, inventory, prepaid expenses, receipts and disbursements for unfinished contracts, perpetual debentures, capital reserves and share capital.

Monetary items (those items for which the amounts appearing in the statement of financial position reflect updated values or realizable values as of the date of the statement of financial position) are presented in the adjusted statement of financial position as of the statement of financial position date, in amounts identical to their nominal amounts as of that date (the comparative numbers were adjusted to NIS of the statement of financial position month).

64

Statement of Operations and Comprehensive Income

The statement of operations items (except financing) which express transactions carried out during the reported year (e.g., income and expenses) were adjusted according to the changes in the CPI from the month in which they were recorded and through the month of the end of the reporting period. The erosion of monetary balances relating to those transactions is included in financial expenses, net.

The statement of operations items related to non-monetary items in the statement of financial position (such as depreciation and amortization, changes in inventory, prepaid expenses and accrued income) have been adjusted on the same basis as the related statement of financial position items.

The statement of operations items related to provisions included in the statement of financial position (such as provisions for pension and severance pay, vacation pay and contingent liabilities) are determined on the basis of the changes in the balances of the relevant balance sheet items after taking into account the relevant cash flows.

The net financial item reflects real financial income and expense, as well as the erosion of monetary items during the year.

Foreign Currency Risk Exposure

Substantially all of the Company’s revenues are denominated in Shekels and, as of June 30, 2014 and December 31, 2013, 57% and 53%, respectively, of the Company’s long-term financial liabilities (excluding foreign hedging transactions and perpetual debentures issued to the State of Israel) were denominated in or linked to currencies other than the Shekel. As of both June 30, 2014 and December 31, 2013, 9% of the foreign capital (the “Financing Component”) is recognized by the PUA as linked to the Determining Basket, a foreign currency makeup defined by the PUA as linked to the U.S. Dollar and the Euro at the rate of 75% and 25%, respectively. The PUA includes the Financing Component in its calculation of the tariffs as a hedging mechanism to reflect a portion of the Company’s financial expenses (or income) resulting from the Company’s foreign currency exposure, effectively transferring a portion of the Company’s exposure to exchange rate fluctuations to its customers. The Financing Component is updated on the annual updating date according to the Company’s liabilities denominated in foreign currencies that are recognized by the PUA and gradually decreased according to the plan published by the PUA, until the complete cancellation of the hedging mechanism in April 2013. On May 6, 2013, the PUA, in response to the Company’s request, decided to freeze the current hedging mechanism until November 1, 2013. On September 16, 2013, the PUA decided that the hedging rate will be maintained at a rate of 9% of the foreign capital set in the tariff base until the next annual tariff update. In the meantime, the Company will review its policy with respect to hedging its foreign currency exposure, taking into consideration the costs and the risks involved in hedging and the effects of hedging on the Company's financial statements and cash flow.

In order to hedge its foreign currency exposure with respect to the portion of its foreign currency denominated obligations which is not covered by the Financing Component, the Company has entered into currency swap and forward transactions thereby converting such obligations into Shekel denominated obligations and expects to continue this practice in the future. See Note 27.c.1 to the Annual Financial Statements.

For the six months ended June 30, 2013 and 2014, the Company recorded losses of NIS 1,400 million and NIS 758 million, respectively, on its hedging transactions. In 2012 and 2013, the Company recorded losses of NIS 1,363 million and NIS 2,164 million, respectively, on its hedging transactions. The inclusion of the Financing Component in the calculation of the electricity tariffs has mitigated, but not eliminated, the effect of exchange rate fluctuations on the Company’s results of operations. As of both June 30, 2014 and December 31, 2013, the tariffs provided coverage for part of the costs with respect to foreign currency or linkage to foreign currency through a hedging mechanism of NIS 3.0 billion (75% according to the U.S. Dollar and 25% according to the Euro).

In order to reduce the Company’s exposure to exchange rate fluctuations, the Board of Directors has adopted up to the end of 2013 a policy of carrying out foreign currency hedging transactions (primarily swaps and forwards) to adjust its financial expenses so that they are recognized for the purposes of the tariff setting mechanism. Any such transactions are executed for periods of at least one year, with permitted exposure of up to 15% of the financial liability’s balance in a particular currency. In addition, any balance of foreign currency exposure is generally exchanged for indexed linked obligations through foreign currency/Shekel CPI-linked hedging transactions and, where markets conditions justify it, foreign currency/Shekel hedging transactions, to further reduce foreign currency exposure.

At the end of 2013, the Company updated its policies with respect to the hedging of currency risk and variable interest rates. Pursuant to the updated policies: (i) the Company will execute hedging transactions in foreign currency in order to reduce the currency exposure , aiming to match the expense structure, to the extent possible, with the revenue structure recognized in the electricity tariff; (ii) the Company will execute hedging transactions for foreign currency payments based on the payment dates for principal and interest; and (iii) the Company will hedge the exposure due to payments to suppliers in foreign currency, to the extent possible. For further information, see Note 27.c.1 to the Annual Financial Statements.

65

Transition to Full IFRS

The Company prepares its financial statements in accordance with the Government Companies Regulations. Starting from 2008, the Company is presenting its financial statements in conformity with IFRS, as modified by the required adjustments for the changes in the general purchasing power of the Shekel (pursuant to the rules established in Opinion No. 36, including the provisions set forth in Opinions Nos. 40, 50 and 56, of the Institute of Certified Public Accountants in Israel), and the principles of the FASB as set forth in Chapter RE6 with respect to accounting for regulated activities.

IFRS was adopted in Israel on January 1, 2008 and applies to public companies. These standards do not allow the Company to prepare its financial statements according to changes in the relevant purchasing power of the Shekel unless high inflationary conditions exist (which existed in Israel until December 31, 2003). As a result, the adoption of full IFRS, rather than the Government Companies Regulations currently applicable to the Company, will require the Company to recognize changes in the CPI (in relation to nominal NIS and not adjusted NIS) in its financial statements with regard to net financial liabilities which are not currently denominated in nominal NIS.

In accordance with the Companies Regulations, the Company will be required to implement full IFRS for the reporting period starting on January 1, 2015. The Company received a special exemption from the obligation to include comparative data for the past two years in its first financial statements under IFRS (i.e., the Company's 2015 financial statements), and the Company is permitted to include comparative data for only one year (i.e., 2014) in its 2015 financial statements. In addition, January 1, 2014 was set as the transition date.

Pursuant to IFRS 14, Regulatory Deferral Accounts, first-time adopters of the IFRS may continue to implement the existing practices with respect to recognition of regulatory assets and liabilities. Therefore, the Company will continue to recognize deferred regulatory accounts in its financial statements after the full implementation of IFRS.

The Company is utilizing the relief provided under IFRS 1, First-time Adoption of International Financial Reporting Standards, to determine the “deemed cost” of the fixed assets and other assets that were presented in the Annual Financial Statements.

According to the Company’s estimates, which were presented to the GCA and the PUA, the termination of CPI adjustments to the financial statements, without a suitable solution for preventing the expected damage to the Company’s equity, will erode the Company's profitability, such that with respect to each percentage increase in inflation, the equity of the Company will be eroded by approximately (on an after tax basis) NIS 490 million based on the Annual Financial Statements and NIS 480 million based on the Interim Financial Statements. The Company is conducting ongoing discussions with the PUA in order to resolve the issue, and, on August 10, 2014, the Company applied to the PUA requesting a formal response.

In light of the above, the Company believes that the transition to full implementation of IFRS should be accompanied by an appropriate tariff rate or accounting solution that will reflect the nominal financing costs and ensure the appropriate yield for capital, as well as tariff updates, in order to prevent a significant delay between amounts due to the Company or to electricity consumers and the collection date, which could have an adverse impact on the Company and erode the equity of the Company and impair its ability to raise funds.

Impact of the Transition to IFRS

The Company prepares estimates regarding the impact of the transition from principles under the Government Companies Regulations as of the reporting date, to principles under the IFRS standards. The process of estimations has not yet been completed and its completion is expected with the submission of the reports as of December 31, 2014, within which a quantitative note, regarding the stated transition, will also be included.

Material changes may occur in the information presented below, deriving inter alia from the continuing process of collecting the information and studying it with regard to the principles of IFRS, as well as with regard to the interpretation given to them.

The Company is preparing to adopt the IFRS standards and is examining the material impacts that are expected to be caused to the Company as a result of adopting these standards. Based on the state of preparations as of the date of the report and subject to the possibility that changes will occur, which may derive from the continued process of collecting the information and adopting it to the IFRS principles, and to changes that will occur (if any) in their interpretation and implementation, assessments concerning the material financial impacts of the transition from the financial reporting principles of the Company under the Government Companies Regulations to the IFRS standards, the consolidated financial position of the Company as of January 1, 2014 (date of transition), and the results of its operation and changes in equity for the period from the transition date until June 30, 2014, will be presented below.

As stated, since the approval of the initial financial statements in which the IFRS will first be implemented or information will be provided according to them in the primary financial statements will be in the future, the Board of Directors reserves the right, if it sees fit to do so, to change the accounting policy on which the information above is based as stated. According to the provisions of the Government Companies Regulations, Principles for Preparation of Financial Statements, in these reports a disclosure was also provided for material financial impacts of the transition on the financial position of the Company as of June 30, 2014.

It should be emphasized that due to the nature of the stated information which is also initial information, the possibility that more

66

changes may occur to it (which may be material changes), and the fact that it is not yet based on a comprehensive set of financial statements, the management and Board of Directors of the Company are of the opinion that it should not serve as a basis or be used for reaching investment decisions of one kind or another. The information below is neither reviewed nor audited.

The following table sets forth the items in the Company’s consolidated statement of financial position as of January 1, 2014 (IFRS) that are expected to be materially impacted by the transition to reporting under the IFRS standards:

Reporting under the Government

Companies Regulations

Estimated impact of the

adoption of IFRS

Estimate of data reported under

IFRS (in NIS millions) Asset items: Inventory - fuel - current assets(1)............................... 1,067 (5) 1,062 Inventory - fuel - non-current assets(1) .................. 1,736 (40) 1,696 Liability items: Credit from banks and other credit providers(1) ...... 7,118 5 7,123 Debentures(1) ...................... 32,770 10 32,780 Liabilities to banks(1) ......... 8,572 11 8,583 Deferred taxes, net ............. 5,088 (12) 5,076

——— (1) Under IFRS, the financial statements cannot be prepared according to the changes in the general purchasing power of the

currency, except in a situation of high inflation (hyperinflation). For more information, see Note 2.a.5.d to the Annual Financial Statements.

The following table sets forth the items in the Company’s consolidated statement of financial position as of June 30, 2014 (IFRS) that are expected to be materially impacted by the transition to reporting under the IFRS standards:

Reporting under the Government

Companies Regulations

Estimated impact of the

adoption of IFRS

Estimate of data reported under

IFRS (in NIS millions) Asset items: Inventory - fuel - current assets(1)............................... 1,104 (7) 1,097 Inventory - fuel - non-current assets(1) .................. 1,614 (38) 1,576 Fixed assets, net and intangible assets, net(1) (2) ... 65,505 103 65,608 Regulatory assets, net(3) ..... 15 47 62 Liability items: Credit from banks and other credit providers(1) ...... 9,136 5 9,141 Debentures(1) ...................... 31,204 9 31,213 Liabilities to banks(1) ......... 6,668 7 6,675 Deferred taxes, net ............. 4,424 24 4,448

———

67

(1) Under IFRS, the financial statements cannot be prepared according to the changes in the general purchasing power of the currency, except in a situation of high inflation (hyperinflation). For more information, see Note 2.a.5.d to the Interim Financial Statements.

(2) For more information regarding fixed assets, see Notes 2.a.5.a, 2.a.5.b, 2.a.5.c and 2.a.4.b to the Interim Financial Statements.

(3) According to IFRS 14, presentation of the regulatory assets /liabilities, net, and their transactions are different in the financial statements under full international standards. The total regulatory accounts in credit and the total regulatory accounts in debt will be presented as separate items in the balance sheet itself and will be separated as a separate category. The net transaction in deferred regulatory accounts that relates to profit and loss will be included as a separate item in the statement of profit and loss and will be separated by subtotals from the remaining income and expenses of the Company, net, without tax impact.

The following table sets forth the estimated impact on the shareholders’ equity of the Company for the year ended December 31, 2014 and the six months ended June 30, 2014 resulting from the transition to reporting under the IFRS standards:

Six Months Ended June

30, 2014

Year Ended December 31,

2013 (in NIS millions) Shareholders’ equity according to financial statements prepared in accordance with the Government Companies Regulations for preparing Financial Statements ................................................................................... 12,944 14,811 Impact of equity balance as of January 1, 2014 due to cessation of adjustment of the statements to changes in the CPI .................................... (60) (60) Impact on the total loss for the period ........................................................ 121 — Shareholders’ equity after full implementation of IFRS ............................. 13,005 14,751

The following table sets forth an assessment of the impact on the Company’s consolidated profit and loss statement for the six months ended June 30, 2014 resulting from the transition to reporting under the IFRS standards:

Reporting under the

Government Companies Regulations

Impact of implementing IFRS 14 due

to classification of deferred

account balances(3)

Estimated impact of the adoption of

IFRS

Estimate of data

reported under IFRS

(in NIS millions) Revenues(1)........................... 12,471 (634) (54) 11,783 Cost of operating the electricity system(1) ............. 11,108 (2,792) (176) 8,140 Profit from operating the electricity system(1) (2) .......... 1,363 2,158 122 3,643 Sales and marketing expenses(1) ............................ 461 — (3) 458 Administrative and general expenses(1) ............................ 656 — (3) 653 Expenses for liabilities to pensioners, net ...................... 4 — — 4 1,121 — (6) 1,115 Profit from ordinary operations(1) ......................... 242 2,158 128 2,528 Financing expenses, net(1) ... 1,753 (34) (20) 1,699 Profit (loss) before income tax(1) ........................ (1,511) 2,192 148 829

68

Income tax(1)(3) ..................... (385) 583 22 220 Profit (loss) after income tax(1) ..................................... (1,126) 1,609 126 609 Company’s share of the loss of included companies, net 2 — — 2 Net transactions in balances of deferred regulatory accounts, net ........ — 1,609 — 1,609 Loss for the period(1)........... (1,128) - 126 (1,002) Other comprehensive loss for the period, after tax(1) .....................................

(740)

—

(5)

(745) Comprehensive loss for the period ............................ (1,868) — 121 (1,747)

——— (1) Under IFRS, the financial statements cannot be prepared according to the changes in the general purchasing power of the

currency, except in a situation of high inflation (hyperinflation). For more information, see Note 2.a.5.d to the Annual Financial Statements.

(2) For more information regarding fixed assets, see Notes 2.a.5.a, 2.a.5.b, 2.a.5.c and 2.a.4.b to the Annual Financial Statements.

(3) The Company’s tax rate for 2014 is 26.5%.

The following table sets forth an assessment of the impact on the Company’s consolidated statement of comprehensive loss for the six months ended June 30, 2014 resulting from the transition to reporting under the IFRS standards:

For the Six Months

Ended June 30, 2014

(in NIS millions)

Comprehensive loss for the period under the Government Companies Regulations for Preparing Financial Statements .................................................. (1,868) Depreciation differences including cancellation of amortization in accordance with the provisions of SFAS 90 after tax impact .............................. 104 Others after tax impact ......................................................................................... 22 Adjustment of remeasurements of a defined benefit plan after tax impact .......... (5) Comprehensive loss for the period after full implementation of IFRS ................ (1,747)

For information regarding further potential changes which may come into effect before the actual transition date to full IFRS, see Note 2.a.5 to the Annual Financial Statements and Note 2.a.4 to the Interim Financial Statements.

Accounting Policies

Accounting Considerations in Applying an Accounting Policy and Principal Factors of Uncertainty in Estimates

General

Implementation of the accounting policies of the Company requires management to apply, in certain cases, significant accounting judgment regarding, among other things, to estimates and assumptions on the book value of assets and liabilities, which may not be found in other sources. The estimates and the related assumptions are based on past experience and other factors considered relevant. The actual results may differ from these estimates. The estimates and basic assumptions are constantly reviewed by Management. Changes in accounting estimates are recognized in the period in which the estimate was changed when the change affects only that period or recognized in that period and in future periods in cases where the change affects both the current period and the future periods. See also Note 2.a to the Annual Financial Statements and Note 2.e to the Interim Financial Statements.

69

Fair Value of Financial Instruments

As described in Note 27 to the Annual Financial Statements, Management exercises discretion in choosing the appropriate evaluation techniques for financial instruments that do not have a quoted price in an active market. The evaluation techniques employed by Management are those applied by market participants. The fair value of other financial instruments is determined on the basis of capitalizing cash flows expected from them, based on assumptions supported by expected market prices and rates. The assessed fair value of financial instruments that are not traded in an active market includes several assumptions that are not supported by expected market prices and rates.

Provisions for Legal Proceedings

Management relies on the opinions of legal and other professional consultants for reviewing the legal aspects of claims and also for assessing the probability of legal claims affecting the Company. After the advisors of the Company form their legal opinion and the chances that the Company will have to pay the claim or will be able to successfully reject the claim, Management estimates the sum which should be recorded in the Financial Statements, if any. An interpretation of a certain legal status that differs from that of the legal advisors of the Company, a different understanding by Management of agreements, changes originating from related court decision and/or new facts, may affect the value of the total provision for legal proceedings filed against the Company and consequently affect the Company’s financial position and results of its operations.

Provision for Municipal Taxes, Fees and Levies

The Company received demands from city and regional councils with respect to municipal taxes for periods preceding the date of the financial statements. These demands derive mainly from changed classification of lands held by the Company, demands to increase billing area and demands related to municipal tax rates. Additionally, from time to time, the Company receives demands to pay retroactive development levies with respect to the Company’s sites, with respect to levies that were not demanded by the authorities in the past and/or demands to pay levies for public infrastructure projects. The Company prepares an estimate at each cut-off period, with the assistance of external lawyers and/or consultants, for the purpose of examining the payment demands versus facts, documents and data held by the Company, and examines the reasonableness of the demand for payments based on the changes in the legal environment, court decisions and new facts, which may affect the value of the provision in the Company’s books, and affect the financial position and results of operations of the Company. See Note 34.b.7 to the Annual Financial Statements and Note 9.c.7 to the Interim Financial Statements.

Employees Benefits, Capitalization Rate of Defined Benefits Liabilities

The present value of the Company’s liability for payment of grants for termination of employee-employer relations, pension plan and benefits for its employees is based on numerous data, determined on the basis of an actuarial estimate, which use many assumptions, including capitalization rate. Changes in actuarial assumptions may affect the book value of the Company’s liability for payments of grants for termination of employee-employer relations, pension and benefits.

The Company estimates the capitalization rate once every quarter based on market yields of Government debentures. Under the guidelines of IAS 19, the capitalization rate for post-employment benefits liabilities will be determined by using the market returns of high-quality corporate debentures at the end of the reporting period. The market returns for government debentures should be used in countries that do not have a "deep market" (i.e., a liquid corporate debenture market). On September 1, 2014, the Israeli Securities Authority published a draft staff's accounting position indicating that there is a deep market in Israel for CPI-linked high quality corporate debentures denominated in Israel Shekels. It is still unclear when the final staff position of the Israeli Securities Authority will be published and when the corresponding changes will be made in the Company's financial statements, but it is possible that such changes could be made in the Company’s interim financial statements for the nine months ended September 30, 2014. The draft staff’s accounting position noted that the implementation will be prospective, and that the Israeli Securities Authority will not intervene when companies apply the change in the capitalization rate for post-employment benefits in the financial statements for 2014.

The following table assumes, as of June 30, 2014, that the Company capitalized the actuarial liability in accordance with a discount rate (as calculated by the Company) based on the return of high-quality corporate debentures and applied it prospectively. If the Israeli Securities Authority determines that the implementation should be retrospective, then, in the absence of clear guidance regarding when the retrospective implementation will begin, it is not possible for the Company to estimate the potential impact. The difference between a discount rate based on market returns of corporate debentures and a discount rate based on market returns of government debentures is approximately 0.8%.

70

For the Six Months Ended June 30, 2014

Before change of

capitalization rate

Estimate after change of the capitalization

rate Gap (in NIS millions)

(unaudited) Excess pension plan assets over pension liability .............................. 1,040 4,330 3,290(1) Liability with respect to benefits after termination of employment ................... (3,192) (2,810) 382(1) Equity ................................ (12,944) (15,005) (2,061) Deferred taxes .................... (4,424) (5,167) (743) Fixed assets........................ (64,529) (63,661) 868

———

(1) Total decrease in the actuarial liability of NIS 3,672 million.

Other main assumptions are made in light of prevailing market conditions and the acquired experience of the Company. For further details on assumptions made by the Company, see Note 12 to the Annual Financial Statements and Note 6 to the Interim Financial Statements.

Life Span, Fixed Assets and Intangible Assets

As mentioned in Note 2.h and Note 2.j to the Annual Financial Statements, Management reviews the estimated useful life of fixed assets and other asset items during every reporting year. Management stated that there was significant no change in the useful life of the fixed assets during the year ended December 31, 2013. For further information, see Note 1.f to the Interim Financial Statements.

Standards for Regulated Companies

The Company applies accounting principles of the American Financial Accounting Standard Board SFAS 71 and SFAS 90 (the “standards”) (see also Note 2.a.2 to the Annual Financial Statements and the Interim Financial Statements), which require the regulated entity to reassess the coverage probability of the regulatory assets on every publication date of the financial statements.

In addition, for purposes of calculating regulatory assets, the Company is assisted by assessments (in those cases where the PUA does not provide exact calculations) and there is no certainty that the PUA (the public body that regulates the electricity rates) will approve such assessments in the future.

Upon reaching a conclusion that the Company does not fulfill the aforementioned conditions for applying the standard and only part of the regulated assets are covered by the rates, or if the rate update in practice is different from the assessment taken into account when calculating the regulatory assets, then all or part of the regulated assets should be deleted from the statement of financial position.

Impairment of Tangible and Intangible Assets

The Company examines the need for the provision for impairment of assets that has been completed recently, in accordance with the provisions of SFAS 90. For this purpose, the Company is assessing recognized costs in comparison with the assessment of construction costs. Changes in the recognized cost assessment, expected costs forecast and cash flow forecast are able to affect the amount of the provision for asset impairment.

The Company also is examining the need for the provision for impairment of assets under IAS 36. Changes in the assumptions and assessments may affect the results of the operations of the Company, and according to the results of the examination, the need for the provision for asset impairment. For additional information, see Note 14.b to the Annual Financial Statements.

Accounts Receivables

The Company estimates, under statistical models, the revenue from electricity sales that will be included in invoices issued after the date of the statement of financial position. The statistical models are based on a simulation of several scenarios that are built on, among other things, electricity generation in practice by the Company and by private producers, loss rate assessments and average price assessments.

The Company’s assessment of its total accounts receivable as of December 31, 2013 is approximately NIS 1,759 million,

71

compared with approximately NIS 1,608 million as of December 31, 2012. The Company’s assessment of its total accounts receivable as of June 30, 2014 is approximately NIS 1,638 million compared with approximately NIS 1,643 million as of June 30, 2013.

Provision for Doubtful Debts

The Company is examining the need for a provision that would account for delinquent customer payments in accordance with IAS 39, which instructs companies to examine the need for a provision for impairment of financial assets.

For this purpose, the Company is reviewing past signs of impairment such as the financial difficulties of its customers and past due payments. A provision for impairment will be determined in accordance with the Company’s estimates. Actual collection of these past due payments may be different from the Company’s assumptions.

Dividend Policy

Pursuant to the Government Companies Law, any decision by a Government Company’s board of directors concerning allocation of profits or distributions is subject to the GCA’s approval. In case of a disagreement regarding a distribution between the GCA and the company’s board of directors, the company is obligated to act in accordance with the GCA’s decision, as approved by the Government.

The current policy of the GCA with respect to distribution of dividends (a policy that was set in 1997 but may change from time to time) provides that the profits out of which dividends will be distributed are of two types: (i) with respect to dividends out of current profits, each Government Company which is a public utilities company (such as the Company) will distribute 60% of its annual net profits (before payment of any profit-based bonus to employees) as a dividend, and (ii) with respect to dividends out of accumulated profits, the amount of dividends will be determined for each specific company while taking into account the company’s governing documents, any applicable law, the company’s needs for investment in the following years, its liquidity, its cash reserves, its cash flow, its existing and desired leverage, its working capital needs and the possibility of its privatization.

However, according to the Israeli Companies Law, a company may distribute dividends out of its profits (as defined in Section 302 of the Israeli Companies Law) (the “Profits Criteria”) and only when there is no reasonable concern that such distribution might deprive such company of its ability to pay its existing and anticipated debts when due (the “Solvency Criteria,” and together with the Profits Criteria, the “Distribution Criteria”). Notwithstanding the above, a court may, at the request of a company that does not satisfy the Profits Criteria, after such company's board of directors has confirmed that it meets the Solvency Criteria, approve a distribution of dividends if the court is convinced that the Solvency Criteria is satisfied. In accordance with the Company’s Articles of Association (the “Articles of Association”), any dividend distribution must be approved by the Board of Directors and further approved at the general meeting of the Company’s shareholders. The Israeli Companies Law and the Articles of Association provide that the general meeting of shareholders may not resolve to distribute dividends in an amount which exceeds the amount recommended by the Board of Directors. The Company believes, based on a legal opinion on the subject, that any such company will not be required and will not be allowed to effect a distribution if the company does not meet the Distribution Criteria and that every distribution is subject to the Distribution Criteria (unless court approval was granted under the circumstances set forth above).

The Company did not distribute or calculate dividends for the years 2010 to 2013.

72

BUSINESS

Overview

The Company is the sole vertically integrated electricity generation, transmission and distribution company in Israel. The State of Israel currently owns 99.846% of the Company, and the Company is therefore a Government Company subject to the provisions of the Government Companies Law. In addition, the Company operates as a “public company” in accordance with the provisions of Israeli Companies Law. See “Relationship with the State of Israel” and “Regulation.”

The Company is one of the largest industrial companies in Israel. As of June 30, 2014, the Company had total revenues of NIS 12,471 million (U.S.$3,627) and net loss of NIS 1,128 million (U.S.$328) and, as of June 30, 2014, the Company had total assets of NIS 82,727 million (U.S.$24,063), in each case in adjusted June 2014 Shekels. As of December 31, 2013, the Company had total revenues of NIS 27,656 million (U.S.$7.968 million) and net loss of NIS 936 million (U.S.$270 million) and, as of December 31, 2013, the Company had total assets of NIS 85,924 million (U.S.$24.755 million), in each case in adjusted December 2013 Shekels. For the year ended December 31, 2012, the Company had total revenues of NIS 28,320 million (U.S.$8.159 million) and net loss of NIS 1,004 million (U.S.$289 million) and, as of December 31, 2012, the Company had total assets of NIS 89,720 million (U.S.$25.848 million), in each case in adjusted December 2013 Shekels.

As of June 30, 2014 and December 31, 2013, the Company had an aggregate installed generating capacity of 13,617 MW and 13,483 MW, respectively, and the Company owned and operated 17 power station sites, including five sites for steam driven power stations. Total sales of electricity by the Company for the six months ended June 30, 2014 and 2013 were 23,784 KWh and 26,265 KWh of electricity, respectively. Total sales of electricity by the Company in 2013, 2012 and 2011 were 53,506 KWh, 57,085 KWh and 53,062 KWh of electricity, respectively. In the ten years from 2003 to 2013, the aggregate demand for electricity in Israel grew at an average annual rate of 3%, compared to the average annual growth rate of Israel’s gross domestic product (“GDP”), which was 4.5% during the same period. To meet increased electricity demand, the Company has constructed significant new generation facilities and expanded and improved and improved its transmissions and distribution system.

The primary factors affecting the Company’s operating performance are (i) the level of demand for electricity in Israel, (ii) the tariffs that the Company is permitted to charge for electricity, which are regulated, and (iii) its operating costs.

The Company’s current development plans provide for the construction of a gas/coal operated power station (“Project D”), consisting of two thermal steam generation units with an aggregate capacity of 1,524 MW, expected to be completed in 2020 (first unit) and 2021 (second unit). However, on October 2, 2014, the Board of Directors of the Company resolved to freeze all activities related to the building of Project D and to exclude this project from the Company’s working plans and budget for 2015. In addition, the Board of Directors resolved not to include investments in the project in the Company’s five-year financial plans and to instruct the Company's management to approach the Minister with a request to modify the development plans accordingly. For more information, see “— Development and Capital Investment Plans.”

Transmission of electricity at higher voltage levels is more efficient than at lower voltage levels because it reduces losses in transmission. The Company intends to expand its 400 KV transmission grid between the years 2014 and 2017 to 10 switching stations with an output of 12,945MVA. In addition, the Company plans to add, during the years 2014 to 2017, an additional 680 km of high voltage overhead circuits and underground cables of 161 KV.

Business Operations

The Company is a vertically integrated electricity company which generates, transmits, distributes and supplies electricity to customers in Israel.

The Company’s activities are composed of three principal segments:

• Generation — activities of the power plants producing electricity.

• Transmission — the transmission and transformation system for high-voltage electricity and over long distances.

• Distribution — the electricity grid and the transformer stations system that brings electricity to the end customers.

The tables below contain summary information regarding the Company’s activity attributed to segments for the six months ended June 30, 2014 and for the year ended December 31, 2013.

73

Generation Transmission Distribution Total


June 2014 Shekels) Total assets .................................................................................. 42,490 16,047 24,190 82,727 Total revenues ............................................................................. 9,660 1,271 1,540 12,471 Operating income from ordinary operations ............................... 115 69 58 242 Net (loss) ..................................................................................... (508) (235) (385) (1,128)

Generation Transmission Distribution Total


December 2013 Shekels) Total assets .................................................................................. 44,230 16,644 25,050 85,924 Total revenues ............................................................................. 21,484 3,095 3,077 27,656 Operating income from ordinary operations ............................... 374 770 218 1,362 Net income (loss) ........................................................................ (704) 330 (562) (936)

The revenues are based on the principles that the PUA uses for determining the tariff for the Company’s segments as described in Notes 38 and 3.b to the Annual Financial Statements and Notes 13 and 3.b to the Interim Financial Statements.

Generation

Production

As of June 30, 2014, the Company maintained and operated 17 power station sites (including five steam driven stations) with an aggregate installed generating capacity of 13,617 MW. Each power station site contained one or more individual units to generate electricity. As of June 30, 2014, the Company operated 63 generating units consisting of 18 thermal units, 31 gas turbine units, 14 combined-cycle gas turbine units.

As demand for electricity rises, the Company operates its generating units according to the criteria of marginal costs of fuels per KWh generated. At times of peak demand, the Company relies first on its thermal units before using the internal combustion units, which can be started up and shut down more rapidly but operate at a higher cost.

In addition to the electricity generated by the Company units, the Company purchases electricity from the IPPs. For additional information regarding the IPP’s, please see “— Competition.”

When these IPPs begin generating and/or selling electricity, it is anticipated that they will help meet some of the growth in demand for electricity consumption. However, due to the uncertainty involved in these independent projects whose completion is outside of the Company’s control, the Company cannot predict how many projects will be completed by the end of the decade.


The price paid by the Company to IPPs for electricity is established by the PUA. The average price paid by the Company to IPPs for the year ended December 31, 2013 and for the six months ended June 30, 2014 was NIS 0.94 per KWh and NIS 0.72 per KWh, respectively. This high price is explained primarily by the high rates paid by the IPPs for the electricity generated through small photovoltaic facilities.

Thermal Units

The Company operates coal, crude oil and natural gas firing units. Some of these units are dual-purpose units that can be fired by either coal (main fuel) or crude oil and some are dual purpose units firing natural gas (main fuel) or diesel/crude oil. As of both December 31, 2013 and June 30, 2014, the Company operates 18 thermal units with an aggregate installed generating capacity of 6,462 MW. As of December 31, 2013 and June 30, 2014, these units consist of:

• Ten dual purpose units capable of operating on either crude oil or coal with an aggregate installed generating capacity of 4,840 MW; and

• Eight units capable of operating on either natural gas or crude oil with an aggregate installed generating capacity of 1,622 MW.

The thermal units are designed to supply basic loads of demand for electricity. The dual purpose units are expensive to construct but have the lowest cost per KWh produced.

74

Gas Turbines

As of June 30, 2014, the Company operated 31 generating units of the gas turbine type that use diesel oil or natural gas, with an aggregate installed generating capacity of 2,074 MW. Of these 31 units, 16 units are jet gas turbines with an aggregate installed generating capacity of 504 MW and 15 units are industrial gas turbines with an aggregate installed generating capacity of 1,570 MW. In addition, of these 31 units, 25 units are located at 11 separate sites designated as gas turbine power stations, and six units are installed on the sites of thermal driven power stations. Setting up industrial gas turbines and jet gas turbines involves a fairly low investment and relatively short timeframe. However, generating electricity with gas turbines is more expensive than doing so with thermal units, and the operation of jet gas turbines is more expensive than the operation of industrial gas turbines. Nevertheless, gas turbines can be started and stopped more quickly. Therefore, the Company typically uses its gas turbines in periods of peak demand.

Combined-Cycle Generating Units

Combined-cycle generating units produce electricity using a combination of industrial gas turbines and thermal turbines. This technology exploits the residual heat emitted from the industrial gas turbines to run an additional (thermal) turbine with no extra fuel. This process contributes to savings in fuel and to environmental conservation. As of June 30, 2014, the Company operated 14 combined-cycle gas turbine generating units, with an aggregate installed generating capacity of 5,081 MW.

Economic Life of Units

The useful life of thermal units without substantial renovation is at least 30 years. The useful life of internal combustion units without substantial renovation is at least 25 years for industrial gas turbines and at least 15 years for jet engines. Substantial renovations like those undertaken by the Company can extend the useful life of thermal units by 15 to 20 years and of gas turbine units by ten to 15 years.

The current physical condition of the units is good, with over 70% of current units having been commissioned in the last 15 years. Based upon industry sector information available to it, the Company believes that the outage rates applicable to its units are favorable compared to those of comparable electricity producers.

Installed Generating Capacity

The Company’s installed generating capacity has increased from 11,297 MW as of December 31, 2007 to 13,617 MW as of June 30, 2014, representing an annual growth rate of 3.16%. As of June 30, 2014 and December 31, 2013, the IPPs’ share of Israel’s total installed generating capacity was approximately 13.2% and 7.5%, respectively (including IPPs that produce electricity for self-consumption and not for sale), and the IPPs’ share of renewable energy capacity was approximately 1.5% and 0.8%, respectively, of Israel’s installed generating capacity.

The following table sets forth the various generating units and their generating capacity in MW as of June 30, 2014:

Type of unit Site

No. of

units

Installed

generating

capacity

(in MW)

Thermal driven power stations

Dual purpose power stations

(coal and fuel oil) Orot Rabin (Maor David A, B) 6 2,590

Rutenberg 4 2,250

10 4,840

Dual purpose power stations

(natural gas and fuel oil) Eshkol 4 912

Haifa 2 282

Reading 2 428

8 1,622

Total thermal driven power stations 18 6,462

Gas turbines

Industrial gas turbines Ramat Hovav 4 436

Zafit 2 220

Alon Tavor 2 220

Eilat 1 34

Atarot 2 68

Gezer 4 592

Jet gas turbines Hartuv 1 40

Eitan 1 40

Ra’anana 1 11

Caesarea 3 130

Haifa 2 80

Kinnarot 2 80

75

Orot Rabin 1 15

Rutenberg 2 40

Eshkol 1 10

Eilat 2 58

Total gas turbines 31 2,074

Combined-cycle gas turbines Ramat Hovav 2 701

Alon Tavor 1 363

Hagit 4 1,394

Eshkol 2 771

Zafit 1 360

Gezer 2 744

Haifa 2 748

14 5,081

Total Company generating units 63 13,617

Peak Demand

Peak demand is driven by a combination of population and economic growth. National peak demand has grown year over year from 7,895 MW in 2000 to 11,590 MW in 2013. The following tables set forth the peak demand, installed generating capacity and available capacity during peak demand for the years ended December 31 2011, 2012 and 2013 and for the six months ended June 30, 2013 and 2014.

Six Months Ended June 30, (MW)

2013 2014 IEC installed generating capacity ............................................................... 13,248 13,617 National Peak demand ................................................................................ 11,217 11,294 IEC generation (during national peak demand) ......................................... 10,740 9,430 IEC available capacity during peak demand (installed generating

capacity less the capacity of the units which were undergoing maintenance or in forced outage) .............................................................

11,733 11,213

Year ending December 31

(MW)

2011 2012 2013 IEC installed generating capacity ............................................................... 12,759 13,248 13,483 National Peak demand ................................................................................ 11,130 11,890 11,590 IEC generation (during national peak demand) ......................................... 10,470 11,120 10,362 IEC available capacity during peak demand (installed generating

capacity less the capacity of the units which were undergoing maintenance or in forced outage) .............................................................

11,112

11,790

11,694

Peak demand typically increases during the summer and winter months because of extreme conditions of heat or cool and increased usage of air conditioners. The Company’s installed capacity exceeded peak demand in each of the periods indicated in the tables above.

The Company has a shortage management policy. A shortage management situation is implemented when the Company knows in advance that it will not be able to supply the energy required at a specific time and, in order to balance the power grid, the Company is forced to initiate short power interruptions distributed through various parts of Israel.

The current aggregate national installed generation capacity (with IPPs and self-generators) is 15,530 MW, which exceeds peak demand in recent periods. Accordingly, the risk for peak demand exceeding aggregate national installed generation capacity is low and will continue to lessen as more IPPs integrate into the system in the future. For additional information on the IPPs’ generation capacity see “— Competition.”

Future Electricity Demand

The Company relies on demand forecasts when it makes monetary and resource investments, raises capital and establishes facilities. If actual demand is higher than the forecast, then the Company’s existing capacity may not cover the future demand. If it is lower, then the Company may commit to expenditures and indebtedness which will not be covered by increased income due to the lower demand for electricity. For more information on the Company’s demand forecasts and an explanation of how they are calculated, see “— Development and Capital Investment Plans — Demand Forecast.” The Company’s forecasts, and especially the Company’s forecasts for the short-term, reflect numerous assumptions and variables, many of which, such as weather and economic conditions, are inherently uncertain and subject to change. The actual demand for electricity will likely vary from the forecasted

76

demand for the short-term and such variations may be material.

Demand for electricity in Israel is seasonal. Seasons are defined as summer (July to August), winter (December to February) and the transition seasons: spring (March to June) and autumn (September to November). Demand is higher during summer (due to use of air conditioning) and winter (due to use of heating), compared to the transition seasons. In summer and winter, the average power consumption is higher than in transition seasons and sees days of peak demand, due to extreme cold or heat conditions. Demand for electricity in Israel is also influenced by economic activity. In years of vibrant economic activity and positive growth of Israel's economy, power consumption and demand for electricity increase. Conversely, in times of financial crisis or challenges, power consumption and demand for electricity decrease, accordingly.

According to forecasted demand for electricity, the upward trend in demand for electric power is expected to continue, with consumption doubling over the next 20 years due to several major factors:

• Population growth – The annual population growth rate in Israel is higher than in other Western countries, due to higher birth rates and immigration waves at different times.

• Higher living standards – In some segments of Israel’s population, living standards are still lower than in some Western countries. Higher living standards include purchase of additional appliances (such as dish washer and dryer), resulting in increased power consumption.

• Climate change – The greenhouse effect appears to be contributing to extreme climate volatility, resulting in increased power consumption for heating and cooling. Peak demand for electric power is often recorded on the coldest or hottest days of the year; since electric power cannot be stored, construction and maintenance of larger generation capacity is needed to avoid crashes in the power utility system during peak demand.

The Company’s demand forecast, which is used for long-term planning with respect to the generation system, assumes an average annual increase of 2.7% to 3% in peak demand in the years 2014 to 2020. The Company maintains several controls to minimize the adverse impact of under-forecasting, including increasing its generating capacity. The controls serving to minimize the damage resulting from over-forecasting demand include, among other things, delaying or canceling equipment purchases and utilizing flexible supplier contracts in terms of volumes and timing of the Company’s purchases. Under the Emergency Plan set by the Minister, the Company, starting in 2007, added and will continue to add generation units with a total capacity of 1,750 MW (including Alon Tavor). Additional factors that help mitigate the adverse impact of variations in demand from forecasted amounts, especially in the short-term, include the Company’s experience in dealing with variations for many years and the Company’s short and long-term development plans. However, there can be no assurance that these actions will enable the Company to predict and/or protect against variations in demand or demand exceeding capacity, and any failure to do so could have an adverse effect on the Company’s business, results of operations or financial condition. For more information, see “— Development and Capital Investment Plans — Demand Forecast.”

The first stage of the Emergency Plan (“Emergency Plan Phase A”) consisted of five gas turbines with a total capacity of 1,002 MW and was completed in 2010 at a total cost of NIS 3 billion (including interest during construction). The second stage of the Emergency Plan (“Emergency Plan Phase B”) consists of three steam turbine add-ons with an aggregate capacity of 369 MW, which was completed in 2014. The addition of the steam turbine add-ons will enable the operation of the existing gas turbines in combined-cycle mode, which is more fuel-efficient. Emergency Plan Phase A initially included the construction of an additional combined cycle plant with a capacity of about 400 MW; however, the construction of the additional combined cycle plant was delayed. Although incorporated into the development plans, there is an uncertainty with respect to the implementation schedules for this part of the Emergency Plan. The cumulative expenditure until December 2013 with respect to Emergency Plan Phase B amounts to NIS 2.6 billion.

The Company’s development plans require material capital investments in the power stations that are to be built by the Company as well as investments required to comply with the environmental protection requirements applicable to the Company. 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 using its revenues, through the tariffs. The Company’s development plans have been financed, and the Company expects that they will continue to be financed, in part by loans from domestic and foreign financial institutions and the issuance of public or private debt in Israel or abroad.

On April 15, 2013, for purposes of financing Emergency Plan Phase B, the Company entered into a loan agreement with HSBC Bank plc, Citibank Europe plc, Commerzbank Aktiengesellschaft and Komerční banka. The loan is for up to U.S.$153 million and up to approximately EUR 110 million and has an estimated term of 14 years. As of June 30, 2014, the Company has borrowed under the loan agreement U.S.$141 million and EUR 101 million.

The Company’s budget for its development plans in 2014 is NIS 4.7 billion. The investment forecast of the Company for its development plans for 2015 to 2018 is a mean annual expenditure of approximately NIS 5.1 billion (December 2013 prices). For additional information, see Note 1.e to the Annual Financial Statements.

The Antitrust Authority sent a notice for a hearing, which was received by the Company on January 1, 2014, that the General Director of the Antitrust Authority may instruct the Company to refrain from increasing its electricity production capacity beyond

77

13,307 MW, so long as the Company’s production capacity exceeds 50% of the entire electricity sector’s production capacity. Any such restriction would not prevent the Company from improving the efficiency of its production stations, but if the efficiency improvement results in increased production beyond 13,307 MW, then the Company must receive approval from the General Director of the Antitrust Authority in advance. In March 2014 and May 2014, the Company presented its objections to the General Director of the Antitrust Authority both in writing and orally. As of the date hereof, a final decision on the matter by the General Director has not yet been received.

Electricity Generated and Load Factor

In 2013, the Company generated a total of 57,116 million KWh of electricity, representing a load factor of 60.65%, compared with 61,074 million KWh and 62.5%, respectively, for the year ended December 31, 2012. For the six months ended June 30, 2014, the Company generated a total 24,427 million KWh of electricity, representing a load factor of 59.60%, compared with 27,769 million KWh and 59.5% respectively, for the same period ended June 30, 2013. A load factor represents the average load of electricity in MW, divided by the peak demand for a specific time period. The average availability of the Company’s plants in the six months ended June 30, 2014 was between 80% and 85%. However, due to wide fluctuations in seasonal demand, there are certain parts of the year when the plants do not have to achieve such high load factors in order to meet demand.

Transmission

All electricity produced by the Company, or purchased by the Company from IPPs, is transmitted through the Company’s high voltage and extra high voltage transmission grid which covers the whole State of Israel and those territories under the rule of the State of Israel since June 1967. The grid consists of extra high voltage and high voltage (400kV, 161Kv) lines which transfer the electricity generated by the units to the main switching stations. The main switching stations transform the voltage from extra high to high voltage through auto transformers and from high voltage to medium voltage and distribute the electricity to sub-stations all over the country. From the sub-stations the electricity is sent to other substations or to end users via the distribution system.

The following table sets forth the extra-high and high voltage lines owned by the Company as of December 31, 2012 and 2013 and as of June 30, 2013 and 2014:

Date

400 KV lines km circuit

(extra high)

161 KV lines km circuit

(high) 115 KV upper lines

km circuit

161 KV underground lines

km circuit (major sub-

stations) June 30, 2014................................................ 741.2 4,458.8 114.5 109 June 30, 2013................................................ 737.2 4,427 114.5 109 December 31, 2013 ...................................... 741.2 4,441.4 114.5 109 December 31, 2012 ...................................... 737.2 4,381.8 114.5 104.2

Transmission of electricity at higher voltage levels is more efficient than at lower voltage levels because it reduces losses in transmission lines. The Company intends to expand its 400 KV transmission grid between 2014 and 2017 to have 10 switching stations with total capacity of 12,945MVA. In addition, the Company plans to add, during the years 2014 to 2017, an additional 680 km of high voltage overhead circuits and underground cables of 161 KV.

The following table sets forth the number of switching stations and sub-stations (belonging to the Company and to its extra high voltage and high voltage customers, who consist of private customers and IPPs) and installed transformation capacity as of December 31, 2012 and 2013 and as of June 30, 2013 and 2014:

Date Switching stations Sub-stations

Private stations Total

Installed Transformation Capacity (MW)

June 30, 2014 ............................................... 10 142 42 194 19,789 June 30, 2013 ............................................... 10 141 42 193 19,771 December 31, 2013 ...................................... 10 141 42 193 19,700 December 31, 2012 ...................................... 10 140 41 191 19,452

Distribution

The Company’s distribution system consists of sub-stations that connect the transmission grid to the distribution lines, and medium-voltage (33 KV, 22 KV, 12 KV, 6 KV) and low-voltage distribution lines (0.4 KV) that are then connected to the Company’s customers.

The Company’s distribution system supplies electricity to approximately 2.6 million customers with a total distribution

78

capacity of 22,871 MVA and covers the following five geographical regions:

Northern Region: This region covers the northern part of the State of Israel, excluding Haifa and its environs. As of December 31, 2013, this region served 428,000 customers, compared with 420,000 customers as of December 31, 2012.

Dan Region: This region stretches from the Road No. 5 in the north, Bar Ilan and Or Yehuda in the east, and the town of Holon in the south. This is the most densely populated of the Company’s regions, therefore most of the distribution grid in the Dan region is underground. As of December 31, 2013, this region served 551,000 customers, compared to 550,000 customers as of December 31, 2012.

Jerusalem Region: This region covers Greater Jerusalem, Beit Shemesh, Har Tuv, Har Hevron and its southern environs, Samaria, including the town of Ariel, and the Jordan Valley between Ein Gedi and Mechula. As of December 31, 2013, this region served 289,000 customers, compared to 285,000 customers as of December 31, 2012.

Southern Region: This region is the largest of the Company’s regions, stretching from Emek Hefer in the north to Eilat in the south, excluding the Dan region. In accordance with its size, this region serves 40% of the Company’s customers. As of December 31, 2013, this region served 1,052,000 customers, compared to 1,030,000 customers as of December 31, 2012.

Haifa Region: This region covers Haifa and its environs, from the South Acre Industrial Zone in the north, Shefaram and Mishmar Ha’emek in the east, Bat Shlomo in the south and the Carmel Beach settlements in the west. This region is a relatively densely populated urban area, and therefore about two thirds of the grid lines are underground. As of December 31, 2013, this region served 275,000 customers, compared to 272,000 customers as of December 31, 2012.

The following table sets forth the High Voltage and Low Voltage lines owned by the Company as of December 31, 2013 and 2012: Date

Medium Voltage (km)

Low Voltage (km)

December 31, 2013 ......................................................................................................... 26,631 21,768 December 31, 2012 ......................................................................................................... 26,194 21,478

The following table sets forth the number of transformers owned by the Company and their total transformation capacity as of December 31, 2013 and 2012 : Date

Up to 12 KV

22 KV

33 KV

Total

Capacity (MVA)

December 31, 2013 ....................................... 2,761 40,397 4,316 47,474 22,871 December 31, 2012 ....................................... 2,733 39,918 4,197 46,848 22,492

Customer Base

The Company serves approximately 2.6 million customers throughout Israel, of which 2.3 million are residential customers. The Company classifies its customers into the following categories: residential, industrial, public commercial and East Jerusalem and Palestinian Authority, water pumping and agriculture.

The number of the Company’s customers grew by approximately 1.47% in 2013. During the same period, electricity consumption decreased by approximately 6.3%, from 57,085 million KWh to 53,506 million KWh.

The number of the Company’s customers grew by approximately 1.47% in 2012. During the same period, electricity consumption rose by approximately 7.6%, from 53,067 million KWh to 57,085 million KWh.

The East Jerusalem Electricity Company and the Palestinian Authority owe the Company, collectively, NIS 1,245 million as of June 30, 2014. The Company is acting to collect these accounts receivables and they are subject to ongoing litigation. For additional information, see Note 4 to the Interim Financial Statements and Note 6.d to the Annual Financial Statements.

Fuel

Introduction

The Company’s primary sources of fuel for electricity generation are coal, natural gas, diesel oil, and crude oil. In accordance with its capital investment program, the Company expects to gradually increase its proportion of production utilizing natural gas, as all relevant generation sites were connected to the natural gas grid in 2011.

The following table sets forth the percentages per types of fuel by MWh used in the generating segment to produce electricity for the years ended December 31, 2011, 2012, 2013 and for the six months ended June 30, 2012 and 2013:

79

For the Year Ended

December 31, For the Six Months Ended

June 30, 2011 2012 2013 2013 2014

Coal ................ 61.5 % 63.4 % 56.2 % 59.94 % 61.35 % Natural gas ..... 32.2 % 14.3 % 40.6 % 34.11 % 38.53 % Diesel oil ......... 4.5 % 15.2 % 2.6 % 4.79 % 0.1 % Crude oil ........ 1.8 % 7.1 % 0.6 % 1.16 % 0.02 % Total ............... 100 % 100 % 100 % 100 % 100 %

Fuel costs constitute the Company’s largest single operating expense, (after adding the transfer of expenses in an amount of NIS 4,333 million as a regulatory asset) accounting for 63.7% of the Company’s operating costs (of which diesel oil represented 12%, coal represented 43%, crude oil represented 2% and natural gas represented 43%) for the year ended December 31, 2013 compared to 63.2% for the year ended December 31, 2012. For the year ended December 31, 2013, total fuel costs were NIS 10,962 million, but NIS 15,295 million was recorded in the Company’s profit and loss statement, as NIS 4,333 million of fuel costs were recorded as a regulatory asset, compared to the NIS 14,641 million recorded in the Company’s profit and loss statement for the year ended December 31, 2012.

The following table sets forth the total costs for fuel (including attributed labor costs) used to generate electricity in the electricity segment for the years ended December 31, 2011, 2012 and 2013:

NIS millions (adjusted to NIS purchasing power of December 2013)

For the Year Ended December 31, 2011 2012 2013

Coal .................................................................................................................. 6,657 7,040 4,814 Crude oil.......................................................................................................... 677 3,132 271 Natural gas ...................................................................................................... 2,834 1,574 4,727 Diesel oil .......................................................................................................... 3,126 8,331 1,304 Transfer of Fuels to Regulatory Assets ........................................................ — (5,269) 4,333 Total expenditure on fuels ............................................................................. 13,294 14,808 15,449

The following table sets forth the average cost of fuel used by the Company for the years ended December 31, 2012 and 2013:

In Agorot per KWh

Year Ended

December 31, 2012 2013

Power stations operating on coal ................................................................. 18.18 15.00 Power stations operating on natural gas ..................................................... 18.08 20.37 Power stations operating on crude oil ......................................................... 72.18 81.33 Power stations operating on diesel oil .......................................................... 89.49 87.54

The Company purchases significant amounts of its fuels directly or indirectly from sources outside Israel (except for natural gas purchased from the Tamar reservoir located within Israel’s economic waters). As a result, the Company and Israel have almost no control over the availability of imported fuels (except for natural gas). Disruptions in the fuel supplies (domestic or foreign) have, and in the future could, adversely affect the Company’s operating results. In order to reduce the negative effects of such disruptions, the Company keeps limited reserves of each type of fuel used to generate electricity (except natural gas). The Company estimates that its reserves of coal will be sufficient for at least one and a half months of consumption and the reserves of crude oil and diesel oil for at least one month of consumption.

The following table sets forth the material fuel suppliers of the Company and their percentage share of total purchases by the Company for the year ended December 31, 2013:

Name of supplier

Type of fuel

Percentage share of total purchases

for the year ended December 31, 2013 The National Coal Supply Corporation Ltd. Coal 24.71% The Tamar Partnership. Gas 17.20% VITOL Diesel oil 7.21%

80

BP Gas marketing limited Gas 6.14%

Coal

In the six months ended June 30, 2014, the Company consumed 5.5 million tons of coal, compared to 6.1 million tons consumed in the six months ended June 30, 2013. In 2013, the Company consumed 11.8 million tons of coal, compared to 14.0 million tons consumed in 2012. The Company purchases all the coal it requires from the National Coal Company – NCSC, a wholly-owned subsidiary of the Company. The agreement between the parties, for the purchase and delivery of coal to the Orot Rabin (Hadera) and Rutenberg (Ashkelon) power stations was signed in July 2004, and will remain in full force and effect as long as the Company is the owner of the licenses to generate electricity in these power stations. The Company has a right to terminate the agreement upon one year’s advance notice. The price paid by the Company is based on the costs to NCSC plus an agreed margin, as approved by the PUA. In 2013, the adjusted average cost per ton of coal was NIS 407 compared to NIS 503 in 2012.

The National Coal Company purchases coal (usually in the framework of supply contracts for at least one year) from several sources, including from South Africa, Colombia, Russia, Indonesia and Australia. In 2013, 42% and 31% of the coal purchased was imported from Colombia and South Africa, respectively. The National Coal Company does not depend on any of its suppliers and no single supplier provides more than 21 of the total annual coal purchases. The purchase policy is to decentralize the coal purchases between countries and within the countries as much as possible, in accordance with the limitations of the quality of coal which can be burned in the power stations.

Most of the purchases of coal are made by the National Coal Company on a FOB basis, whereby all of the costs involved in the sea transportation and unloading of coal at the generation sites of the National Coal Company are added to the purchase price, while the remaining purchases are made by the National Coal Company on a CIF basis, whereby the purchase price includes the costs of the sea transport of the coal. The prices for the majority of the purchased coal are negotiated every six months, while the prices of the remainder of the purchases are linked to international indices of coal prices. Most of the coal purchase agreements include a standard force majeure clause pursuant to which the parties may delay the supply of coal or even terminate the agreement upon the occurrence of certain events outside the control of the parties.

The Company is subject to various environmental regulations regarding the maximum content of sulfur in coal, in order to minimize sulfur dioxide emissions of the power stations into the air.

The Company’s policy is to maintain a coal reserve at each power station, suitable for seven weeks of average consumption and to avoid going below the stock needed for five weeks.

Natural Gas

The Company is increasingly dependent on natural gas as a means of electricity production. The Company began using natural gas in February 2004 and since November 2011 there are 8 generation sights connected to the national gas grid: Eshkol, Reading, Gezer, Hagit, Zafit, Ramat-Hovav, Alon-Tavor and Haifa.

In the six months ended June 30, 2014, the Company consumed 1,328,000 tons of natural gas, and in the six months ended June 30, 2013, the Company consumed 1,487,000 tons. In the year ended December 31, 2013, the Company consumed 3,528,000 tons of natural gas at an average cost of NIS 1,340 per ton, and in 2012 the Company consumed 1,290,000 tons at an average adjusted cost of NIS 1,220 per ton. The increase in 2013 was due to the commencement of the supply of natural gas from the Tamar reservoir and the impact of LNG supplied through a regasification vessel connected to a buoy offshore Hadera.

For the six months ended June 30, 2013 and 2014, approximately 36% and 0%, respectively, of the natural gas that was used for the generation of electricity was supplied to the Company by the Yam Tethys Group. For the six months ended June 30, 2013 and 2014 approximately 47% and 99.7% of the natural l gas that was used for the generation of electricity was supplied to the Company by the Tamar Partnership. In 2012 and 2013, approximately 98% and 26%, respectively, of the natural gas that was used for the generation of electricity was supplied to the Company by the Yam Tethys Group. In 2013, approximately 64% of the natural gas that was used for the generation of electricity was supplied to the Company by the Tamar Partnership.

For the six months ended June 30, 2013 and 2014, approximately 17% and 0.3% respectively of the natural gas that was used for the generation of electricity was supplied to the Company as LNG from the LNG vessel.

As of the date hereof, there are no natural gas storage services available in Israel. Since the Company utilizes only one supplier of natural gas, with additional LNG cargoes as backup, and relies upon the national gas transmission system, the Company is increasingly dependent on natural gas as a means of electricity production and is vulnerable to risks related to the limited number of natural gas suppliers and disruptions in the natural gas transportation system.

In March 2012, the Company entered into the GSPA with the Tamar Partnership that operates the Tamar reservoir, and natural gas began to flow from the Tamar reservoir on March 31, 2013. The Tamar reservoir has 282 BCM of proven and probable natural gas reserves. The supply of natural gas from the Tamar reservoir assures the supply of significant quantities of natural gas from local sources which are not subject to foreign political instability that previously halted the supply of natural gas from Egypt. However, the

81

Company is still vulnerable to risks associated with the limited number of natural gas suppliers and to disruptions in the pipeline from the Tamar reservoir and/or the natural gas transportation system. For information on the Tamar reservoir see “— Tamar Reservoir.”

In 2010, a major potential reservoir of natural gas was discovered 135 km west of Haifa with a reserve of approximately 535 BCM according to best estimates (“Leviathan”). The Leviathan reservoir has not yet been commercially developed and negotiations for purchasing gas from the Leviathan reservoir have not yet begun.

Diesel oil

As of April 2013, following the beginning of delivery of natural gas from the Tamar reservoir, the Company’s diesel oil consumption has decreased significantly and is mainly used as a back-up fuel at the sites of coal power stations. In the six months ended June 30, 2014, the Company consumed only 9,463 tons of diesel oil, compared to 264,665 tons in the six months ended June 30, 2013. Most of the supply of diesel oil is pumped through the national pipeline system to the Company’s generation sites, except for a few small generation sites that are not connected to the distillate pumping system and for which the diesel is transported by road tankers. Due to the disruptions in the supply of natural gas in 2011 and 2012, the quantity of the diesel oil reserve was raised in 2012 to 330,000 tons and was not reduced as per the Company’s policy for 2013 to maintain a reserve of 190,000 tons of diesel oil (as an emergency reserve).The storage is distributed among the Company’s gas turbine sites and storage terminals that are connected to the National Refined Products Pipeline System. The Company does not expect to purchase additional diesel oil in 2014.

Crude Oil

Since the Company began increasing its consumption of natural gas in 2004, the Company’s crude oil consumption has been significantly reduced. During these years crude oil was used mainly as a back-up fuel or during peak demand periods. However, due to disruptions in the gas supply from Egypt and the depletion of the Yam Tethys “Mari B” reservoir, the consumption of crude oil increased significantly in mid-2011 and 2012. As of April 2013, following the beginning of delivery of natural gas from the Tamar reservoir, no crude oil consumption is expected for generation of electricity. Minor quantities of crude oil will be used for operational needs in coal powered units.

In the six months ended June 30, 2014, the Company consumed only 1,755 tons of crude oil, compared to 79,832 tons in the six months ended June 30, 2013.

The Company’s crude oil consumption is set by the General Comprehensive Personal Order (as defined herein), which requires the use of diesel oil before using crude oil at the Company’s dual fuel power stations, in the case of a stoppage or shortage in natural gas supply. Under the General Comprehensive Personal Order issued by the Ministry of Environmental Protection (the “MOEP”) to the Eshkol power station, the Company is obligated to use low sulfur crude oil with a maximum sulfur content of 0.5% at the Eshkol power station. Under the General Comprehensive Personal Order issued by the MOEP in 2010, the Company is obligated to use low sulfur crude oil with a maximum sulfur content of 0.3% at the Haifa power station.

The Company’s policy is to maintain a total crude oil reserve of 165,000 tons split between the Eshkol power station, where crude oil can be consumed by dual fuel power units, and the Orot Rabin (Hadera) and Ashkelon power stations, which are storage sites where the current use of crude oil is of a very small quantity. In the event of an emergency, all crude oil reserves will be moved and consumed at the Eshkol dual fuel units.

Yam Tethys Group Natural gas has been supplied to the Company since 2004 by the Yam Tethys Group, which holds the lease for the offshore

Mari-B natural gas reservoir (located about 24 km west of Ashkelon), pursuant to an agreement entered into between the Company and the Yam Tethys Group in June 2002 (the “Basic Agreement”). According to the Basic Agreement, the Yam Tethys Group will supply the Company with natural gas until the eleventh anniversary of the Basic Agreement or the date of which the full contractual quantity of 18 BCM has been consumed by the Company, whichever is earlier. In July 2009, the Company and the Yam Tethys Group entered into an additional agreement for the supply of an additional quantity of one BCM per annum for a period of five years. Since October 2011, due to the depletion of the Mari-B reservoir, there has been a gradual decrease in the quantity of gas actually supplied by the Yam Tethys Group and the Company received constant notices about decreases in the quantity of natural gas available to it from the reservoir.

In December 2012, the Company signed a settlement agreement with the Yam Tethys Group regarding compensation for significant decreases in the gas quantities delivered by the group under the existing gas purchase agreements.

Based on this settlement agreement, the Yam Tethys Group supplied gas to the Company during the first quarter of 2013, until the commencement of gas flow from the Tamar reservoir and additional hourly gas quantities, beyond the Tamar gas quantities, as of April 2013. The gas quantity balance in favor of the Company under the Basic Agreement and the settlement agreement was fully utilized by the Company in December 2013 and the Mari B of the Yam Tethys Group reserve was fully depleted.

Purchase of Natural Gas from EMG

In August 2005, the Company signed an agreement with EMG, an Egyptian company, for the supply of natural gas from Egypt, which commenced in July 2008.

82

Between February 2011 and March 2012, there were several explosions along the Egyptian gas pipeline owned and operated by GASCO, the Egyptian gas transport company, which is a subsidiary of EGAS, the Egyptian national gas company (EMG’s gas supplier). As a result, the supply of gas by EMG to the Company was interrupted for an extended period.

In April 2012, the supply of natural gas from Egypt stopped completely, and EMG received a notice from the Egyptian gas supply companies, EGAS and EGPC, terminating their agreement with EMG. The Company is involved in arbitration proceedings with EMG, EGAS and EGPC seeking compensation for significant damages that it has sustained and will sustain due to the non-supply of Egyptian gas, which the Company believes amounts to approximately U.S.$3.9 billion, which includes past losses (with interest) and future losses. After considering the consequences of the unilateral termination of the agreement among EMG, EGPC and EGAS in the ongoing international arbitration, the Company, together with its international legal advisers decided in February 2013, before submitting its full statement of claims under the arbitration, that due to the conduct of the Egyptian gas companies and their fundamental contract breaches, the Company had no choice but to accept the tripartite agreement with EMG, EGAS and EGPC as terminated. At the same time, the Company decided to terminate the agreement between it and EMG.

The Company submitted its full statement of claims under the arbitration in February 2013 and the Egyptian gas companies submitted their responses at the end of May 2013. A hearing was held in January 2014 and the parties filed post-hearing submissions on April 9, 2014. An additional hearing was held on May 15 and 16, 2014 to close the case and the parties submitted their statements of costs on June 13, 2014. The parties are currently waiting for a written judgment in the form of an award from the arbitration tribunal. The Company is also claiming pre-award interest on its total claim for the period June 30, 2013 to the date of any arbitration award in its favor. The Company cannot be certain when the arbitration tribunal will reach its decision and what will be the amount of any award given by the arbitration tribunal.

Tamar Reservoir

In March 2012, the Company entered into a gas sale and purchase agreement with the Tamar Partnership (the “GSPA”) with respect to the supply of natural gas from the Tamar reservoir, which is located approximately 90 km west of the coast at Haifa. The supply of natural gas from the Tamar reservoir commenced on March 31, 2013. Under the GSPA, the Company has undertaken to purchase at least 42.5 BCM of refined natural gas, up to a maximum amount of approximately 77 BCM during the term of the GSPA. The GSPA includes an option to increase the quantity supplied to a total of approximately 99 BCM after upgrading the gas supply system through compressors and / or the construction of a second pipeline (the “Option”). In April 2013, the Company informed the Tamar Partnership of its request to exercise the Option.

The gas price in the GSPA has been set according to a formula that contains a base price which is linked to the U.S. Consumer Price Index plus 1% in each of the years 2012 to 2019 and minus 1% for subsequent contract years (the “Plus Minus One Percent Mechanism”). The GSPA 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 amount of 3.5 BCM per year in the first five years and thereafter 2.5 BCM per year, and during the period of the Option, to the extent implemented, the annual minimum quantity will be five BCM per year.

The GSPA is in effect until the fifteenth anniversary of the commencement of the supply of gas or until the full contractual quantity is supplied, whichever is earlier. If, prior to the end of the thirteenth anniversary of the execution of the GSPA, the Company informs the Tamar Partnership that it expects that it will not be able to consume the full contractual quantity during the 15 year period, then the GSPA will be extended until the earlier of the expiration of an additional two year period or the consumption of the entire contractual quantity. Under certain circumstances, such as liquidation, insolvency, assignment of rights to creditors, appointment of a receiver, etc., the parties may terminate the GSPA with 120 days’ advance notice.

The General Director of the Israel Antitrust Authority, in his decision dated June 14, 2012, exempted the GSPA pursuant to Section 14 of the Israeli Antitrust Law, subject to certain conditions, as detailed below.

On June 14, 2012, after holding a public hearing process and having plenary discussions, the PUA decided to recognize the Company costs of the purchase of natural gas from the Tamar partnership, subject to certain condition, as detailed below.

Amendment No. 1 to the Tamar GSPA was signed in June 2012 in order to implement the conditions set by the Israel Antitrust Authority and the PUA. The Amendment No. 1 includes the following conditions:

• The Option is split into two phases. The first Option exercise notice will be in accordance with the GSPA and had to be provided by no later than April 15, 2013. The first Option termination date will be December 31, 2019.

• The Company may extend the Option after December 31, 2019 by giving notice to the Tamar Partnership by no later than April 15, 2015. The second option termination date will be the termination date of the GSPA. At the end of March 2014 the Antitrust Authority has published a public hearing about postponing the notice date for extending the Option to June 2016, in order to enable competition with potential new gas suppliers.

• The Company will be able to increase the hourly gas supply rate on an annual basis beyond the rate set forth in the GSPA, as long as such increase is possible from a systematic perspective and in coordination with the system administrator.

• The Plus/Minus One Percent Mechanism in the price adjustment formula was cancelled under Amendment No. 1 with

83

respect to the Option and the linkage of the base price of the option to the U.S. Consumer Price Index was reduced to a linkage rate of 30%, from January 1, 2013 until the end of the Option price period, including with respect to its extension.

The remaining terms of the GSPA had not been modified to the detriment of the Company.

On April 11, 2013, the Audit Committee and Board of Directors of the Company, at separate sessions, approved the exercise of the Option in the GSPA, and the Company informed the Tamar Partnership of its decision to exercise the first Option that will terminate on December 31, 2019. The additional gas quantities under the option may be available to the Company during the second quarter of 2015. When the Option is exercised, the Company will be able to increase its hourly capacity by 50% and reduce the use of more expensive and pollutant fuels.

Capacity of the Gas Pipeline from the Tamar Reservoir

On November 29, 2012, the Natural Gas Authority reached a decision regarding the use of the gas pipeline from the Tamar reservoir to the permanent receiving terminal in Ashdod, due to the inability of the pipeline to supply the anticipated national hourly demand of natural gas requirements in the coming years. The Company presented its position to the Gas Authority on February 14, 2013, stating that the decision will adversely affect the Company, electricity consumers, the electricity market and the public generally, as the Company will be forced to increase its use of alternative fuels, which are costly and cause pollution. A substantial increase in the cost of generating electricity is anticipated beginning in 2015, estimated to amount to hundreds of millions of shekels per year (according to preliminary estimates). Furthermore, the Company believes that the decision raises significant difficulties for constructing a second pipeline from the Tamar reservoir and other new gas fields and an additional receiving gas point on the Israeli coast. The Company also believes that the use of a single pipeline to transfer gas from the Tamar reservoir is detrimental to the reliability of the supply of natural gas and the electricity it helps to generate, and therefore enlarges the risk that due to any failure or damage to this pipeline the periods of non-electricity supply will significantly increase. As a result, the Company requested that the Head of the Natural Gas Authority reconsider the decision of the Natural Gas Authority for the reasons specified above. However, on February 21, 2013, the Company received a reply from the Natural Gas Authority stating that it has no intention of changing its decision since the decisions of the Natural Gas Authority are made in a balanced manner with a view to promote the goals of the Natural Gas Sector Law and with a broad view of its goals.

In June 2013, the Government decided to adopt the main recommendations of a committee established to examine the natural gas sector in the State of Israel. The Government determined that in order to increase the reliability of the supply of natural gas and increase the quantity of supply to the local economy, it is necessary to construct a pipeline to transmit natural gas from the Tamar reservoir to the Ashkelon area, including a facility for the treatment of natural gas, and to use the Mari B reservoir as an active storage facility for natural gas. The same Government resolution also addressed, among other things, setting a minimum quantity of natural gas to be provided to the Israeli market and requiring an approval for exporting natural gas outside of the State of Israel.

Liquefied Natural Gas (LNG)

Until the commencement of the supply of natural gas from the Tamar reservoir on March 31, 2013, in order to address the natural gas shortage as well as improve the response to peak demand and the reliability of the supply of natural gas following commencement of the supply of natural gas from the Tamar reservoir, the Minister approved an infrastructure project for the acquisition of LNG. According to the Minister’s decision, the gas transportation company Israel Natural Gas Lines Ltd. (“INGL”) was responsible for the construction of a buoy, 10 km west of the Hadera Power station, and for connecting the buoy to the national transportation system. INGL completed the construction of the buoy at the end of January 2013. LNG is an additional source of fuel for the Company that has historically been more expensive than natural gas but less expensive than other liquid fuels. In August 2012, the Company signed an agreement with the BP Gas Marketing Ltd. Company (“BP”), to purchase ten LNG cargos in the period from December 2012 to April 2013. As a result of the delay that occurred in the construction of the marine buoy array by the gas lines company and as a result of the early stages of the commencement of the supply of gas from the Tamar reservoir, the Company had to sell five of the ten LNG cargos of the BP company in the free market (two of them were sold at a comprehensive loss of approximately $24 million).

The Company was responsible for chartering a re-gasification vessel to connect to the buoy and for purchasing LNG cargoes. In September 2012, the Company signed a charter agreement with Hadera Gateway Ltd. for the chartering of a re-gasification vessel for the storage and re-gasification of LNG. The vessel supplies re-gasified LNG through the buoy directly to the national transportation system. The contract had a term of five years, with an option to terminate after two years or three and one-half years with a penalty. The transfer of the LNG cargo from the transporting ship to the re-gasification vessel is carried out through a ship-to-ship (STS) cargo transfer operation in the open sea outside the territorial waters of the State of Israel.

In September 2013, the Company signed an amendment to the contract which fixed the term of the contract to five years (from the date the contract was originally signed) with a discount of 23% on the cost of chartering. In 2013, the annual cost of chartering and operating the LNG vessel was approximately U.S.$100 million. During 2013, the Company consumed six LNG cargoes from the supplier BP Gas Marketing Limited, pursuant to the LNG Sale and Purchase Agreement, signed in 2012. Additional LNG cargoes were purchased from the supplier Vitol in August 2013 and from BP in March 2014.

84

Israel Natural Gas Lines

In 2003, INGL was established by the Government in order to build and operate the gas transportation system within the State of Israel, and it was granted a license to transport natural gas. In June 2006, the Company signed an agreement with INGL for the transportation of natural gas to the Ashdod and Reading Power Stations. The agreement establishes the commercial, technical and legal provisions , which apply to the transportation of natural gas for a period of 15 years (the “Transportation Agreement”). On May 31, 2007, the Gas Authority published a Master Form of Gas Transportation Agreement between INGL and its customers which applies to all shippers of natural gas. The Company was granted flexibility regarding capacity booking through the right to divert up to 15% of booked capacity and through the right to book capacity for the short-term at a special tariff. The Company signed this version of the Transportation Agreement in January 2009.

Suppliers

The Company engages various suppliers in Israel and overseas. In general, the terms of payment to suppliers, except for advance payments, will be 60-90 days from the later of the date the Company receives a payment request or the date the Company receives the goods or services. The fuel suppliers have shorter times according to the type of fuel. Since August 18, 2013, the terms of payment for most of the suppliers (not including fuel suppliers) in new contractual engagements are end of month + 90 days. The Company has a procedure for overseas suppliers, which defines the terms of payment and determines that in general, the payment will be transferred at least 60 days after the determining date according to the source of the payment (e.g., equipment, services, advances and liens). Nevertheless, terms of payment of less than 60 days can be determined in accordance with instructions provided by the Company’s Finance Division or with a written approval of the Head of the Finance Division.

The terms of payment that were set with the Tamar Partnership, the major gas supplier of the Company, are that the payment for receiving gas will be executed within 15 days from the date of the pro-forma invoice. For more information regarding the Tamar Partnership, see “— Fuels — Tamar Reservoir.”

The following table shows the material suppliers of the Company, the type of raw material supplied and the rates of purchase that in 2013 exceeded 5% of the rate of purchases of the Company from suppliers throughout 2013:

Name of the supplier Raw material Acquisition rate The National Coal Supply Corporation Ltd.

Coal 24.71%

The Tamar Partnership Gas 17.20% VITOL Diesel oil 7.21% BP Gas marketing Limited Gas 6.14%

Material agreements

The agreements listed below are the material agreements that are outside of the Company’s ordinary course of business of the Company:

• Agreement granting the right of use and services with respect to IBC (as defined herein). For more information regarding IBC, see “— Fiber Optics Telecommunications Company.”

• Agreement for the construction of a desalination facility at the Orot Rabin site. • Guarantee agreements with the State of Israel providing guarantees for debentures Series 24 and Series 25 and for certain

loan agreements of the Company. See “Relationship with the State of Israel — Borrowings and Guarantees from the State of Israel.”

Development and Capital Investment Plans

Introduction

Pursuant to the Electricity Sector Law, the Minister may, in consultation with the PUA, require the Company to submit its development plans for the Minister’s approval. If the Company fails to submit such development plans for approval, the Minister may, in consultation with the PUA, set a development plan which the Company would then be obligated to implement. The Licenses also require the Company to have development plans and submit them to the Minister for approval. The Company may not conduct any development activities outside the scope of development plans approved by the Minister.

The Company has long-term development plans (up to ten years) to expand the Company’s generation, transmission and distribution capacity in order to meet the projected needs of the Israeli electricity sector. The Company’s development plans seek to achieve optimum stability and economic efficiency in electricity supply over the short and long-term. The development plans serve as a basis for reaching decisions on the required additional generation units, including the type, capacity, date of commencement of operation, location and fuel type, as well as the required additional transmission and distribution facilities.

In devising its development plans, the Company is faced with uncertainty as to certain key elements, including future demand for electricity, fuel prices, competitive and economic factors and new technologies that may become available for developing the

85

generation and other segments. As a result, the development plans are subject to change over time and any such changes may have an impact on the Company.

Demand Forecast

Development in electricity consumption is affected by economic, climatic and demographic factors. The link between electricity consumption and these influential factors is expressed with the help of an econometric model, developed jointly by an outside consultant with the Company. Energy efficiency in electricity consumption over the years was included in the calculations in the future demand forecasts and subsequently in planning the generation system.

The demand forecast model assumes an average GDP annual growth rate of 3.7%, which means an increase of 2.0% in GDP per capita, assuming a population increase by 1.7% per annum. Climatic uncertainty implicit in the forecast exceeds the uncertainty in economic development, and therefore, in order to reduce such climatic uncertainty, the forecast model uses three different summer climatic scenarios. According to management’s estimates, the demand forecast, which allows for long-term planning of the generation system, assumes an average annual increase of between 2.7% and 3% in peak demand in the years 2014 to 2020.

Current Development and Capital Investment Plans

The Company’s current development plans provide for the construction of a natural gas/coal operated power station (Project D), consisting of steam and gas turbine generation units, with an aggregate capacity of 1,524 MW, expected to be completed in 2020 (first unit) and 2021 (second unit). However, on October 2, 2014, the Board of Directors of the Company resolved to freeze all activities related to the building of Project D and to exclude this project from the Company’s working plans and budget for 2015. In addition, the Board of Directors resolved not to include investments in the project in the Company’s five-year financial plans and to instruct the Company's management to approach the Minister with a request to modify the development plans accordingly.

The Company’s current development plans, as approved by the Minister, also include the construction of an additional combined cycle plant at Alon Tavor site, with a capacity of about 400 MW. As of the date hereof, there is a high degree of uncertainty regarding the date of completion of the project. The project was initially included in the Emergency Plan, and is scheduled to be completed by 2020. Although incorporated into the current development plans, there is an uncertainty with respect to the implementation schedules of this project.


Beginning in 2007, in response to the urgent need for additional generation units to meet the projected needs of the electricity sector, the Minister required the Company to construct several projects under the framework of the Emergency Plan, seeking to add a total generation capacity of 1,750 MW. The first stage of the Emergency Plan, (“Emergency Plan Phase A”), consisted of five gas turbines with a total capacity of 1,002 MW and was completed in 2010 at a total cost of NIS 3 billion. The second stage of the Emergency Plan, (“Emergency Plan Phase B”), consisted of three steam turbine add-ons with an aggregate capacity of 369 MW, which was completed in 2014. The addition of the steam turbine add-ons enables the operation of the existing gas turbines in combined-cycle mode, which is more fuel-efficient. The Emergency Plan initially also included the construction of an additional combined cycle plant at Alon Tavor site, with a capacity of about 400 MW. Although incorporated into the current development plans, there is an uncertainty with respect to the implementation schedules for this part of the Emergency Plan.

The Company’s development plans require significant capital expenditures. The Company has short-term (one year) and medium-term (up to five years) capital investment plans that correspond to its development plans. The Company’s budget for its development plans in 2014 is NIS 4.7 billion. Based on its most recently published forecasts, the forecasted cost for the Company’s capital expenditure plans for the years 2015 through 2018 is an average of approximately NIS 4.2 billion annually. The Company’s development plans are funded through net cash generated by operating activities and by financings and, to a lesser extent, the tariff. The Company historically has financed, and in the future expects to finance, its development plans primarily from loans from Israeli and foreign financial institutions, as well as public and private offerings of debt securities in Israel and abroad. There is no assurance that the Company will be able to successfully complete, or know what the terms will be for, such financings in the future.

Employees

Introduction

The following table sets forth the number of permanent employees, temporary employees and total employees of the Company, all of whom were employed within Israel, as of the dates indicated.

As of December 31, As of June 30, 2012 2013 2013 2014

Permanent Employees .......................................... 9,852 9,847 9,823 9,815 Temporary Employees ......................................... 2,978 3,121 3,169 2,944 Total Employees ................................................... 12,830 12,968 12,992 12,759

86

As of June 30, 2014, the number of employees has decreased by 233 (approximately 1.8%) compared with June 30, 2013. As of December 31, 2013, the number of employees has increased by 138 (approximately 1.1%) compared with December 31, 2012.

The following table sets forth the various categories of employees as a percentage of total employees of the Company as of the dates indicated.

As of December 31, As of June 30,

2012 2013 2013 2014

Office Workers ............................................................ 37 % 37 % 37 % 37 % Engineers and Technicians ........................................ 27 % 28 % 27] % 29 % Field Workers ............................................................. 34 % 33 % 34] % 32 % Senior Staff .................................................................. 2 % 2 % 2 % 2 %

The Employees’ Organization

The employees’ union is part of the Histadrut and subject to its decisions. Almost all employees of the Company are members of the employees’ union. Employee representatives are elected by employees in each of the Company’s business segments and represent the interests of employees’ vis-à-vis Management. Every four years elections are held for local employee organizations based on geographical criteria and activity sector, from which the national committee is chosen. The main activities of the employees’ union are: (i) representing the interests of employees vis-à-vis Management, (ii) negotiating wage agreements, (iii) defending employees against arbitrary decisions, (iv) providing financial support to employees, (v) subsidizing health and dental insurance, (vi) caring for the dependents of deceased employees, (vii) performing community and voluntary services, and (ix) caring for the Company’s pensioners.

Employment Agreements

The Company’s relations with its employees are governed by the Israeli labor laws, by certain general employment agreements and collective bargaining arrangements (the “Employment Agreements”) and by other relevant Israeli laws, including the Budget Foundations Law – 1985 (the “Budget Foundations Law”). The Employment Agreements regulate wage and service conditions, including rest and employment hours, overtime, paid absences, disciplinary and dismissal procedures, and retirement conditions, as well as employees’ entitlement to free electricity up to a certain quantity. Such compensation components are subject to Section 29 of the Budget Foundation Law, described below. Changes and updates to the Employment Agreements are executed periodically following negotiations between Management, the Histadrut and the National Secretariat of the employees’ union and require the approval of the Board of Directors, the GCA and the Commissioner of Wages.

In May 2013, employers in the public sector entered into a collective bargaining agreement with the Histadrut, pursuant to which, (i) salary increases of approximately 1% that were agreed upon in April 2011 will not be effective until January 2015, (ii) certain pension contributions will increase in July 2015 by 0.5%, (iii) all salary increases are settled by this agreement until December 31, 2012, and (iv) no labor disputes with respect to the matters set forth in the agreement may take place and no work-stoppages will be initiated until December 31, 2014. This agreement is not applicable to the Company’s employees. New legislation by the State of Israel requires for all employers in the public sector who do not enter into this agreement to reduce employees’ salaries by approximately 1%. This law also requires employers in the public sector (including the Company) to transfer the savings to the State of Israel.

On July 18, 2013, a new collective bargaining agreement was signed by and between the Company, the employee union and New National Federation of Labor. The new agreement is based on and has the same effective dates as the May 2013 agreement described above.

According to Section 29 of the Budget Foundation Law, the Company cannot agree to changes in pay, retirement terms or pensions, or any other monetary benefits relating to work, and cannot introduce any such changes or benefits without the approval of the Commissioner of Wages, unless the changes or benefits are in accordance with what is agreed or introduced with respect to all employees of the civil service of the State of Israel. In addition, such changes will require the approval of the Board of Directors and the GCA. For more information regarding the Salary Agreement and the Pension Agreement, see Note 12.f to the Annual Financial Statements.

Salary Deviations

As a Government Company, the Company is subject to Section 29 of the Budget Foundations Law, which effectively limits its ability 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 on these matters.

From 2001 to 2013, the Company received a number of letters from the Commissioner of Wages, including references to the wage terms of the employees of the Company, pensioners of the Company and next of kin of former employees who are entitled to pension payment. These letters stated that a number of wage components were paid to employees, pensioners and/or next of kin of former employees of the Company in violation of the Budget Foundations Law. As a result, the Commissioner of Wages decided to cancel and/or change the payments and ordered the Company to demand that the employees, pensioners and next of kin of former

87

employees of the Company refund such payments.

In October 2013, the Company received a letter from the Commissioner of Wages describing the decision of the Commissioner of Wages regarding salary deviations at the Company in four areas: (i) overtime payment not in accordance with actual performance; (ii) payments of certain expenses that materially exceed applicable civil service norms; (iii) certain additional payments for managerial positions that were paid not in accordance with a collective bargaining agreement from 1994, which has lower rates than the Company is presently paying and were paid also to employees who were not entitled to such payments; and (iv) inclusion of global overtime payments in certain of management’s pensions. In his decision, the Commissioner of Wages stated that the salary deviations must cease. The Commissioner of Wages also stated his intention to conduct a hearing regarding the possibility of retrieving salary components that were paid to the Company’s employees, pensioners and next of kin.

In response, the Histadrut declared a labor dispute and the employees’ union resolved to take certain actions adverse to the Company. In October 2013, the Company urgently applied to the Labor Court which approved the settlement between the employee’s labor organization, the Histadrut and the Government pursuant to which the decision of the Commissioner of Wages will not come into force until the Labor Court’s decision on the underlying case, and the employees’ union will refrain from taking any actions with regard to the decision of the Commissioner of Wages. The Commissioner of Wages stated in the Government’s response filed with the Labor Court that the implementation of his decision would have the potential financial effect of reducing by approximately NIS150 million per year the Company’s salary expenses and a one-time decrease of NIS 450 million on the Company’s actuarial liability. The Company disputes the decision of the Commissioner of Wages that the underlying practices constitute salary deviations and the Company’s position, based in part on legal opinions that the Company received, is that these four areas have been, are being and continue to be paid in accordance with the law, and the Company is required to continue to pay these amounts. Accordingly, the Company also disputes the potential financial effect calculated by the Commissioner of Wages.

In light of the Labor Court’s ruling postponing the effectiveness of the decision of the Commissioner of Wages until the decision in the underlying case, and given the Company’s position stated above, the Company did not reduce its actuarial liability in its financial statements. This labor dispute is still pending before the Labor Court.

For additional information on the Commissioner of Wages position and the labor disputes, see Note 34.c to the Annual Financial Statements and Notes 9.d.8 and 9.d.9 to the Interim Financial Statements.

Certain salary deviations served, in part, as the basis for a class action approved against the Company (the matter of Schleider et. al.), where the salary deviation allegedly served to inflate the tariff that was set by the PUA and that the electricity consumers paid, as the Company allegedly did not report to the PUA these salary deviations. For more information regarding the matter of Schleider et. al., see “Business — Legal Proceedings — Class Actions — July 8, 2009 - August 30, 2009 (Schleider et. al.).”

Trust Account

For several years, the Company has held funds in a trust account for the purpose of paying pension liabilities of the Company. After the Central Pension Fund was established, the funds accrued in the trust account up to that date which reflected the actuarial liability of the Company (as of the founding date of the Central Pension Fund), were transferred to the Central Pension Fund. However, when the Central Pension Fund was founded in 2005 it became apparent that it was against applicable regulations to transfer to the Central Pension Fund certain amounts relating to various grants of non-recurring nature to employees in connection with termination of employment and non-recurring rights extended to pensioners.

In March 2012, the Company was provided with the recommendations of the Regulators Team with respect to amounts deposited by the Company in the trust account. The Regulators Team concluded that certain funds deposited into the trust account were deposited without an obligation to make such deposits, and determined, among other things, that the Company should take the necessary actions in accordance with any laws, including actions vis-a-vis the trustee or the beneficiaries of such account, to release funds that the Company is not required to deposit in the trust account.

Following a Board of Directors resolution and several legal proceedings, the Company transferred surplus funds held in the trust account in an amount of NIS 600 million to the Central Pension Fund. For more information on the Regulators Team and its recommendations, see “Relationship with the State of Israel — The Regulators Team.”

On March 21, 2013, following the review of the legal aspects of the subject and after receiving the recommendations of the regulatory teams, the Board of Directors resolved to direct the trustee to transfer all funds in the trust account, except for certain funds that are intended to cover non-recurring components of pension benefits for certain employees, to the Central Pension Fund to cover the deficit in the Central Pension Fund or the Company, subject to court approval. On May 20, 2013, the Company filed its motion with court to instruct the trustee accordingly. This motion is currently pending.

The recommendations also state that the resolution of the Board of Directors to transfer NIS 600 million out of the trust account was a first step towards the implementation of the recommendations because, among other things, there are no grounds and there have been no grounds to make deposits for the "free electricity" component since it is a benefit granted in kind to employees of the Company. The Regulators Team is of the opinion that the arrangement presented by the Company following the resolution of the Board of Directors from March 2012 stands in contrast to the Regulators Team's recommendations and that the Board of Directors

88

should discuss the Regulators Team’s recommendations and act in accordance with those recommendations with respect to the rest of the funds that are in the trust account.

In addressing the matter of the trust account, the Yogev Letter stated the following: “The Company will take measures to release funds from the trust account at a volume of no less than NIS 1 billion; the remaining amount will finance the non-recurring components on an ongoing basis. The legal proceeding in this matter will continue.”

For additional information with respect to the trust account, see Note 6.l to the Interim Financial Statements and Notes 12.m and 13 to the Annual Financial Statements. For additional information on the class action in the matter of Schleider et. al., see “Business — Legal Proceedings — Class Actions — July 8, 2009 - August 30, 2009 (Schleider et. al.).”

Labor Disputes

From time to time, the Company has had labor disputes with its employees and their unions that have led to disruptions in the Company’s business and have adversely affected the Company’s business. These disruptions have included strikes, work slow-downs and disruptions to the Company’s operations.

December 2012 Dispute

In December 2012, the Chairman of the Professional Union Division of the Histadrut announced a labor dispute, relating to unilateral actions taken by the Company’s management despite prior discussions with the employees’ representatives.

On September 16, 2014, in connection with an ongoing labor dispute regarding the Structural Change, the Labor Court ruled that given the State of Israel is not willing to continue negotiations with the Company’s employees regarding the potential implications of a massive introduction of IPPs into the electricity sector on the Company’s employees’ rights and job security, the Company’s employees may take unionized action and may strike, after submitting an outline of the strike they intent to take. With respect to a strike and its scope, there will be a separate hearing to be held shortly. Both the Histradrut and the State of Israel filed motions for leave to appeal this decision. In addition, the Labor Court ruled that until a further decision is rendered, its previous decision, prohibiting the Company’s employees from taking certain sanctions against IPPs and other private entities that operate, or are supposed to operate in the electricity sector, will continue to remain in effect. On October 19, 2014, the national labor court ruled that the State of Israel, through its various branches, is not prohibited from granting conditional and new licenses to IPPs and connecting IPPs to the electricity grid, and therefore previous rulings of the Labor Court will not prevent the State of Israel from doing so.

For additional information regarding the labor dispute, see Note 34.c.1 to the Annual Financial Statements and Note 9.d.1 to the Interim Financial Statements.

This dispute is currently pending and therefore the Company cannot predict what impact, if any, it would have on the Company’s business.

October 2013 Dispute

In October 2013, the Company received a letter from the Commissioner of Wages describing the decision of the Commissioner of Wages regarding salary deviations at the Company in four areas: (i) overtime payment not in accordance with actual performance; (ii) payments of certain expenses that materially exceed applicable civil service norms; (iii) certain additional payments for managerial positions that were paid not in accordance with a collective bargaining agreement from 1994, which has lower rates than the Company is presently paying and were paid also to employees who were entitled to such payments; and (iv) inclusion of global overtime payments in certain of management’s pensions. In his decision, the Commissioner of Wages stated that the salary deviations must cease. The Commissioner of Wages also stated his intention to conduct a hearing regarding the possibility of retrieving salary components that were paid to the Company’s employees, pensioners and next of kin.

In response, the Histadrut declared a labor dispute and the employees’ labor organization resolved to take certain actions. In October 2013, the Company urgently applied to the Labor Court that approved the settlement between the employee’s labor organization, the Histadrut, and the State of Israel, pursuant to which Commissioner of Wages’ letter will not come into force until the Labor Court reaches a decision on the underlying case, and the employees’ organization will refrain from taking any actions with regard to the Commissioner of Wages’ decision. The Commissioner of Wages stated in the State of Israel’s’ response filed with the Labor Court that the implementation of his decisions would have the potential financial effect of reducing the Company’s salary expenses by approximately NIS 150 million per year, in addition to a one-time decrease of NIS 450 million of the Company’s actuarial liability. The Company disputes the Commissioner of Wages’ decision that the underlying practices constitute salary deviations, and the Company’s position, based in part on legal opinions that the Company received, is that these four components have been, are being, and continue to be, paid in accordance with the law, and that the Company is required to continue to pay these amounts. Accordingly, the Company also disputes the potential financial effect calculated by the Commissioner of Wages.

This labor dispute is still pending before the Labor Court.

For additional information regarding this labor dispute, see Note 34.c.10 to the Annual Financial Statements and Notes 9.d.8 and 9.d.9 to the Interim Financial Statements.

89

May 2014 Dispute

On May 15, 2014, the Chairman of the Professional Union Division of the Histadrut announced a labor dispute regarding the following subjects: (a) the Company’s “revolving door” policy under which the company tends to appoint non-permanent employees to positions that may be filled by permanent employees; (b) not providing tenure for temporary employees that have been waiting many years for tenure, despite the existence of standards for tenure; (c) a unilateral change in tenure quotas for 2014 that was approved and agreed upon during negotiations between the parties; (d) implications of increased workload on employees due to a shortage of manpower; and (e) conduct in bad faith and in a manner unacceptable in labor relations in general, and in collective labor relations in public service, in particular. As a result of this labor dispute certain sanctions were taken by the employees. The Company filed its petition against these sanctions and the matter is currently pending.

For additional information regarding this labor dispute, see Note 9.d.11 to the Interim Financial Statements.

Competition

The Company currently generates, transmits and distributes the vast majority of the electricity used in Israel and has been declared to be a monopoly in the Electricity Sector by the General Director of the Israel Antitrust Authority. Pursuant to the Electricity Sector Law and its regulations, the Company is required to:

• purchase electricity from IPPs;

• allow IPPs to use its transmission and distribution network; and

• provide a back-up source of supply to customers of IPPs.

The Government has set a target of increasing the installed generating capacity of electricity by IPPs to 20% of Israel’s installed generating capacity by 2020. In addition, the Government has set a target of increasing the share of electricity generated from sources of renewable energy by IPPs to 5% of Israel’s electricity by 2014 and 10% by 2020. As of June 30, 2014 and December 31, 2013, the IPPs’ share of Israel’s total installed generating capacity was approximately 13.2 % and 7.5%, respectively (including IPPs that produce electricity for self-consumption and not for sale), and the IPPs’ share of renewable energy capacity was approximately 1.5% and 0.8%, respectively, of Israel’s installed generating capacity. Pursuant to State policy, the PUA has set a higher rate to be paid to renewable energy IPPs than that paid to the Company. However, in accordance with PUA resolutions on the subject of costs recognitions, increase in the costs of the Company arising from purchases of electricity from renewable energy IPPs and other arrangements to support financing to the renewable energy IPPs, will be recognized in the tariff.

During the six months ended June 30, 2014, the Company purchased approximately 1,075 million KWh from IPPs (compared with 370 million for the six months ended June 30, 2013). During the year ending December 31, 2013, the Company purchased approximately 1,048 million KWh from IPPs (compared with 376 million KWh in 2012). The price paid by the Company to IPPs for electricity is determined by the PUA. The average price paid by the Company to IPPs (including photo-voltaic) for the six months ended June 30, 2014 was 72 Agorot per KWh and the purchased electricity represented about 4.5% of the electricity supplied by the Company (compared with 120 Agorot per KWh and 1.5% of the electricity supplied by the Company, respectively, for the six months ended June 30, 2013). The average price paid by the Company to IPPs (including photo-voltaic) for the year ended December 31, 2013 was 94 Agorot per KWh and the purchased electricity represented about 1.9% of the electricity supplied by the Company (compared with 119 Agorot per KWh and 1.27% of the electricity supplied by the Company, respectively, for the year ended December 31, 2012).

Tenders and conditional generation licenses have been granted to a number of IPPs. As of June 30, 2014 and December 31, 2013, the capacity of tender winners and/or conditional license holders for private electricity production was 5,262 MW and 6,281 MW, respectively, which includes renewable energy. As of June 30, 2014 and December 31, 2013, the capacity of tender winners and/or conditional license holders for private electricity production without renewable energy was 3,887 MW and 4,786 MW, respectively, which is approximately 20% and 23%, respectively, of Israel’s expected generating capacity (taking into account the Company’s existing generation capacity, future and existing producers, Emergency Plan B, Alon Tavor and Project D but excluding renewable energy). In addition, as of June 30, 2014 and December 31, 2013, tenders and conditional licenses have been granted to IPPs using renewable energy technologies for an aggregate production capacity of about 1,375 MW and 1,500 MW, respectively. As of June 30, 2014 and December 31, 2013, the capacity of IPPs who were granted generation licenses to sell electricity to the Company was approximately 1,913 MW and 885 MW, respectively, which is approximately 12.0% and 6.0%, respectively, of Israel’s total installed generating capacity. Some of the IPPs that hold conditional licenses and/or those that won tenders are in advanced building stages (for example, Dalia Power Energies Ltd., which is licensed to have a generating capacity of 870 MW) and others are in advanced planning stages (for example, Dead Sea Works Ltd., which is licensed to have a generating capacity of 327 MW). As of June 30, 2014 and December 31, 2013, the aggregate generating capacity of IPPs in advanced building and planning stages was approximately 2,314 MW and 2,670 MW, respectively, for ultra-high voltage and high voltage, which equals to 14.9% and 18.5% of Israel’s generating capacity as of June 30, 2014 and December 31, 2013, respectively. The rest of the conditional license holders which are conventional IPPs, are at the feasibility stage. Due to the uncertainty involved with these IPP projects, whose completion is outside the Company’s control, the Company cannot predict how many projects will be completed or when any such projects will be

90

completed.

The Company has entered into agreements with the following IPPs:

• In November 2009, the Company executed an agreement with OPC, which won a tender from the State of Israel in 2001 to build a combined cycle power station of 440 MW.

• In August 2010, the Company executed an agreement with Dorad Energy Ltd. for the purchase of their available generation capacity of energy of approximately 850 MW and the provision of infrastructure services.

• In May 2012, the Company signed agreements with two co-generation producers, Ramat Negev Energy (124 MW of output) and Ashdod Energy (52 MW of output), which, to the best of the Company’s knowledge, are expected to be operational in 2014.

• In May 2012, the Company executed an agreement with Dalia Power Energies Ltd. for the purchase of their available generation capacity of energy of approximately 870 MW and the provision of infrastructure services, which expires at the end of 2015.

• In June 2012, the Company executed an agreement with Ashalim Sun P.V. Ltd., which won a tender from the State of Israel, for the purchase of energy (30 MW of output), which expires at the end of 2016.

• In November 2013, the Company executed an agreement with Ashalim Plot A and Plot B, which won a tender from the State of Israel, for the purchase of their available generation capacities and energy, in an aggregate amount of 242 MW.

• Additionally, the Company has 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).


The Company expects a considerable increase in the scope of generation by IPPs, including generation using renewable energy. The Company estimates that an increase in the electricity generation by IPPs may impact the Company in several ways including the following:

• Part of the electricity currently produced by the Company and part of the increased demand for electricity will be satisfied by IPPs, resulting in a decrease in electricity generation by the Company. As a result, there will be a decrease in revenues in the Company’s generation segment, as well as a potential loss of strategic consumers. However, there is considerable uncertainty with respect to the entry of IPPs and the Company cannot accurately predict how many IPPs will enter into the market and when;

• Since the majority of IPPs will use the transmission and/or the distribution grid of the Company, and since IPPs are billed for the use of the Company’s infrastructure, the Company expects that revenues in the transmission and distribution segments will not materially decrease and may even increase;

• The increase in the generation capacity in the electricity sector and the increased usage by IPPs of the Company’s transmission and distribution infrastructure may require the Company to direct considerable investments to the transmission and distribution grids;

• In the case of a failure by IPPs the Company is required to serve as a back-up source of electricity and provide their customers with electricity, which will require the Company to maintain higher levels of generating capacity; the Company anticipates that once IPPs comprise a large portion of the generating capacity in the market, the PUA will update the tariffs to compensate the Company, at least partially, for the costs derived from the need to maintain such high levels of generation for reserve;

• The Company must purchase electricity from IPPs at a rate set by the PUA (the period for such purchase and the amount of electricity vary according to the type of IPP);

• Pursuant to State policy, the PUA has established arrangements to allow the renewable energy IPPs to be paid a higher tariff than that paid to the Company. However, any increase in the costs of the Company resulting from payments required from the Company to the renewable energy IPPs will be recognized in the framework of the tariff. Accordingly, the expenses for the transition to green electricity will be included in the framework of the tariff. Notwithstanding, there may be a time gap until such costs are covered by the tariff;

• Pursuant to the implementation of the provisions of the law and government resolutions, the PUA encourages the entry of

91

IPPs into the electricity sector. Within this framework, IPPs were given a safety net and preferential conditions in connection with, among other things, the use of the Company’s transmission and distribution systems and the Company's commitment as a backup source, in the case of a failure of the IPPs, to provide electricity to the consumers. Due to the uncertainty with respect to the structure of the Company after the structural change, if and to the extent implemented, and the length of time for which preferential conditions will be given, there is no certainty that the Company will be able to compete with the IPPs; and

• The expected increase in competition poses financial risks to the Company, as it creates uncertainty with respect to the amount of electricity that the Company will be required to generate or purchase in the future.

The Electricity Sector Law requires the restructuring of the electricity sector in the State of Israel, in order to encourage competition in the sector. For more information, see “Regulation — Electricity Sector Law” and Note 1.b to the Annual Financial Statements.

Research and Development

General

The Company’s research and development (“R&D”) program is aimed at developing tools to utilize and derive the greatest advantage from new technologies, dealing with stricter requirements for environmental protection (in all areas) and achieving supply reliability targets, while striving to minimize costs. The results of the investments in R&D are tested in advanced research projects, including new technologies to improve utilization in the electricity chain; improving the reliability and quality of electricity supply; load management; varying sources of energy and renewable energies; environmental aspects relating to Company activity; optimal utilization of land reserves and other Company resources; and improved and more efficient processes. The Company focuses on research with a potential for implementation within a five year period. Projects are carried out either by Company employees or by external bodies (e.g., universities, research institutions and organizations). As of December 31, 2013, the Company’s expenses for R&D projects were NIS 3.8 million, excluding the Technological Incubator projects expenses of approximately NIS 10.2 million (compared to NIS 2.5 million December 31, 2012, excluding the Technological Incubator projects expenses of approximately NIS 9.3 million). The Company has one patent in the registration stage in Europe and Israel and one patent pending in the United States.

Smart City Project

The Company is conducting a pilot program entitled “Smart City” for the installation of smart electricity meters. The first part of the project focuses on technology and entails the replacement of about 4,300 electricity meters with smart meters of different types. The new electricity meters will be connected to the Company’s systems and will allow the Company to analyze customer behavior, receive information from the specified customers, and achieve energy efficiency. The main objective of the “Smart City” program is to learn about and acquire practical experience in the process of energy data management and the operation of smart meters. As of the date hereof, the Company has replaced most of its electrical meters with the smart meters that will be integrated with the control system for the transmission and distribution network to allow for network losses to be measured.

The project will benefit customers by providing them with information about their energy consumption to help improve their efficiency, save money, and contribute to a “greener” environment. In tandem with the “Smart City” program, the Company is developing a mobile application to alert customers of their electricity consumption and provide analysis of their consumption patterns.

Properties

The Company owns the assets (fixed assets, land and facilities) that it uses (subject to the Assets Arrangement) or possesses either through long term lease agreements (mainly with the Israel Land Authority) or pursuant to purchase or expropriation, or through rights that were extended to the Company by property owners (such as an easement or authorization of use at no cost, or possession rights that have a contractual regulation process) or through rights that the Company has by statute. In addition, the Company has rights to thousands of small properties (mainly transformation rooms of different types). For a material portion of the real estate assets, the rights of the Company are not registered or regulated. The status of the real estate assets that have not yet been regulated stems from a number of reasons, such as planning reasons (e.g., absence of parcellation or demands for regulating outline plans, a large number of properties, dependence on outside parties or absence of documents) or disputes with various authorities, including tax authorities, which prevent the receipt of approvals for the registration of the rights. In view of this complexity, the Company cannot estimate the length of the period until the conclusion of the registration, but it estimates that the costs involved in this are not expected to be material. For more information, see Note 1.f to the Annual Financial Statements.

The Company has approximately 30 district and regional offices, with a total area of approximately 150,000 square meters. In addition, there are approximately 13,000 transformation, switching and bulk rooms dispersed throughout Israel. In addition, the assets of the Company include assets, mainly grids and lines, which are in the territories of the Palestinian Authority (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. For more information, see Note 14 to the Annual Financial Statements.

92

It is the position of the Israel Land Authority that lands that were allocated by the Israel Land Authority to the Company for public purposes, but which are unused or are not being used for the allocated purposes, should return to the possession of the Israel Land Authority. 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 Authority, based on the recognition of the management of the Israel Land Authority that the Company must regulate sites in advance to gain nationwide coverage. However, even if this decision were not to apply to the land allocated to the Company with a tender exemption, as of the date hereof, the Company is making use of all of the land areas that have been allocated to it by the Israel Land Authority, except a few tracts whose usage date in accordance with the development plans is not yet due, and for which there is future zoning for development and use. In addition, in accordance with the decision, even if the Company is required to return land that has not been used to the Israel Land Authority, the return to the Israel Land Authority will require paying the Company consideration for the return, as prescribed in the decision, to the extent that the Assets Arrangement does not establish a different resolution. In addition, the Company leases from various parties (such as the Israel Land Authority, local authorities and private entities) approximately 80 more properties that are used for various purposes, including: offices, storerooms, monitoring stations and temporary and portable substations. The lease agreements have different terms, ranging from one year to ten years, and are renewed or updated in accordance with the needs of the Company in various places and for different purposes. The Company believes that it will be able to renew the rental agreements under conditions that are similar to those existing as of the date hereof. However, due to several factors that are not under the Company’s control, such as market conditions, the needs of the Company, agreements with the lessors and others, there is no certainty that the Company will be successful in extending such leases. The Company has created floating charges on all of its assets for securing some of its liabilities (see Note 20.g to the Annual Financial Statements), including for the assets and rights in real estate. In addition, the main office building of the Company, covering an area of approximately 80,000 square meters, 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 Authority pursuant to a lease with a 49 year term (expires June 2048), with an option for an extension for an additional 49 years. The Company has two head offices in Haifa and in Tel Aviv, and nine logistics sites that are located on land used as storage areas.

As of December 31, 2013, the aggregate amount of the Company’s fixed assets, net was NIS 64,721 million and the aggregate amount of indebtedness secured by floating charges on the assets of the Company was NIS 36,698 million.

For further information relating to the Company’s properties, including the Assets Arrangement, see “Risk Factors — The Company may be obligated to acquire from the Government certain assets” and Notes 1.f and 14 to the Annual Financial Statements.

The Assets Arrangement

The Electricity Sector Law provides that certain assets held by the Company are to be acquired by the Company from the Government for their fair value. The Electricity Sector Law does not specify which particular assets are to be so acquired or the method by which value is to be determined. Consequently, the assets to be so acquired may or may not constitute a significant portion of the Company’s assets, and the cost to the Company, if any, may or may not be material.

For more information regarding the Assets Arrangement, including its potential impact on the Company’s financial condition, see “Risk Factors — The Company may be obligated to acquire from the Government certain assets,” “Relationship with the State of Israel — The Assets Arrangement” and Note 1.f to the Annual Financial Statements.

Information Technology

The Company relies on a variety of information technology (“IT”) systems in its operations and its success is largely dependent on the accuracy and proper use of these systems. In connection with managing its growth, the Company continually evaluates the adequacy of its systems and procedures, and anticipates that it will regularly need to make capital expenditures to update and modify its management information systems, including software, hardware and infrastructure as the Company grows and the needs of its business change. The IT budget is based on a six year master plan. No exceptional investments are foreseen in the near and medium term.

The Company’s IT systems architecture is based on several principles, one of which is reliability. This principle is implemented in the foundations of the IT architecture (physical, logical and governmental). Most of the Company’s business processes are computerized. The majority of the applications are based on standard products (such as SAP, SAG, ORACLE and Microsoft) and tools so no specific dependencies are created. This environment does not create a high level of reliance on any specific application.

Most of the main business systems (financial, logistic, human resources, engineering, maintenance and project management) are implemented or will be implemented in the near future in the SAP ERP system. This system has embedded mechanisms that enable separation and organizational changes even though significant resources are taken in account. Additional systems that are based on other platforms will have a much bigger influence on the resources and time to market due to separation.

The Company has a contingency plan in place that considers the various events and circumstances that may disrupt the normal functioning of the Company’s IT systems. Included in the contingency plan is a backup plan for any damage caused to the Company’s IT infrastructure.

93

Fiber Optics Telecommunications Company

On July 11, 2013, the Company completed a transaction with a consortium of companies for the joint establishment of a telecommunications company, 40% of which will be held by the Company (in return for the right of use of the company’s infrastructure and rights of way pursuant to an agreement entered into on July 25, 2013) and 60% of which will be held by the consortium. The telecommunications company, named Israel Broadband Company (2013) Ltd. (“IBC”), was incorporated on July 14, 2013 and was granted a general telecommunications license and a special communications license by the Minister of Communications on August 27, 2013. IBC will provide ultra-broadband services to telecommunication service providers and large business customers through a fiber optics network that will be deployed, among other things, over the Company’s electricity network. In accordance with the July 11, 2013 agreement, IBC’s controlling shareholder (an investors’ consortium) invested NIS 150 million in IBC capital, in addition to the commitment of an additional NIS 150 million as a shareholders’ loan. In addition, IBC is entitled to receive a government grant of NIS 150 million, half of which was received in December 2013 and the remainder is expected to be received during 2015. The Minister of Finance and the Minister of National Infrastructures, Energy and Water have granted the Company the necessary permit to become active in the communications field. On July 25, 2013, the Company and IBC entered into a right of use and services agreement pursuant to which the Company will provide various services to IBC. This agreement grants IBC the exclusive right-of-use for fiber telecommunications facilities over the Company’s electricity network, subject to certain conditions set forth in the right of use and services agreement. As of the date hereof, IBC has initiated the deployment of ultra-broadband services, including network access installation, wavelength provisioning and site hosting.

For more information, see Note 11.b to the Annual Financial Statements.

Insurance and Risk Management

The Company has considerable properties and conducts extensive operations throughout the State of Israel. The Company, like other organizations, is exposed to risks that may affect its ability to achieve the goals and objectives set by its management. These risks include strategic, operational, financial, and compliance risks. To reduce the probability and/or severity of these risks to the optimal minimum and to fulfill the requirements of the Electricity Sector Law, the Company undertakes risk management through risk reviews and cost-benefit analyses in the organizational units of the Company, including preparation of annual work plans, timetables and required budgets and at the Enterprise Risk Management (“ERM”) level, through the use of an external consultant, according to principles outlined in the circular published by the GCA. These actions help management in assessing these risks, defining orders of priority for handling these risks and establishing plans for reducing these risks. Based on this process, the Company decides which risks should be insured and purchases insurance policies, such as property insurance, liability insurance, construction insurance, directors’ and officers’ insurance, vehicle insurance and marine insurance. These policies are intended to provide proper coverage of damages that the Company, its employees and other third parties may incur. These policies include:

• An “all risks" insurance policy for the coverage of damages to the property of the Company (except the electricity grid), with a coverage limit of $1 billion. The coverage includes loss of revenue and increased fuel expenses.

• A general liability insurance policy that includes coverage of general third party liability, product liability, professional liability, liability for accidental pollution damages, liability for electromagnetic fields and employers’ liability. The limit of liability of this policy is $100 million.

• A construction “all risks” insurance 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, insurance for construction of power stations, construction of a Palestinian substation and other projects may be mentioned.

• A directors' and officers’ liability insurance policy that covers the liability of the directors and officers of the Company. The limit of coverage of this policy is $300 million.

• A third party marine liability insurance that covers the marine operations of the Company (such as, the loading and unloading of fuels, operations at various ports including handling of ash, coal loading and unloading, natural gas supply to power stations, and LNG loading and unloading). The limit of liability of this policy is $300 million.

• Mandatory third party insurance for the fleet of vehicles of the Company.

• Cargo insurance for air, marine, and inland transport.

• Insurance for the vessels of the Company.

• Additional insurance in accordance with the needs of the Company.

The insurance policies purchased by the Company normally exclude damages resulting from acts of terrorism or war.

Legal Proceedings

The Company is involved in various legal proceedings and is subject to various pending claims in the ordinary course of its

94

business, including those described below. As of June 30, 2014, ten petitions (one of which was submitted as an expansion of an existing claim) are pending against the Company for recognition of actions as class actions, two of which have been recognized as class actions. The sum of nine of the actions mentioned above amounts to a sum of NIS 25.2 billion (U.S.$7.3 billion) and another action has been assessed by the plaintiffs in the amount of several tens of millions of NIS. The Company has determined, in reliance on the opinion of its legal advisors with respect to these claims, that based on current information, such claims and proceedings will not materially affect the financial position of the Company. Based on the opinion of its legal counsel, the Company has not made any provision for these class actions, beyond a negligible amount that is attributed in its Annual Financial Statements, but to the extent that these petitions are accepted in part or in full, this may have a material adverse effect on the Company. For further information regarding legal proceedings pending against the Company, see Note 34.b to the Annual Financial Statements.

Class Actions

There are two pending claims that may constitute more than 10% of the value of the Company’s current assets:

July 8, 2009 – August 30, 2009 (Schleider et. al.)

On July 8, 2009, a request was filed with the Tel Aviv District Court to approve a claim as a class action against the Company claiming causes of misleading consumers and utilizing consumers distress according to the Consumer Protection Law - 1981, abusing the status of a monopoly according to the Anti-Trust Law, enrichment by force of the Unjust Enrichment Law – 1979, and deceit and negligent wrongs in the Damages Act (new version) - 1968. The claimant alleges that the Company collects illegal amounts from electricity consumers through electricity bills to cover excessive, illegal and invalid salaries (all alleged according to the claimant’s claim) of Company employees. The claimant claims that the accrued amount of the allegedly illegal salary payments, collected in contrast with the Government Companies Law, and the Budget Foundations Law, amounts to NIS 5 billion over the seven years preceding the filing date of the claim. The claimant also claims that the Company submits misleading data to the PUA.

In addition, on August 30, 2009, a request to approve a class action against the Company was filed with the Petach Tikva District Court for causes based on the Consumers Protection Law, the Trade Limitation Law, the Unjust Enrichment Law, the Damages Law and the Contracts Law. The claimants claim, that an error in the actuarial calculations of the pension to which Company employees are entitled led to the increase in the Company’s pension liabilities. The claimants also claim that the cost of the increased pension liability was allegedly passed on to consumers through setting higher than required electricity rates and alleged excessive payments for electricity consumption, estimated at approximately NIS 6 billion during the seven years preceding the filing date of the claim and during the proceedings of the claim. The claimants also claim that the Company was aware of the error, but refrained from correcting it and even presented erroneous data to the PUA.

On April 17, 2013, the District Court gave its decision approving the request to approve these petitions as a class action (hereinafter the “Decision of Approval”). The Company’s legal advisors are of the opinion that the Decision of Approval is erroneous and on May 13, 2013, the Company filed a request for leave to appeal the decision with the Supreme Court. At the same time, the Company filed a request for a stay of performance of the Decision of Approval. On June 9, 2013, the Supreme Court gave its decision, under which the Decision of Approval will be delayed until another decision is made.

On January 20, 2014, the Attorney General of the Government, after resolving that this matter may affect the public interest, submitted his position in the application for leave to appeal, within which the Attorney General of the Government supported the acceptance of the request for leave to appeal and cancellation of the Approval Decision. In accordance with the decision of the Supreme Court, the respondents (the applicants in the request for approval) submitted their response to the position of the Attorney General of the Government on March 26, 2014, and the Company submitted its response on May 15, 2014. The Supreme Court will decide the manner of continuation of the proceedings after the submission of the responses as stated.

The plaintiffs submitted an additional motion, in an amount of approximately NIS 2-3 billion, trying to expand their original application both in terms of the period to which their original application relates and in terms of the scope of the issues covered thereunder. On March 2, 2014, the court ruled that this matter will be stayed until the Supreme Court will render its judgment in the application for leave to appeal that was submitted by the Company with regard to the Approval Decision. For further information, see Note 9.c to the Interim Financial Statements.

95

REGULATION

The Company constitutes a large portion of the electricity sector in Israel. The Company currently acts as a monopoly in all sections of the sector (including electricity supply, electricity generation and the sale, transmission and distribution of electricity and provision of back-up services for electricity customers and manufacturers). The Company is therefore subject to extensive regulation and license requirements. The Government’s power to supervise and control the Company is derived primarily from (i) the Electricity Sector Law, (ii) the Government Companies Law, (iii) the Israeli Antitrust Law, and (iv) its power as owner of 99.846% of the shares of the Company. In addition, the Company is subject to all other laws of Israel. Descriptions in this Offering Circular of various Israeli laws, statutes, rules and regulations, including the Electricity Sector Law and the Government Companies Law, are partial and not exhaustive.

Electricity Sector Law

Tariffs

Since March 4, 1996, the Company has operated in accordance with the Electricity Sector Law, which replaced the Electricity Concession Ordinance. The Company operates as one combined and coordinated system to supply electricity to customers, from the stage of electricity generation at production sites, through its transmission and transformation, to distribution and supply to each consumer.

The Electricity Sector Law establishes the PUA, the members of which are nominated by the Government pursuant to the Ministers’ proposal. The Electricity Sector Law requires the PUA to set electricity prices or tariffs (the “tariffs” or “tariff”) for each segment of activity, taking into account the type and standard of services. and a fair rate of yield on capital considering the rights and obligations of the holder of an Essential Service Provider's license. The tariffs will be updated by an update formula set by the PUA. The update formula may take account of an improved efficiency coefficient that will be deducted from the update which the PUA, in consultation with the Ministers, decides to take into account, for the greater efficiency of the holder of an Essential Service Provider’s license. For the purpose of determining tariffs, the PUA reviews the costs of the holder of an Essential Service Provider’s license (the Company is an Essential Service Provider within the definition provided by the Electricity Sector Law) and, it may ignore some or all of the costs that, in the PUA’s opinion, are not necessary for the holder of the Essential Service Provider’s license to comply with his obligations.

In accordance with the Electricity Sector Law, the PUA sets separate tariffs for the various activity segments (generation, transmission and distribution), as well as tariffs paid by the Company for electricity produced by IPPs. The tariffs for all three segments of activity (generation, transmission and distribution) are based on formulas established by the PUA, which the PUA has periodically revised and which the PUA aggregates in order to determine the tariffs for all kinds of customers. The current electricity tariffs that the Company charges its consumers are NIS 0.5403 (pursuant to the PUA’s decision on May 6, 2013) for KW/hour for residential consumption and NIS 0.5561 (pursuant to the PUA’s decision on May 6, 2013) for KW/hour for general consumption (in either case, excluding of VAT).

The main provisions of the Electricity Sector Law on the subject of tariffs are as follows:

• The PUA determines tariffs on the basis of recognized cost, taking into account, among other things, the type and standard of services, and including a fair rate of return on equity.

• When setting tariffs, the PUA may ignore some or all of the costs that in its opinion are not necessary to enable the Company as an Essential Service Provider to fulfill its obligations.

• Every tariff will reflect the cost of the particular service price with no cross subsidizing, thus no reduction in one service price at the cost of raising another service price.

• The tariffs will be updated according to the formula set by the PUA, which may employ an efficiency factor, in consultation with the Ministers.

Annual Update

Each year, in April, the PUA is required to carry out an annual update of the various components of the costs recognized in the tariff base (the updates have been delayed in recent years). The PUA carried out the annual update for 2010 on March 14, 2011. This update resulted in a decrease in the average consumer rate by 0.34% on that date. The Company objected to several assumptions used by the PUA to determine the recognized fuels mixture for 2010.

According to the decision of the PUA on August 8, 2011, the PUA will update the fuels mix every month according to, among other factors, realization in the Company’s natural gas supply and actual demand curve. On that date, the PUA decided to update the recognized costs to the Company, and also to update costs of the Company arising from purchasing electricity from IPPs, retroactively from April 1, 2011. These updates increased the Average Tariff by 9.89% effective as of August 14, 2011.

The PUA’s decision on the 2011 update included the cancellation of the gas incentive on August 17, 2011, and later on September 14, 2011, the Company requested that the PUA update the fuels mix to include a gas incentive according to the gas

96

adjustment mechanism, which is defined in the new tariff base (which refers generally to the PUA’s system used for calculating all tariffs including the segment tariffs and the Average Tariff) for the generation segment published on February 15, 2010. In response to these and other requests, the PUA decided on November 14, 2011 to postpone the deposits made by the Company into the dedicated account (for Emergency Plan Phase B), with respect to November and December 2011. The suspension of the deposits will not affect the tariff, as these funds were already collected in the past from the Company’s customers. The updated tariff according to the PUA’s decision regarding the annual update for 2011 became effective as of August 14, 2011.

On October 24, 2011, the PUA decided to increase the tariff again, which resulted in an increase in the Average Tariff by 4.72%. Then, on March 22, 2012, the PUA adopted a resolution outlining the Gradual Tariff Increase, as a result of which the Average Tariff increases 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 to recover the liquidity shortfall the Company has faced due to the higher fuel costs over the last few years. The PUA indicated that it elected to adopt the Gradual Tariff Increase because it determined that reflecting the entire cost of these additional fuel costs in a single increase would have resulted in too large of an increase in the Average Tariff. On May 6, 2013, the PUA announced an increase of 5.5% in the Average Tariff. The PUA’s resolution from May 6, 2013 replaced the resolution from March 22, 2012 with respect to the 4.4% tariff increase in 2013. In its July 10, 2014 decision, the PUA announced that the tariff for consumers will remain unchanged in 2014 from its current level and noted that the third phase of the Gradual Tariff Increase will not be required since the remaining fuel costs will be recovered under the existing tariff. In addition, the PUA clarified that the tariff is expected to be reduced substantially in 2015 due to the completion of the collection of the remaining fuel costs. For further information, see Note 3.a.3 to the Interim Financial Statements.

Regular Update and Tariff Formula

The costs recognized to the Company in calculating the tariff are theoretically updated twice a month: on the first day of the month for changes in fuel prices and on the sixteenth day of the month for change in the Consumer Price Index, changes in the average monthly wage for employees in Israel and changes in the foreign exchange rate (the “Theoretical Update”). Differences between the actual update and the Theoretical Update are recorded as a regulatory asset or liability, included in the tariff, as of the annual update date, and collected on the following annual update date. For more information on the accounting treatment of such difference, see Note 3.a to the Annual Financial Statements.

The tariff base also includes efficiency coefficients for each sold KWh, which seeks to promote efficiency in the Company and to reflect economies of scale at cumulative annual rates that rise gradually. Since April 1, 2012, these efficiency coefficients have not been applied to the transmission and distribution segments.

The PUA publishes the recognized fuel basket for the Company for each year during the following year. Moreover, the recognized fuel basket is retroactively updated in the annual update of the subsequent year according to the actual demand, the updated operation dates of generation units, and other unexpected events that occurred during that year. Since the tariff is not updated with each Theoretical Update, a gap is created between the update of the tariff and the Theoretical Update. As a result, the Company records an asset/liability in its books, with respect to the difference between the actual fuel components charged and the theoretical fuels basket, that will be recognized retroactively and for compensation with respect to the delay in updating the fuel components in the tariff base, based on valid decisions of the PUA and on estimates of the Company regarding future decisions of the PUA.

Temporary Tariff for the Management Administration

In May 2013, the PUA set a temporary tariff, commencing on June 1, 2013, for costs associated with the management of the electricity system. These costs will be reduced from the recognized costs in the generation, transmission and distribution segments and will be monitored through a separate tariff component. The temporary annual recognized cost for the system management was approximately NIS 240 million for 2013. This tariff component is temporary and is subject to change when the tariffs for the transmission and distribution segments are updated and any such changes will be made retroactively.

On August 10, 2014, the PUA published a resolution for a public hearing on a system operation services (ISO) tariff. The ISO tariff will include five components: balancing and ancillary services costs, back-up services (i.e., services designed to ensure economic equilibrium and minimize failure of power supply), overall system costs (i.e., costs derived from regulatory constraints), services provided for power on a unit basis, and administrative/internal costs. The PUA determined that the ISO tariff will be applied retroactively as of June 1, 2013.

Tariff for Back-up Services

In May 2013, the PUA announced its intent to recognize in the tariff, in the following months, the costs associated with back-up and other ancillary services that the Company provides to IPPs. This recognition became effective on June 1, 2013.

Regulatory Assets and Liabilities

According to the decision of the PUA dated March 7, 2011, approximately NIS 2 billion out of the long-term regulatory liability, with respect to 2009, will be repaid to customers through a deduction in the tariff base, spread out through the end of 2017 (pursuant to the PUA’s decision of May 6, 2013). Until its repayment to the customers, this amount will be used by the Company as a loan to

97

finance part of Emergency Plan Phase B. This repayment will be deducted from the recognized cost. As a result, the Company has a long-term regulatory liability, the balance of which was NIS 2,110 million and NIS 1,758 million, respectively, as of December 31, 2012 and December 31, 2013. According to this decision, the balance of the amount exceeding NIS 2 billion, will be included in the compensation component, with respect to the delay in the update for 2009, and will be part of the fuel costs recognized retroactively from April 1, 2010. As of December 31, 2012 and December 31, 2013, the balance of the regulatory asset with respect to consecutive non-updates of the fuel component was NIS 7,577 million and NIS 3,335 million, respectively. This balance includes income receivable, with respect to profits from fuels, which will be recognized in the tariff base in the future. In May 2013, the PUA resolved to shorten the 15-year period to a period of seven years, which is expected to increase the amount of debt to be repaid by the Company to its customers by NIS 300 million, in each of the years 2013 to 2017.

Tariff for the Transmission, Distribution and Generation Segments

Effective as of February 15, 2010, the PUA set a new tariff base for the generation segment for the years 2010 to 2014 and updated the tariffs structure book (the “Tariff Document”). The Tariff Document provides that the tariff base for the generation segment was determined while balancing between the need of the Company to establish and operate its generation capacity in the upcoming years while maintaining its financial strength, and the right of the electricity consumers to a decrease in tariffs due to a reduction in fuel costs as a result of the increased use of natural gas on the other hand.

The update of the tariff base for the generation segment included updates to the capital costs, operating costs, fuel mixture and other costs. The recognized costs were determined after the PUA conducted a costs control of Company costs and capital costs, as recorded in its records over the years.

The Company’s analysis of the February 2010 generation tariff base indicated that it would not cover all of the Company’s costs associated with generation activities for the period between 2010 and 2014.

The current tariff base for the transmission and distribution segments was determined in 2002 and was based on data from 2000 (although as part of the PUA’s resolutions of March 22, 2012 and March 6, 2013 for an increase in the Average Tariff, there was an increase in the recognized costs for the transmission and distribution tariffs made through an advanced payment). During the tariff period, the Company’s income increases according to the sales increases less the reduction in efficiency coefficients. Since April 1, 2012, efficiency coefficients have not been applied to these segments. As of the date hereof, the new tariff base for the transmission and distribution segments has not been published. The Company expects that the new tariff base for the transmission and distribution segments will be updated by the PUA and published in the near future. For further information relating to the tariffs, including details of fuel purchases and consumption as they affect the tariffs, see Note 3.b and 3.c to the Annual Financial Statements.

Licenses

General

Since March 4, 1996, following the termination of the Concessions, the electricity sector has been regulated under the Electricity Sector Law. The purpose of the Electricity Sector Law is to regulate the activity of the electricity sector for the benefit of the public, while ensuring reliability, availability, quality and efficiency, facilitating competition and reducing costs. The Electricity Sector Law provides that each activity in the electricity sector is to be governed by licenses granted by the PUA, the validity thereof subject to the approval of the Minister. The types of licenses that may be granted under the Electricity Sector Law include: (i) a generation license, (ii) a transmission license, (iii) a supply license, (iv) a distribution license, (v) a trade license, and (vi) a system operations license. In addition, the Electricity Sector Law provides that a license for transmission, distribution or system operation, as well as one or more generation licenses for a material portion of the electricity generating capacity of Israel, will be referred to as an “Essential Service Provider License.”

Under the Electricity Sector Law, the Minister has overall responsibility for the electricity sector, including the supervision of the Company. The PUA is responsible for granting licenses, supervising the holders of such licenses, setting the tariffs and determining the standards of service which are required from a holder of an Essential Service Provider License. Pursuant to the Electricity Sector Law and the terms of licenses granted thereunder, such licenses may, in certain circumstances, be terminated or amended (even on a retroactive basis) before their expiration.

Pursuant to the Electricity Sector Law, a holder of an Essential Service Provider License is required, among other things, to provide service to the general public without discrimination (according to criteria set by the PUA), purchase electricity from IPPs, provide infrastructure and certain back-up services, and act to ensure provision of all its services throughout the license period, including services pursuant to a development plan approved pursuant to the Electricity Sector Law. Furthermore, the Minister has the authority, in consultation with the PUA, to require a holder of an Essential Service Provider License to submit development plans relating to the operation of such license to the Minister for approval. If the holder fails to submit such development plans for approval, the Minister may, in consultation with the PUA, impose a development plan which the license holder would be obligated to implement.

The Electricity Sector Law further provides that a holder of an Essential Service Provider License will collect payments pursuant to the tariffs set by the PUA. Further, a holder of an Essential Service Provider License will make payments to another license holder

98

or a customer, pursuant to the tariffs. The term “Tariffs” (following Amendment No. 9) refers to (i) payments made by a customer, an IPP or a holder of a self-production license, to a holder of an Essential Service Provider License (including payments for infrastructure and back-up services) , (ii) payments made by a holder of an Essential Service Provider License to another license holder (excluding payments set in a tender issued by the Government) and, (iii) payments made by a holder of an Essential Service Provider License to a customer, for electricity generated by such customer or for arrangements for the management of the demand of electricity. The Electricity Sector Law provides that unless approved by the Minister, a license or any part thereof may not be transferred, pledged or confiscated, directly or indirectly.

The Company’s Current Licenses

The Company has been granted, pursuant to the Electricity Sector Law, a general License for the transmission, distribution, supply, trade and sale of electricity (which also covers the Company’s system operation activity, which was added to the Electricity Sector Law in 2007). In addition, the Company was granted generation Licenses for each generation unit it operates. The Company is also deemed to be a holder of an Essential Service Provider License because (i) it holds a License which includes distribution and transmission, and (ii) it holds generation Licenses that were determined by the Minister to concentrate a material portion of the electricity generation.

As of the date hereof, the Licenses of the Company have been extended until January 1, 2015. By virtue of Amendment 12 to the Electricity Sector Law in accordance with section 60 (d11) to the Electricity Sector law, a further extension of the Licenses until January 1, 2016 will require an order to be issued by the Ministers after consultation with the PUA and the GCA and with the approval of the Economic Affairs Committee of the Knesset, if the Ministers believe that such an extension is necessary for the promotion of the goals of the Electricity Sector Law. This authority of the ministers to extend the Licenses by order is limited to one period only, which will not exceed one year, and is therefore in accordance with the Electricity Sector Law in its present version. An additional extension of the Licenses of the Company to a date later than January 1, 2016 will require a legislative amendment.

The Company believes that the above mentioned extension by the Amendment of the Electricity Sector Law and by the Ministers applies to all of its Licenses; however, the PUA has stated that the extension does not apply to 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 Company’s development plans that were approved by the PUA on January 1, 2009. The PUA's position is that it was given the authority to extend these new generation licenses. In view of this position, and for the sake of caution, the Company has applied to the PUA and requested an extension for these new generation licenses. On February 12, 2014, the Minister approved the decision of the PUA of January 23, 2014, within which the validity of these new generation licenses was extended until January 1, 2015.

There is no certainty that the Licenses will be extended or that no changes will be made to the term of the Licenses; however, based on past experience, the Company expects that the Licenses will continue to be extended in the future. In addition, in light of the uncertainty regarding the implementation of the Structural Change, the Company cannot be certain of the length or timing of any future extensions, whether there will be any changes in the terms and conditions of its Licenses or whether they will be extended at all. The Company believes that following the implementation of the Structural Change, the Company will be issued new licenses in conformity with the Sector Reform, but there is uncertainty as to the terms and conditions of such licenses and there is no assurance that the Company will be issued any licenses at all.

The Electricity Sector Law states that an Essential Service Provider License holder will prepare financial statements as the Ministers prescribe after consultation with the Minister of Justice, with respect to the contents of such financial statements, the accounting principles to be used, and the declarations and notes for such financial statements. In accordance with the regulations, conditions and procedures for the granting of a license, an Essential Service Provider is required to submit financial statements separately for each area, activity, and profit center, and to submit consolidated financial statements with respect to its activities in accordance with all of the licenses that are in its possession. A “profit center,” for these purposes, is defined as, “a unit that has a closed income and expense structure, 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 requirement regarding the preparation of financial statements is also included in the general license of the Company and in most of its generation licenses. These Licenses also state that any operations of the Company will be carried out as a separate profit center, and certain activity may be conducted in more than one profit center. The Licenses further state that the profit centers will be determined by order of the Minister, the PUA or the Electricity Administration Manager, in accordance with the relevant requirements of each License, including any requirements set forth in an appendix to the License. However, the appendix with respect to the profit centers has not been attached to the Company’s generation license.

The Company manages its activities as separate profit centers as required under its Licenses. However, the Company does not submit audited financial statements for profit centers, as required for most of its Licenses, including the new generation licenses, and does not submit audited annual financial statements separately for each area, activity, generation unit or power station. The Company instead submits the audited financial statements for the operations of the Company in its entirety. The Company, under applicable regulations, is exposed to a risk that proceedings may be initiated against it or that its licenses will be revoked due to its failure to comply with this requirement. To the best of the Company’s knowledge, the PUA and the Ministry of Energy and Water are aware of

99

the Company’s abstention from such requirements. As of the date hereof, no sanctions have been imposed on the Company for such abstention. The Electricity Sector Law imposes criminal sanctions (including imprisonment), as well as monetary fines and administrative sanctions, for violations of the Electricity Sector Law or the licenses issued thereunder.

The Yogev Letter addressed the issue of separate profit centers by stating that: “the various sectors of the Company’s operations will be managed as separate and audited profit centers.” Therefore, the Company believes that its obligation to prepare audited financial statements for its profit centers should be resolved as part of the overall Structural Change.

Structural Change

The purpose of the Electricity Sector Law is to regulate the activity in the electricity sector for the benefit of the public, while ensuring reliability, availability, quality and efficiency, while facilitating competition and reducing costs.

In recent years, several amendments to the Electricity Sector Law have established an outline for the decentralization of the generation, transmission, distribution and system management activities by separating such activities among several entities. The amendments to the Electricity Sector Law also provide transitional provisions and a timeline for the implementation of these provisions that allow the Company to generate, transmit, distribute, sell and trade in electricity, as well as serving as system manager, in accordance with the Company’s Licenses. The Licenses have recently been extended until January 1, 2015.

The Electricity Sector Law sets certain conditions and restrictions for granting licenses for activities in the electricity sector. The main conditions and restrictions are as follows:

• The Electricity Sector Law determines that no person will engage in the 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, other than pursuant to a license that has been granted to it for this purpose in accordance with the Electricity Sector Law by the PUA, which will take effect after the approval of the Minister.

• In general, a license will not be granted to any person for more than one activity, provided however that (i) it is possible to grant a generation license together with a supply license to one person, with due attention to, among other things, the development of competition in the electricity sector, and (ii) 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 management of the system or will be a holder of means of control in a holder of such a license, and will also be a holder of a license for the generation, distribution or supply of electricity, or if it would hold means of control in the holder of such a license. However, a holder of a license for the management of the system or its subsidiary, if so determined in the license and if crucial for the reliability of the supply of electricity, may also be granted licenses for generation, so long as these licenses are not 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 generation capacity.

• No generation license or distribution license will be issued to a person holding means of control of a transmission license holder.

• No transmission license will be issued to a holder of means of control of a generation license holder or a distribution license holder.

• No generation license will be issued if one of the following conditions is satisfied: (i) the license applicant holds means of control of a holder of a distribution license that holds 10% or more of the distribution volume in the electricity sector, (ii) the license applicant holds means of control of a distribution license holder, and after receipt of the requested license will hold 10% or more of the volume of the generation capacity in the electricity sector, (iii) a person will hold after the receipt of the requested license 30% or more of the generation capacity in the electricity sector, or (iv) the license applicant is a holder of a transmission license.

• No distribution license will be issued if one of the following conditions is satisfied: (i) 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, (ii) the license applicant holds means of control of a generation license holder, and after receipt of the requested license will hold 10% or more of the volume of the distribution in the electricity sector, or (iii) a person 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 PUA and the GCA, are entitled to establish percentages that differ from those with respect to the last two bullets above if they find it to be crucial for the promotion of the purposes of the Electricity Sector Law, and they are also authorized to set additional restrictions on the granting of licenses.

The Electricity Sector Law sets certain transitional provisions and milestones for the implementation of the Structural Change, including the following:

• The Company’s Licenses that were granted to it pursuant to the Electricity Sector Law, and that were in effect prior to the

100

expiration of the transition period as defined in the Electricity Sector Law (i.e., ten years from the enactment of the Electricity Sector Law - March 4, 2006) will continue to be in effect until the date set forth in the Electricity Sector Law as extended from time to time (which currently is January 1, 2015). A further extension of the Licenses through January 1, 2016, will require an order to be issued by the Ministers after consultation with the PUA and the GCA, and the approval of the Economic Affairs Committee of the Knesset, if the Ministers believe that such an extension is necessary for the promotion of the goals established by the Electricity Sector Law. The Minister’s authority to extend the Licenses by order is limited to only one period which will not exceed one year and therefore, as presently drafted, the Electricity Sector Law will require a legislative amendment in order to extend the Licenses beyond January 1, 2016.

• Notwithstanding the restrictions of the Electricity Sector Law, the PUA is authorized, upon approval from the Minister, to grant substitute licenses for the Company’s Licenses that were in effect prior to the expiration of the transition period, if the substitute licenses that do not comply with the Electricity Sector Law will be valid until the date set by the Electricity Sector Law (currently January 1, 2015). Additional extensions beyond January 1, 2015, will require an order to be issued by the Ministers, as stated above, and an additional extension beyond January 1, 2016, will require amendments to the legislation. To the extent that such a substitute license is granted, the substituted licenses will apply only to an activity for which a substitute license was not granted. To the best of the Company’s knowledge, to date, no substitute licenses have been granted.

• The PUA is authorized, upon approval of the Minister, to grant New Generation Licenses, even if certain conditions under the Electricity Sector Law for the granting of a generation license are not met, for power stations included in the development plans approved by the Minister, in consultation with the PUA, prior to January 1, 2009. The new generation licenses can be granted for the same periods for which the licenses that existed prior to the expiration of the transition period were granted. Additional extensions beyond January 1, 2015, will require an order to be issued by the Ministers as stated above, and an additional extension beyond January 1, 2016, will require amendments to the legislation.

• The PUA may, with the Minister’s approval, grant a Government Company or a subsidiary of a Government Company generation or distribution licenses for an electricity system that was operated pursuant to the Company’s Licenses that were in effect prior to the expiration of the transition period and pursuant to the new generation licenses, even without satisfying certain conditions of the cross ownership limitations set forth above, if the following conditions are met: (i) generation licenses will 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 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 station, (ii) distribution licenses will 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 PUA and the GCA, to determine otherwise, should they find this to be crucial for the advancement of the purposes of the Electricity Sector Law, (iii) after the receipt of the license, the license holder will 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 sector; and (iv) the validity of the license will be contingent upon the requirement that from July 1, 2013 no Government Company or subsidiary of a Government Company will 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 clause of the Electricity Sector Law.

• The Ministers will determine by January 1, 2015, after consultation with the PUA and the GCA, whether a Government Company or a subsidiary of a Government Company that holds means of control in a generation or distribution license holder will also be able to hold means of control in a transmission license holder. Additional extensions beyond January 1, 2015, will require an order to be issued by the Ministers, as stated above, and an additional extension beyond January 1, 2016, will require amendments to the legislation. To the best of the Company’s knowledge, to date, no such determination has been made.

• Notwithstanding the provisions described above, a supply license may be given to a Government Company or to a subsidiary of a Government Company that is a holder of a distribution license by law, until the time that has been set forth in the Electricity Sector Law (as of January 1, 2015). Additional extensions beyond January 1, 2015, will require an order to be issued by the Ministers, as stated above, and an additional extension beyond January 1, 2016, will require amendments to the legislation. In addition, a supply license may be given to a company that is a holder of a distribution license, even if it is not a Government Company or a subsidiary of a Government Company, until the date set forth in the law (as of the date hereof, July 1, 2013), but that time may be extended by an order, by the Ministers, after consultation with the PUA, if they find this to be crucial for the advancement of the goals of the Electricity Sector Law for a period that will not exceed six (6) months only.

• Pursuant to the Electricity Sector Law a Government Company or a subsidiary of a Government Company, which holds means of control in a holder of a license pursuant to the transitional provisions in the Electricity Sector Law, will not

101

engage in the field of engineering or 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 subsidiary of a Government Company that holds a license pursuant to the transitional provisions in the Electricity Sector Law, will not engage in such activities for another corporation that is a holder of a license pursuant to the Electricity Sector Law.

During the years following the enactment of the Electricity Sector Law, the Government adopted several resolutions with respect to the Sector Reform and the Structural Change. Some of these resolutions were subsequently enacted as amendments to the Electricity Sector Law and others have not been adopted or otherwise implemented. For further information with respect to these and other Government resolutions and decisions, see Note 1.e to the Annual Financial Statements.

The Company believes that these provisions of the Electricity Sector Law enable a gradual process through which the Company will be restructured as a holding company that will operate several majority-owned generation subsidiaries, several majority-owned distribution subsidiaries and one transmission subsidiary, in the following manner:

• Several 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 these generation companies would have power stations that would operate based on a mix of fuels of various types, including: diesel oil, natural gas and coal (subject to an exception with respect to generation using coal);

• At least four subsidiaries holding a distribution license, each of which would hold licenses for 25% of the distribution level in the Electricity Sector, at the most, and the costs with respect to the electricity facilities used by each of the companies being as similar as possible;

• A company with a transmission license, unless the Ministers determine by January 1, 2015 that a Government Company or a subsidiary of a Government Company 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;

• 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);

• The system management activity would be carried out within a separate corporation in which the Company would have no holdings;

• 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); and

• The holding structure that has been described above is subject to the approval of the Minister.

However, it is possible that one or more of these generation, transmission or distribution companies will be entirely separated from the group. The provisions of the Electricity Sector Law are complex and the Company believes that it can be interpreted in various ways. Although the Government viewed, in its decision dated September 12, 2006, the implementation of the Structural Change in a manner that is similar to the Company’s view, there is no certainty that the Electricity Sector Law will be implemented in accordance with this resolution. As a result, there is a considerable uncertainty regarding the implementation of the Electricity Sector Law and the Structural Change.

In a February 2007 letter to the Chairman of the Board of Directors, with respect to the enactment of Amendment No. 5, the General Manager of the GCA (as defined above under “— Licenses”) clarified that in the implementation of Structural Change pursuant to the Electricity Sector Law, including Amendment No. 5, consideration will be given to, among other things, the implications of the Structural Change on the Company’s liabilities, with, among other things, the intent that the repayment of loans that the Company took will not be prevented. In addition, the Company believes that the Structural Change cannot be implemented in accordance with the Electricity Sector Law without addressing issues concerning the Company’s creditors, to the extent the rights of such creditors would be affected by the implementation of the Structural Change, subject to any applicable laws. As of the date hereof, the Company and the State of Israel did not resolve the issues around these matters. For more information relating to the understandings regarding the Structural Change, see Note 1.e to the Annual Financial Statements.

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.

The Yogev Team

On July 22, 2013, the Ministers appointed a steering team headed by Ori Yogev (currently the head of the GCA) to formulate by December 31, 2013 recommendations with respect to the Sector Reform and the Structural Change in the Company (the “Yogev

102

Team”). The Company has no representative on the Yogev Team and is not privy to all of the Yogev Team’s negotiations or discussions.

The Yogev Team’s appointment letter states as follows: “Since 1996, with the enactment of the Electricity Sector Law, the electricity sector in the State of Israel operates under a regime of licenses to all the activities within the sector. The [Company] has a license to transmit, distribute, supply, sell and trade electricity, as well as licenses to generate electricity. The [Company]’s licenses were extended from time to time and they are about to expire by the end of this year. In accordance with the Electricity Sector Law, as currently drafted, it is not possible to grant the [Company] new licenses under its current structure. The licenses are obviously required for the continuity of the activity and the provision of essential services in the electricity sector. The economic and financial condition of the [Company] today also requires a reform and a significant change for the continuity of the company activities and the provision of essential services.”

The Yogev Team tasks are to:





In March 2014, the Yogev Team's draft recommendations were published for public comment (the “Yogev Draft Report”). For additional information on the Yogev Team, see Notes 1.e and 9.b.6 to the Interim Financial Statements.

The summary and conclusions chapter of the Yogev Draft Report states as follows:

1. System Management

A. A separate government company will be established, to which the System Management Unit, the Design, Development and Technology Branch and the Statistics and Market Research Department of the Company will be transferred (the “System Management Company”).

B. The System Management Company will handle all subjects related to designing the development and system management of the production sections and the delivery, including the management and optimization of the electricity sector, including the loads for the power plants, operating the electricity marketing mechanisms, management of the electrical grid system and the physical design. In addition, the System Management Company will conduct research and development activities with an emphasis on evaluating the technologies that may join the grid.

C. Assets – The System Management Company will receive all the relevant assets for designing and operating the production and delivery system from the Company.

1. The Dania site will be transferred from the Company to the system administration by the end of 2014, and will be used as the main site for the electrical system management.

2. The Ramat Hasharon site will remain under the ownership of the Company, but all the information that passes through this site that will be available to the Company will be publicly available for all the private electricity producers. The site will be used by the System Management Company for two purposes:

a. As a backup site to be used by the System Management Company in emergencies, when the Dania site cannot be operated or when two available sites are needed simultaneously. In addition, the site will also continue to act in supervising electricity flow in the event of emergencies.

b. As the operating site where all the supervisory activities of the license holder for delivery are conducted. System Management Company representatives will be constantly present at the site and will give instructions to the delivery license holder.

3. All assets, including special programs, computer equipment and other equipment needed for managing the electricity system will be transferred to the System Management Company by the end of 2014.

4. The System Management Company will not maintain production means.

D. Human Resources and Organization

1. The System Management Company will employ between 150 to 200 employees.

2. At the establishment stage, most of the personnel will be based on Company's employees from the System Management unit, the Design, Development and Technologies branch and the Statistics and Market Research unit.

103

The goal is to transfer the units of the electricity chain completely, except for employees or sub-units that are not responsible for system topics.

3. The establishment of the System Management Company, including appointment of the Board members, selecting a Chief Executive Officer and appointing senior employees will commence during 2014 on an immediate basis.

4. The target date for the onboarding of all authorities and full operation of the System Management Company is January 1, 2015.

5. Based on assessed need, the period until October 30, 2014 will be defined as a transition period for the purpose of completing the activities needed for the full operation of the separate company. This transition period will begin on the date of the company’s commencement of operations on January 1, 2015 and continue until full operation is achieved.

6. A dedicated team will be established (including representatives from the Ministry of Finance, the Ministry of Energy, the PUA and the System Management Company) to evaluate all subjects related to the System Management Company’s financial strength, including capital structure, composition of liabilities, cash flow in the electricity chain, exposure to manufacturers through suppliers and administering the electricity system. As necessary, the team will be supported by financial consultants and accountants.

2. Electricity Marketing Model

A. The Yogev Team recommends a gradual transfer to an electricity marketing model based on the pool method as follows:

1. Energy: All of the plants in the market compete for the offer to sell energy (determined by relation to the marginal cost of each plant). The clearing price will be used for the payment for energy – the price at the meeting point between demand and supply, paid uniformly to all the manufacturers.

2. Availability: Unless noted otherwise, all the plants receive identical availability payments for each available energy unit they place at the disposal of the system administration.

B. Combining the IPPs under the existing regulations: IPPs for which regulation has been approved will continue to operate in the framework of the specific regulation for each respective manufacturer. In the future, the combining of IPPs will be incentivized to the extent the pool mechanism allows.

C. The Company's Power Stations: in principle, the power stations will operate under special arrangements pursuant to which each power station will receive the entire un-depreciated capital cost (each station in accordance to its cost and age) within the framework of the available payment, and energy costs in the exact amount of the variable costs (pass through). One Model F combined cycle plant (out of 11) will be incorporated in a separate company and will participate in the pool mechanism according to its rules. The extent of the Company’s power plant that can take part in the competition will be evaluated from time to time according to the sector structure and level of competition.

D. Private plants presently in the establishment process that will reach financial closure by 2019 will be gradually combined into the pool forward transition model, and in the supervised pool model after the transition period, until the gradual establishment of the accepted pool sector, according to the sector’s development.

E. IPPs reaching financial closure from January 1, 2019 onward will be entered into the pool model according to the model’s requirements.

F. Cogeneration plants will operate according to current regulations, as amended from time to time.

G. Until full operation of the pool is reached, electricity manufacturers will be able to sign on bilateral transactions as a substitute for availability payments, but only for the duration of the transition period. After the transition to the supervised pool model is completed, the question of continuing bilateral sales will be reviewed, subject to market conditions.

3. Trade in Natural Gas

A. Trade in surplus natural gas between all the natural gas users in the market including electricity manufacturers and industry and gas marketers will be permitted. This trade needs to be open to the supplier of natural gas, if it seeks to sell gas in a spontaneous manner. It is important that the trade in natural gas be efficiently and objectively managed in the marketplace, so that the market can balance the surpluses and deficits in the fastest and best manner possible. It is also important that competitive interests not disrupt the trade in natural gas, such that the trade needs to operate within the framework of an independent clearing house.

B. Duplicative distribution lines will be expedited to prevent a deficit in natural gas.

C. A linepack will be added and will improve the ability of the distribution grid to support the volatile demand levels of consumers throughout the day.

104

D. A team from the Ministry of Finance and the Ministry of National Infrastructures, Energy and Water will evaluate in 2016 the development progress of the Leviathan reservoir. To the extent that it seems the Leviathan reservoir will not be connected to the natural gas grid until 2018, the team will give guidance regarding the fair distribution of natural gas among all the license-holding electricity manufacturers.

E. The evaluation of options for storing gas in Sodom, the Yam Tethys reservoir and at any other existing sites will be continued.

4. Production

Selling plants to IPPs – The following Company plants will be sold:

1. The Ramat Hovav site with a capacity of 1,140 MW will be sold by the end of 2014.

2. The land and everything related to the fourth combined cycle in the emergency plan at Alon Tavor will be sold in its entirety to the State of Israel, or directly to private entities if the State of Israel so decides, before the end of 2014.

3. The existing plants at the Eshkol C and Eshkol D site (in Ashdod) with a capacity of 912 MW, including the related land, will be sold to private entities in parallel transactions, pursuant to the decision to establish and obtain all the necessary permits for the establishment of Power Plant Project D, which will be wholly owned by the Company.

The sale process will be managed by a team comprised of personnel from the GCA and the General Comptroller. The Company will provide all necessary support to implement this process.

A. Incorporation – The following Company plants will be incorporated:

1. Commencing on January 1, 2015, all of the sites in which there are Model F Combined Cycle power plants, will become one subsidiary wholly-owned by the Company (the “Subsidiary”). All of the plants at these sites, as well as the related obligations of the Company with respect to the plants, will be transferred to the Subsidiary’s ownership through a process managed by a team made up of personnel from the GCA, the General Comptroller and the Company.

2. Commencing on January 1, 2015, the power plants at the Reading D site will be incorporated into the Subsidiary. The Company will build two combined cycle generation plants at the site, according to market needs.

B. Scrapping – The following Company plants will be dismantled:

1. The Reading site with a capacity of 428 MW will be scrapped by 2021.

2. The Haifa C site with a capacity of 282 MW will be scrapped by the end of 2018.

3. The Eshkol plant with a capacity of 912 MW will be scrapped by 2018.

C. Future Development – The Company will begin the establishment of a nuclear power plant under its ownership in 2025, according to market needs.

D. Other than the above, no establishment, replacement or upgrade of power plants will be undertaken by the Company during the agreement period. All the steps described above will achieve the Yogev Team’s objective, such that at the end of the period, private production will constitute no less than 42% of the State of Israel’s electricity production.

E. Every sale or transfer of assets to the Subsidiary will be conducted subject to all laws and pursuant to the limitations included in the agreements with respect to the reduction of the Company’s debt.

F. Topics for re-evaluation – a special team will be established, including the Chief Executive Officer of the Ministry of National Infrastructures, Energy and Water, the Finance and Environmental Protection Ministries, the Company and the System Management Company, to evaluate the following topics:

1. Conversion of units 1-4 at the Orot Rabin site - necessity and financial feasibility.

2. Installing scrubbers in units 1-4 at the Orot Rabin site - necessity and financial feasibility.

3. Completion of the scrubber project at the Ruttenberg site - timing.

4. Plant D - operating regimen regarding types of fuel.

5. The evaluation and submission of conclusions regarding the application of renewable energy projects and the submission of recommendations regarding the policy of issuing additional licenses.

Until the Yogev Team reaches its conclusions, efforts to advance and complete the conversion of units 1-4 at the Orot Rabin site and the scrubber project at the Ruttenberg site will be postponed.

105

5. The Transmission Segment

A. To allow the activities of private entities as sub-transmitters to account for up to 10% of the transmission grid consumption.

B. The sub-transmitters will provide electricity to the non-residential sector that is characterized by:

1. Existing historical transmitters or those who have the ability to choose whether to join or waive their historical transmission.

2. Sites that provide services in a concentrated manner (i.e., maintenance, cleaning, security, communication, etc.). These sites may include office buildings, shopping malls, shopping centers, industrial buildings, industrial parks (with central management), industrial areas, airfields, hospitals, universities, student dormitories, etc.

3. Settlements in the framework of cooperatives, where decisions are made through the voting of the residents and the distribution system is operated by the cooperative.

C. Sub-transmitter activities will be permitted according to law and will be subject to, among other things, a definition of permitted operations, safety requirements, periodic inspections, requirements regarding the distribution license holder and additional topics as needed.

D. The Company will continue to be the license holder as an essential service provider, and will sell the service at a supervised price.

6. The Distribution Segment

A. The distribution segment will be opened to competition according to rules to be determined by January 1, 2015.

B. The Company will continue to be the supply license holder and will sell the service at a supervised price.

C. Present and future IPPs that meet the threshold conditions to be determined will also hold supply licenses and will be allowed to supply the electricity manufactured by them or by others to consumers who own smart meters. Manufacturers of electricity by renewable energy methods are not included in this provision.

D. Market share of all the private suppliers will not exceed the market share of all the IPPs in the market.

E. The activities of those companies operating in the field of demand response will be promoted, with the aim of encouraging their activities and guaranteeing the financial optimization of electricity utilization in the market. To the extent deemed necessary, these companies will also hold licenses to supply electricity.

F. Sub-distributors will also hold supplier licenses.

G. Supply license holders will have free access to the information issued by the analog electricity meters and the smart metering of their customers. The information will be retained by the System Manager and its transfer is subject to the agreement of the customers.

7. Smart Metering

A. The Yogev Team recommends advancing the deployment of smart metering in the State of Israel, in scope and on a schedule to be determined by the results of a cost-benefit analysis.

B. The network will be built with an open architecture and will allow open access to users, service providers and others, according to authorizations by customers, who own the information.

C. Establishment of the project will be executed by the Company, which will be assisted by subcontractors for the purpose of installing and maintaining the smart meters.

D. All the information will be transferred to the System Management Company and all other necessary individuals as decided by State entities and will be distributed according to the limitations of the law.

E. The schedule and scope of the project will be determined in the development plans by the Minister of National Infrastructures, Energy and Water, scheduled to be approved by law by October 30, 2014.

8. Assets

A. Arrangements with respect to the implementation of the Assets Arrangements will be determined by October 30, 2014, in accordance with the principles specified in the Yogev Draft Report.

B. Assets used by the Company in the electricity chain will continue to maintain the ownership or leasing arrangements in effect to date.

C. Assets required by the Company for future development of its sectors of operation – a team comprised of personnel from the Company, the Ministry of Natural Infrastructures, Energy and Water, the Ministry of Finance and the GCA will examine and determine the assets meeting this description by October 30, 2014. These assets will be leased from

106

the State of Israel to the Company for a period of 49 years, without consideration, or arrangements such as those presently practiced will be determined, at the team’s discretion.

D. The assets that are not useful to the Company and are not needed to develop the electricity chain will be sold by the Company to the State of Israel.

E. The rights, properties and assets specified will be transferred by the Company to the State of Israel when they are free of hazards, ground contamination, etc., without consideration.

F. The Company is obligated to refrain from claiming ownership rights with respect to properties and other assets that are not included in a list of specified rights and assets. The State will be allowed to receive these assets for no consideration on the date the Company notifies the State of Israel of them.

9. Structural Changes

A. The Company will undergo a significant process of efficiency planning and organizational change based on principles established by the Company’s management. In the framework of this process, organizational changes that will take place include the reduction and optimization of the district structure, a transition to regional power plants and regional maintenance, the reorganization of the administration and services divisions and a significant reduction in permanent human resource employment, as well as the reduction in the control and management roles, among others.

B. The Company will operate in the transmission and distribution segments, as well as in the management branches, via audited profit centers that will permit full transparency and attribution of costs. The Company’s operation of such segments will be based on a model agreed upon among the Company, the Ministry of Finance, the PUA and the Natural Infrastructures, Energy and Water Ministry by October 30, 2014.

10. Reorganizing and Managerial Flexibility

A. The Company will execute a comprehensive reorganization plan for reducing the Company’s employee ranks and this plan will determine the organization of the Company’s employees for a period of ten years.

B. Reinforcing the management capability of the Company’s management – Changes need to be made in employment agreements to allow for the necessary flexibility in the Company’s activities as a commercial company and to reduce the current limitations in the existing collective agreements, in the following areas, among others: temporary employees in various segments (including project-based employees); the establishment of a new disciplinary mechanism; the establishment of a mechanism for termination in the case of incompatibility; management authority in tender committees for bids on management positions; employee mobility; employee advancement; work attendance; and utilization of the working day.

C. Personal Contracts – All managers at the Company, from the level of Deputy Head of Branch and higher will be employed through personal contracts. In addition, efforts will be made to expand employment through personal contracts in core expert positions, in which there are gaps in knowledge or in salary with regard to the labor market (e.g., high voltage, construction, information and communications systems, smart grid, renewable energies, etc.). The Yogev Team recommends that the quota of workers employed through personal contracts should not fall below 3% of the number of tenured employees.

D. Salary Structure – The Company must act to change the salary structure so that it is better suited to the demands of the competitive modern labor market. On this issue, the Yogev Team recommends that intake mechanisms for skilled workers in needed positions be determined and based on these needs and that the Company make efforts towards cancelling the open salary ladder. Also, the institution of more gradual advancement mechanisms, in contrast to those currently in practice, will help significantly reduce the costs of employing workers at the Company.

E. Free Electricity – Payment for the electricity component to the Company’s employees will cease and the conversion to a salary component equal to the average market consumption will be evaluated.

F. Trust Account – The Company will transfer an additional NIS 1 billion from the trust account for non-budgeted components to the central cashier by January 1, 2015. The Company will finance this transfer with the balance of sums in the trust account to pay the non-budgeted components in a regular manner.

G. Relevant State factors are evaluating the issue of capitalized interest for the actuarial liabilities. When it is determined that there is a deep market for high-quality corporate bonds in the State of Israel, the Company will be advised by the relevant State factors to capitalize its pension liabilities according to market yields on high-quality corporate bonds.

11. Capital Structure of IEC

A. During the years 2015 through 2018, the Company will offer its shares to the public.

B. The Company will redeem its liabilities guaranteed by the State of Israel according to the original amortization table determined when the guarantees were originally issued.

107

C. By June 30, 2014, a plan for executing the Company’s issuance of shares or convertible bonds will be determined and control of the Company will remain in the hands of the State of Israel. The Company’s issuance of shares will be executed during 2015.

D. The proportion of the Company’s equity capital to the Company’s balance sheet will equal 35% by 2025.

E. Implementation of all of the Yogev Team’s recommendations should bring about the removal of sole borrower limitations in the electricity sector. The Yogev Team will examine removal of such limitations and its conditions with the Banks Supervisor.

F. As of January 1, 2015, the Company will be able to engage in business initiatives abroad through a wholly-owned subsidiary. Every project that the Company commences through such subsidiary will involve a designated company for various activities in conjunction with private investors. The format for establishing the designated companies, with respect to their scope, exposure and the planned investment, will be defined in a plan to be agreed upon between the Company and the GCA by January 1, 2015.

12. Additional Recommendations

A. The new company for electric power producing plants will be liquidated.

B. The GCA will submit by June 30, 2014 a recommendation regarding decisions regarding the transition of the Company to conform to IFRS standards so that the Company’s financial strength is not harmed.

C. After the Yogev Draft Report’s approval by the Ministers, the Yogev Team will continue to operate for 18 months in order to monitor the implementation of the Yogev Team’s recommendations and will discuss and handle the main concerns raised by IPPs. The Yogev Team also will appoint an ad hoc team to conduct regular follow-up reviews and issue warnings of failures in implementation.

On May 7, 2014, the Company delivered to the Yogev Team its response and initial position regarding the Yogev Team's draft recommendations. The Company’s comments are focused on two major issues: the scope of the future development of the electricity sector (with emphasis on the generation segment) and ensuring long-term stable financial strength for the Company.

On September 8, 2014, the Company received a copy of a letter from Ori Yogev to the National Labor Federation (the “Histadrut”) entitled “The Position of the State Regarding Israel Electric Corporation Ltd” (the “Yogev Letter”). The Yogev Letter set forth a summary of the final proposal to the Company's employees for a Structural Change of the Company acceptable by the Ministers. The letter clarifies, that the subject matter of the letter regarding the Company's changes in the electricity sector will require in one part amendments to primary legislation and in another part other regulation. The implementation of the Structural Change, as reflected in the Yogev Letter, may have material impact on the Company's business, operations and financial results. An English translation of the Yogev Letter is included in Annex C to this Offering Circular.

The Yogev Letter states as follows:

Part A – Implications of the Structural Change for employees’ rights

Downsizing:

1. Elimination of 1,700 permanent positions over the next decade by natural retirement, at a hiring ratio of 1:3. 2. Elimination of 800 temporary positions in the first year of the agreement and increasing outsourcing by 300 employees. 3. IEC staff positions starting in 2025: 10,500 employees, of whom not more than 8,100 will be permanent employees. 4. The option of voluntary retirement will be offered in the first year of the agreement according to conditions to be subsequently

determined.

Remuneration with respect to the Structural Change:

5. Structural Change bonus – each permanent employee will receive a bonus in the amount of NIS 50,000 on the basis of milestones: • One-third of the bonus upon the establishment of the system management company. • One-third of the bonus upon completion of the incorporation of the subsidiary for the gas turbine-based stations. • One-third of the bonus when IEC stations are put up for sale.

6. Pension supplement – all of the permanent employees of the Company who are employed by the Company on the signing date of the detailed agreements for the implementation of the Structural Change will be entitled to a pension supplement of NIS 1,000 per month starting at age 67, as set forth below: • First- and second-generation employees will be given a pension allowance supplement of NIS 1,000. • Third-generation employees will be given a supplement of approximately 10% of salary for pension, which will be an

accruing supplement without defined benefits. • Employees whose pension is more than twice the average salary in the State of Israel will receive a reduced pension

supplement. • The pension supplement will be given in two parts:

- A fixed supplement. 108

- A supplement contingent upon achievement of the milestones, in a manner identical to the grant and graduated according to salary.

7. Conversion of the free electricity benefit: • No change for pensioners of the Company on the signing date of the agreement. • New employees and temporary employees on the signing date of the agreement will not receive a benefit or compensation. • Permanent employees on the signing date of the agreement – the free electricity component will be converted to a salary

component at the value of consumption in the amount of 7,500 kilowatt-hours, with a gross-up of the benefit at the present value. The component will be a pension component.


8. Cancellation of the parity mechanism with regard to “unsuitability”, thereby enabling management flexibility. 9. Establishment of a new disciplinary system. 10. Complete flexibility of management with respect to the dismissal of temporary employees. 11. Cancellation of parity in tenders committees from the level of section head and up to department head; setting threshold

conditions for managerial positions from the level of section head and up, within the authority of the executive management. 12. Flexibility for executive management in the relocation of employees. 13. Incentive pay – incentive income according to goals and profitability. 14. Attendance at work and ensuring the fulfillment of the quota of working hours.

Salary agreements:


16. Managers and additional employees, up to 3% of the actual number of employees, will be employed under personal contracts. 17. Increase in the initial salary and reduction of pay raise mechanisms in such a way as to reduce the total costs of salary.

Part B – The Structural Change at the Israel Electric Corporation

18. Removal of system management from the IEC and operation by a separate government company in the first year of the agreement.

19. IEC will sell the Ramat Hovav stations, the land at Alon Tavor and the land at Eshkol C-D. Power stations will be constructed by private electricity producers according to the needs of the Israeli economy in place of the Eshkol C-D stations, which will be scrapped. A station will be constructed at Alon Tavor according to the needs of the Israeli economy. The Haifa C station will be scrapped.

20. At the end of the lifespan of the Reading station, IEC will construct a generation unit of the combined cycle F or H class, with an installed power capacity of approximately 440 MW on the Reading site, and an additional identical unit approximately one year later, according to the needs of the Israeli economy.

21. Beyond the Reading station and the Ashkelon D station, IEC will not construct or replace additional power stations. 22. IEC will complete the emission reduction project: construction of scrubbers in Units 5-6 at Orot Rabin and Units 1-4 at

Rutenberg; conversion of Units 1-4 at Orot Rabin to natural gas operation, backed up with coal. 23. Smart metering – the meter system will be converted to a digital system in an economical and gradual way, in decreasing order of

consumer size, as a function of the results of the cost-benefit study. The smart metering system, including data control, will be managed by an outside company.

24. A subsidiary of IEC will be established for sites that include generation units based on F and E model gas turbines. 25. A subsidiary will be established for business entrepreneurship abroad (“Electricity Entrepreneurship”). 26. The various sectors of the Company’s operations will be managed as separated and audited profit centers.


27. The goal of equity capital relative to the balance sheet will be 35% in 2022. 28. The Company shares will be offered on the stock exchange in 2015 and 2018 at a scope of 15%, provided that a resolution for

appropriate privatization is adopted by a ministers committee. The offering will be contingent on any provisos that might be necessary in order for the State of Israel to reserve its right to implement a structural change in the Company in the future; in addition, the Company’s activity as the holder of an essential service provider license will not be adversely affected.

29. IEC will repay its State guarantee-backed undertakings in accordance with the original payment schedule. 30. Real estate properties that are not essential for IEC in the framework of its ongoing operations will be transferred to the State of

Israel by means of an arrangement that shall be determined. 31. The State will pay the consideration for the power stations, the system management assets, and the land and buildings that the

State of Israel or the system management company will purchase from the Company by offsetting them against IEC’s debt to the State of Israel.

32. Real estate properties that serve IEC and that are expected to serve it in the future will remain under the currently existing arrangement.

109

33. The Company will take measures to release funds from the trust account in an amount no less than NIS 1 billion; the remaining

amount will finance the non-recurring components on an ongoing basis. The legal proceeding in this matter will continue.

Part C – General

34. In the distribution segment, private entities will be added, up to 10% of the electricity market share. 35. The supply segment will be opened to competition by private entities. Supply licenses will be granted to electricity producers and

to suppliers that comply with threshold conditions, including financial soundness.


36. All supplements given to employees are contingent upon compliance with all of the above goals. 37. This proposal will be valid for 30 days after the date of its submission to the employees.

On September 14, 2014, the Chairman of the Histadrut responded to the Yogev Letter indicating, among other things, that the Histadrut and the employee’s union will not stand idle and will take all measures to oppose the final proposal for the Structural Change.

As of the date of hereof there are material differences between the State's position and the Histadrut's position, especially with respect to employees’ rights in the context of the Structural Change, and there are no active negotiations between the parties. The Company's position is that negotiations must resume and that the Sector Reform must be advanced. The Chairman of the Board of Directors of the Company has sent a letter to the Prime Minister and the Ministers stating as much. The Labor Court has also called on the parties to resume negotiations. As of the date hereof, the implementation of the draft recommendations of the Yogev Team has not yet commenced, and despite the publication of the Yogev Draft Report and the Yogev Letter, there is still uncertainty with respect to the final form of a Structural Change, or the Sector Reform, the time of its implementation and its consequences for the Company, its operations and financial results. The recommendations of the Yogev Team may have a material impact on the Company’s business, operations and financial results.

On September 16, 2014, in connection with an ongoing labor dispute regarding the Structural Change, the Labor Court ruled that given the State is not willing to continue negotiations with the employees regarding the potential implications of massive introduction of IPPs into the electricity sector on the Company's employees’ rights and job security, the employees may take unionized actions and may strike, after submitting an outline of the strike they intend to take. With respect to a strike and its scope, there will be a separate hearing to be held shortly. Both the Histradrut and the State filed motions for leave to appeal this decision. In addition, the court ruled that until a further decision is rendered, its previous decision, prohibiting the employees from taking certain sanctions against IPPs and other private entities that operate, or are supposed to operate in the electricity sector, will continue to be in effect. On October 19, 2014, the national labor court ruled that the State of Israel, through its various branches, is not prohibited from granting conditional and new licenses to IPPs and connecting IPPs to the electricity grid, and therefore previous rulings of the Labor Court will not prevent the State of Israel from doing so.

For additional information on the Yogev Team, see Notes 1.e and 9.b.6 to the Interim Financial Statements. An English translation of the Yogev Letter is included in Annex C to this Offering Circular.

Israeli Securities Law

The Company has in the past issued shares to the public in Israel (most of which have since been repurchased by the Government) and has issued domestic notes that are traded on the Tel-Aviv Stock Exchange in an aggregate amount of approximately NIS 4.9 billion in three different series (of which two are secured by a Government guarantee), as of June 30, 2014. As a result, the Company is a public company that is subject to the Israeli Securities Law of 1968, the regulations promulgated thereunder and the various guidance and instructions issued by the Israel Securities Authority and the Tel-Aviv Stock Exchange. In compliance with the Israeli securities laws, the Company publishes its periodic and immediate reports with the Israel Securities Authority and the Tel-Aviv Stock Exchange.

In November 2013, the administrative enforcement committee appointed under the Israeli Securities Law approved an administrative enforcement settlement between the Company and the Israeli Securities Authority, with respect to gaps in the Company’s projected cash flow report that was published by the Company for the period from July 1, 2012 to June 30, 2014. Pursuant to the administrative enforcement settlement, the Company agreed to pay NIS 5 million (plus an additional NIS 5 million on a conditional basis to be paid if the Company will, during the three years following the settlement, publish misleading information in violation of the Israeli securities laws). The Company further agreed to implement certain remedial actions to strengthen its cash flow projections and internal procedures, including the appointment of an external examiner that will monitor the implementation of the Company's internal enforcement plan. The Israeli Securities Authority agreed not to take any further enforcement proceedings against the Company with respect to this matter and the Company was not required to admit that its actions constituted a violation of the Israeli Securities Law. The external examiner has submitted two periodic reports to the Israeli Securities Authority as part of the ongoing review.

The Company is in the process of implementing a comprehensive internal self-enforcement plan. The enforcement plan is

110

intended to identify and prevent violations of, and enhance compliance with, the Israeli securities laws. To this end, the Board of Directors appointed a corporate responsibility committee that is responsible for the implementation of the plan, as well as David Yahav, the Company’s General Counsel and Secretary, who was appointed as the officer in charge of the plan. In this regard, the company also engaged BDO Ziv Haft Consulting & Management Ltd. to carry out a compliance survey that is designed to identify gaps in the Company's compliance with Israeli securities and other related laws and the Company's exposure to the risks involved with potential violations of the Israeli securities laws. BDO submitted their report to the Company in August 2014. BDO's report concluded that as of the date of the report, the Company's internal enforcement plan is being executed properly in all material respects and there are no material risks for material violations of securities laws.

State Comptroller

In October 2012, the State of Israel Comptroller published a report regarding the pension arrangement of the Company’s employees. The State Comptroller’s report addresses, among other things, the payment procedures to the Central Pension Provident Fund, the manner of recording actuarial liabilities in the Company’s financial statements, the financial statements of the Central Pension Provident Fund and the lack of recognition by the PUA of the pension component in the tariff. The State Comptroller criticized the Company with respect to the following matters: (a) funds that were deposited in a trust account to cover the Company’s actuarial liability without obtaining appropriate approvals; (b) the Company’s management authorized improvements to the employees’ work and pension conditions without receiving the appropriate approvals; (c) the entry into a collective bargaining agreement regarding the linkage of the employees’ pension funds to the CPI, notwithstanding the fact that most of the Company’s pensioners have already reached the highest level in the pay rank or close to that; (d) lack of coordination between the regulators supervising the Company; and (e) the functioning of the Board of Directors and the management of the Company with respect to the Company’s pension arrangements. The Company is taking action to rectify the deficiencies that were identified in the State of Israel Comptroller’s report.

The Israel Antitrust Authority

On January 5, 1999, the General Director of the Israel Antitrust Authority declared the Company to be the holder of a “monopoly” in the Electricity Sector, particularly in the fields of electricity supply (including electricity generation and its sale), transmission and distribution, as well as in the provision of backup services to customers and producers of electricity. The Restrictive Trade Practices Law — 1988 (the “Restrictive Trade Practices Law”), among other things, forbids a monopoly to take advantage of its position in the market in a way that may reduce the competition or damage the public and grants the General Director of the Israel Antitrust Authority the authority to instruct a monopoly to take actions to prevent damage to the public or the competition, caused by the monopoly’s conduct. Further, the General Director can apply to the Restrictive Trade Practices Court—a body established under the Restrictive Trade Practices Law— and ask for the granting of an order calling for the dissolution of a monopoly through the division of such into two or more separate business entities. In light of the existing degree of supervision by the PUA and other authorities, to which the Company is subject, and in view of the structural changes required pursuant to the provisions of the Electricity Sector Law, including the incorporation of the generation units in the framework of separate subsidiaries and the expected entry of IPPs to the electricity market, the Company is unable to assess what the future implications of such a declaration with respect to the Company’s operations, profitability and financial position will be. For more information, see “— Competition” and Note 1.a to the Annual Financial Statements.

On February 19, 2013, the Company received a letter from the Israel Antitrust Authority instructing the Company to take all necessary actions to connect the OPC power station (or any other power station) to the electricity grid as soon as possible, noting that if the Company should fail to take such actions, it may lead to enforcement actions by the Israel Antitrust Authority.

On January 1, 2014, the Company received a letter from the Israel Antitrust Authority pursuant to which the General Director of the Antitrust Authority is considering instructing the Company to refrain from directly or indirectly increasing its electricity generation capacity beyond 13,307 MW, as long as the electricity generation capacity of the Company is more than 50% of the total generation capacity in the electricity sector. The letter noted that it does not prevent the Company from executing works to increase efficiency in the electricity generation stations it owns, but if these works increase the electricity generation capacity in excess of the maximum generation capacity noted above, such works will have to receive approval in advance from the General Director of the Antitrust Authority. In March 2014 and May 2014, the Company presented its objections to the General Director of the Antitrust Authority both in writing and orally. As of the date hereof, a final decision on the matter by the General Director has not yet been received.

Environment

The activities of the Company are subject to environmental laws and regulations regarding various matters, including the pollution of air, soil, water sources, noise and magnetic fields, as well as the storage and usage of hazardous materials. Environmental laws and regulations stipulate, among other things, the permitted levels of air pollution, noise, and various waste emitted in sewage from power stations and the Company’s other facilities, as well as mechanisms for handling hazardous materials.

To the best of the Company’s knowledge, as of the date hereof, the Company is in compliance with the material provisions of the laws relating to environmental protection and holds the environmental licenses and permits required for its current activities and when further licensing is required, the Company will act to obtain such licenses.

111

In recent years, Israeli standards applying to the activities of the Company, the supervision of environmental quality and the enforcement of environmental regulations have become increasingly strict. Based on environmental regulation trends in other western nations, the Company believes that this trend towards increased regulation will continue.

In 2013, the Company’s budget for environmental matters was approximately NIS 839 million. In the Company’s budget, which was approved in 2013, for its development plans, it has allocated an aggregate amount of approximately NIS 5.6 billion for reducing emissions (as an initial estimate) for the years 2011 to 2018. These estimates are based on the Company’s current budget and development plans and may not materialize (in full or in part) due to factors that are not under the Company’s control, including changes in regulatory requirements that apply to the Company. For more information regarding environmental matters, see Note 3.i to the Annual Financial Statements.

The material environmental impacts of the Company’s generation, transmission and distribution operations include, among other things, the following:

Air quality: Pollutants are released into the atmosphere during electricity generation as by-products of fuel combustion. The primary pollutants are sulfur dioxide, nitrogen oxide, particles and carbon dioxide.

The Clean Air Law – 2011 (the “Clean Air Law”) requires the Company to apply for permits with respect to its emissions by March 1, 2015, which could impose significant additional economic and procedural obligations on the Company. 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 September 30, 2016, or until a resolution is reached with respect to an emissions permit request, if the Company has applied for permits by March 1, 2015. For new facilities or major changes to existing facilities, the Company must receive an emissions permit as a condition to their operation.

In January, 2014, an emission permit was received for units 1-4 at the Orot Rabin station, for the conversion of the units to natural gas. Most of the provisions of the permit will enter into effect only after the conversion of the units to natural gas.

During the months of September and October the Company received additional conditions in business licenses for the Tzafit, Ramat Hovav and Haifa sites, under which the Company must submit the application for an emissions’ permit and submit additional documents for a combined (integrative) environmental regulation. These combined (integrative) regulations include additional environmental requirements in various aspects, such as wastewater, wastes, soil pollution, odors and noise. These requirements may impose significant additional economic and procedural costs and obligations on the Company that may be material. In April 2014, the Ministry for Environmental Protection approved the Company's request to submit the integrative licensing documents gradually and on alternative dates for year 2015 to 2016.

Regulations were promulgated under the Clean Air Law regarding ambient air pollution standards that may have an effect on the planning of future projects and on the operation of existing facilities. The Company is unable as to the date hereof to evaluate the scope of the implications of the regulations and their materiality.

The Clean Air Law further allows the MOEP to set a levy for emissions of pollutants into air. As of the date hereof, the MOEP has not yet set such a levy.

The Clean Air Law also allows the MOEP to declare a region in the State of Israel as an “air-polluted area.” This declaration allows the MOEP to impose sanctions in order to minimize the air pollution in that designated area. To the best knowledge of the Company, the MOEP is considering the declaration of three air-polluted areas in the State of Israel (the Haifa bay, Tel-Aviv metropolitan area and Jerusalem). As this process is in its early stages, the Company is unable as of the date hereof to evaluate its implications, if any, on its operations.

The Company is also subject to provisions relating to air quality set in “personal orders” issued by the MOEP under the Abatement of Nuisances Law - 1961, including a “general comprehensive personal order” dated December 2010 (the “General Comprehensive Personal Order”). This order defines, among other things, the Company’s obligations to incrementally install devices for reducing emissions in its coal fired power stations (through the end of 2016) and to continuously monitor emissions into the air as well as limitations on the use of fuels.

The Company has presented the MOEP with possible alternative dates of closing for the units of the abovementioned emission reduction project. In February 2014, the company received the MOEP approval, subject to conditions, to postpone the completion date of the project until June 30, 2018. The Company delivers a bi-monthly report to the MOEP concerning the commencement of the project. In recent reports, the Company indicated that labor restrictions and the uncertainty regarding the recognition of the costs of the project in the tariffs may affect the updated dates of the project (see further information below).

Recently, the Company informed the MOEP that the combat events in southern Israel ("Tzuk Eitan"), the ongoing labor dispute and its financial situation may significantly impact the Company's ability to comply with the updated dates of the project. In September 2014, the Company held a meeting with the MOEP representatives at the Ruttenberg site during which it relayed detailed information about the current status of the project and conducted a tour of the site with the MOEP representatives.

112

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 environment. The Company's facilities in Alon Tavor, Haifa, Hagit, Reading, Eshkol, Tzafit, Gezer and Ramat Hovav are connected to a natural gas supply system and are powered by it in accordance with the availability of the gas and the regulatory directives. In addition, units 1- 4 at the Orot Rabin power station are expected to be converted to natural gas power gradually by June 2018. The Company has initiated the promotion of a National Outline Plan, required for the Orot Rabin site that would facilitate its operation by natural gas at the site. The Company has applied to the PUA to receive rate recognition for the project before it is launched. The PUA notified the Company that it intends to recommend that at this stage only 70% of the comprehensive investment budget of the Company for the emission reduction project of 2013, with respect to units 5-6 at Orot Rabin and units 1-4 at Rutenberg, will be recognized. Regarding tariff recognition for converting units 1-4 at Orot Rabin to natural gas, the PUA notified the Company that in view of the draft of recommendations of the Steering Team that includes a recommendation to appoint a dedicated team that will examine, among other things, the financial necessity and worthiness of converting units 1-4 to gas, the discussions regarding a tariff recognition for this part of the project should not continue until the work of the team that will be appointed is completed. For more information regarding units 1-4 at the Orot Rabin site and completion of the scrubbers’ project at the Ruttenberg site, see Note 1.e.4 to the Annual Financial Statements.

The Company updated the Ministry for Environmental Protection of the position of the PUA and the difficulty it presents for the completion of the emission reduction project, and in April 2014, letters were received from the Director-General of the Ministry for Environmental Protection and the Minister for Environmental protection. Pursuant to the April 2014 letters, the Company has to meet the dates of the emission reduction plan as determined in the individual lateral order that was signed in December 2010 and that applies to all power stations of the Company.

In May 2014, the Company approached the Director General of the GCA, the Director General of the Ministry of National Infrastructures, Energy and Water, the Director General of the Ministry for Environmental Protection, and the Chairman of the PUA, requesting clear and uniform guidance with respect to the continuation of the emission reduction project, in light of the existing uncertainty regarding the covering of the project costs, being able to comply with the timetables set for the project, and the draft recommendations of the Steering Team.

In recent correspondence and meetings held regarding the recognition of the costs of the project, it appears that the PUA recognizes the necessity of the project and will decide upon the recognition of the costs of the project after a cost-inspection and after receiving further information and data from the Company. The Company is in constant contact with the PUA and the relevant ministries in order to resolve the matter.

Soil and water: The Company stores, holds and uses various hazardous materials and fuels. The Company works diligently to prevent and rehabilitate pollution of soil and water sources originating from those materials.

During a shut-down of a site and according to MOEP instructions provided from time to time, the Company is obligated on occasion to dismantle old fuel infrastructures. In such cases, circumstances may give rise to rehabilitation of polluted soil that may impose significant expanses on the Company depending on the scope of the polluted area and the nature of the pollution.

The Company is obligated under conditions of business licenses and toxins permits to seal second containments of fuel tanks, in order to prevent spilling of fuel that may trigger pollution of soil and water sources. Meeting these obligations may impose expenses on the Company, which may be significant, depending on the specific site’s characteristics. The Company is in contact with the MOEP regarding the applicability and interpretation of the MOEP instructions.

The Company allocated U.S.$150 million in order to conduct a six-year inspection of all of its oil tanks and pipes.

In May 2012, during a routine filling of the tank at the Haifa power station with diesel oil, a spillover of diesel oil from the tank to the spill containment pallet was identified. The Company delivered immediate notification of the event to the Ministry of Environmental Protection and acted to pump the diesel oil from the spill containment pallet. Most of the fuel was pumped and cleared and the Company is continuing the pumping and rehabilitation efforts, in addition to periodic monitoring operations. All the operations are executed in accordance with the instructions of the Ministry of Environmental Protection. In May 2013, the Company received a notice of sanction of approximately NIS 2.6 million, under a claim of breach of the Hazardous Materials Law, 1993, with respect to this event. In June 2013, the company presented its arguments regarding the matter to the Ministry for Environmental Protection. As of the date hereof, the response of the Ministry for Environmental Protection to the Company's arguments has not yet been received.

In March 2014, after completion of a fuels inventory at the Hagit site, it was discovered that a container with a capacity of 10,000 cubic meters of diesel oil was missing approximately 200 cubic meters of diesel oil. An examination was performed following a leakage of diesel oil into a trench of upper runoff water which then mixed with diesel oil and reached the Hagit stream. Upon discovery of the leakage, the Company took steps to stop the leakage and locate its source.

The Company estimates that very small quantities of upper runoff water mixed with diesel oil remained in the area of the site. The Company reported the results of the inspection to the Ministry for Environmental Protection and is in constant contact with the

113

relevant authorities and is acting in accordance with their instructions on this matter. The Company conducts soil surveys of the site and after completion of the surveys the Company estimates the potential liability associated with the oil leak.

Land Pollution Prevention and Rehabilitating Contaminated Land Bill, 2011 (“Land Bill”): In August 2011, a bill for the Prevention of Soil Pollution and the Rehabilitation of Polluted Soil Law - 2011, completed its first of three legislative phases. This bill prescribes a general prohibition against causing soil pollution and imposes duties on the owners and possessors of land and possessors of hazardous materials to prevent soil pollution and to take action to rehabilitate polluted soils. The bill was discussed in 2012 by the Knesset Interior and Environmental Protection Committee in preparation for the second and third legislation phases. The Company has delivered its comments on the bill. If and to the extent this bill will become effective, it may impose material costs on the Company.

Preservation of the costal environment: The Coastal Environment Preservation Law prohibits, among other things, 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, from time to time, charged with requirements with respect to and restrictions relating to its development plans, as they relate 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 for both the prevention of sea pollution and the protection of its facilities from sea pollution of an external source.

In May 2013, the Company received a warning and a summons to a hearing from the Division of Sea and Coasts at the Ministry for Environmental Protection, following which a hearing was held for the Company by the Division of Sea and Coasts of the Ministry for Environmental Protection in June 2013. In the hearing, it was claimed that the Company did not execute examinations and reports required under the Ports (Loading and Unloading Oils) Regulations, 1975 in the fuel piping found in the marine mooring site of fuel tankers located close to the Eshkol power station. The Company is acting in accordance with the summary of the hearing and has, among other things, prepared for the treatment of sea oil pollution incidents, is taking the required steps with regard to the piping, and is enlisting marine patrols when fuel is being unloaded, in accordance with the instructions of the Ministry for Environmental Protection.

The Reading site: In 2010, a national zoning plan for the Reading site was published for public comment. The plan stipulates, among other things, that the power plant on the site is to be shut down by 2020, obligating the Company to move various facilities and perform environmental recovery actions. The public comments to the plan were submitted and the plan is awaiting approval by the National Assembly for Building and Construction. Such approval, if granted, is conditioned upon final approval by the Government. If the current suggested plan is approved, it may impose substantial expenses which may be material to the Company.

Pursuant to a national zoning plan that applies to the Reading site, the Company may be required to relocate certain facilities and make environmental investments at the site. The plan has not yet taken effect and if the plan is approved in its proposed version, its provisions will impose material costs on the Company. As part of the examination of the future of the Reading site, public committees were appointed by the Minister of Energy and Water and the Minister of the Interior who recommended that the site should continue to have a power station operating from it. In January 2014, an order was received from the National Council for Planning and Construction outlining a proposed new national zoning plan that would apply to New Generation units at the site.

Electromagnetic fields: According to the provisions of the Non-Ionizing Radiation Law – 2006 (the “Radiation Law”), the Company is required to hold appropriate permits provided by the Ministry of Environmental Protection for the construction and operation of radiation sources, as defined by the Radiation Law, that the Company operates. Operating a radiation source without a legal permit or with deviation from its conditions may constitute a violation of the Radiation Law and may even lead to an injunction to remove the source. Certain radiation permits incorporate unacceptable terms and conditions which the Company is negotiating with the Environmental Protection Ministry. The exact wording of the operating permits for the Company’s existing installations is still being negotiated.

With regard to exposure standards and the implementation of a cautionary principle, the recommendations of an expert committee had been adopted until the promulgation of specific regulations under the Radiation Law. Pursuant to those recommendations, the threshold value for short-term effects due to magnetic fields is 1,000 milligauss. In addition, the Company will apply a cautionary principle in the design and construction of new facilities. With respect to existing facilities, the Company is required to allocate U.S.$2 million a year in order to reduce public exposure to magnetic fields.

The Ministry of Environmental Protection and the Ministry of Health informed the Company that they intend to recommend a standard of four milligauss for continuous and prolonged exposure. If such a standard is adopted within the framework of binding regulations, this may have material implications on investments in facilities that are required for the operation of the electricity sector. In accordance with the Radiation Law, such a decision in matters affecting costs for the electricity sector requires the approval of the Minister of Environmental Protection, the Minister of Energy and Water and of the Minister of Finance.

Asbestos: Under the Prevention of Hazards from Asbestos and Harmful Dust Law - 2011 (the “Asbestos Law”), the Company is required by the year 2021 to, among other things, dismantle and dispose of all friable asbestos that have been installed to provide thermal insulation in certain areas of the Company’s facilities. The Company is taking actions to satisfy the provisions of the Asbestos

114

Law, among other things, for the purpose of removing friable asbestos from the power stations and to obtain the relevant permits required under the Asbestos Law.

Pollutant Release and Transfer Register (“PRTR”): In April 2012, the Emissions and Transfers to the Environment - Obligation of Reporting and Register - 2012 (the “Environmental Protection Law”) was published, imposing an annual reporting duty with respect to emissions and transfers of pollutants and waste to the environment. Among other things, the Environmental Protection Law creates a national emissions register, which will be made available for public inspection. The emissions register will be established and managed by the MOEP. The Company has submitted a report in accordance with the requirements of the law.

PCBs: The Company has removed all transformers and cables containing polychlorinated biphenyls (PCBs) from its power stations, sub-stations and transformation stations and has disposed of them at the national hazardous waste site in Ramat-Hovav.

Planning and zoning: The Company’s operations are subject to environmental provisions set in zoning plans and building permits. During planning procedures for new or expanded facilities, the Company is also required to conduct environmental impact assessments from time to time by the planning and environmental regulators.

Prevention and reduction of air pollution from vehicle fleet: In September 2013, the Company received draft instructions under the Clean Air Law for the Prevention and Reduction of Air Pollution from Vehicle Fleets, and was asked to submit comments. The draft instructions sought to determine, among other things, an average particle emission target for vehicle fleets and procedures for gradually increasing the percentage of vehicles that use alternate means of propulsion. The Company is studying the draft instructions and their expected implications and has delivered its comments on the matter to the Ministry for Environmental Protection.

Energy saving: The Company's generation activities are subject, among other things, to the Energy Sources Law and various relevant regulations that deal with energy saving and State resolutions that are published periodically, with respect to the policy for energy saving and greenhouse gas emissions abatement. The Company is taking all necessary actions to comply with these regulations and studying the consequences of new regulatory initiatives in the field. The Company estimates that these regulations will not materially affect the generation activity of the Company.

Effluents: During the course of the generation of electricity, industrial effluents form in the generating facilities. The industrial effluents at coastal power stations are for the most part recycled, after treatment, for reuse in the station, while other treated wastewater is released into the sea, in accordance with the offshore discharge permits issued to each site, pursuant to the Prevention of Sea Pollution from Land Sources Law.

Hazardous materials: The Company 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 all necessary actions to comply with the conditions of the permits.

Fly ash: Fly ash is created through the generation of electricity at coal power stations, including Orot Rabin and Rothenberg. Since 1998, the fly ash has been sold by the Company for use in construction, infrastructure and agriculture.

In June 2008, the Director of the Prevention of Noise and Radiation Section at the Ministry of Environmental Protection announced that he considered fly ash to be radioactive waste. In July 2008, the Company submitted an objection to this claim, among other things, asserting that this classification has no scientific basis, and presented evidence to support its claim that fly ash should not be considered radioactive wasted based on related directives and regulations from western countries and the International Atomic Energy Agency (IAEA).

In January 2010, Standard SI 5098 “Content of Natural Radioactive Elements in Construction Products,” which establishes that construction products in the State of 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. To the Company’s knowledge, construction products containing fly ash from the Company’s power stations are inspected in accordance with the requirements of the standard.

The supply of fly ash for the range of uses is continuing unhindered, and to the Company’s knowledge, it has not been affected by the announcement of the Radiation Supervisor of the Ministry of Environmental Protection and by the publication of the standard, and is not likely to suffer any material harm regarding this issue in the future.

Environmental risk management policy: The Company considers itself responsible and obligated to take measures to protect the environment and to minimize environmental hazards along the electricity manufacturing and distribution chain. The Company’s environmental policy principles include, among other things, the internalizing of environmental considerations in its decision making and in the planning and operation of its facilities; the adoption of higher environmental standards; sound usage of materials and natural resources; the encouragement of electricity savings; and conducting open and transparent dialogue with the public and with the Company’s stake-holders.

115

MANAGEMENT

Board of Directors

In accordance with the Articles of Association, the Board of Directors will consist of no less than seven and no more than 21 members (currently, there are 18 members). Directors are appointed for three-year terms by the Ministers after consultation with the Appointments Review Committee, the members of which are appointed by the Minister of Finance. Directors may be reappointed. The Company is also required by law to appoint two external directors. Candidates for the positions of external directors on behalf of the Government are nominated by the Ministers after consultation with the Appointments Review Committee and appointed for three-year terms by the General Meeting. External directors may only be reelected twice (for a total term of nine years). Pursuant to the Government Companies Law, the appointment of external directors requires a majority vote in the Company’s General Meeting, provided that such majority vote will include the vote of a majority of the shareholders who are not the controlling shareholder of the Company and are participating in the vote, except if the number of the dissenting shareholders who are not the controlling shareholder of the Company is less than 2% of the voting rights in the Company. Since the Government holds 99.846% of the voting power of the Company, this requirement has no practical effects on the Company.

The references below to the date on which a director of the Company began to serve are to the month and year of the first term for which the director was appointed. Breaks in service often occur between the completion of one term and the date of reappointment. The Board of Directors currently consists of the following persons:

Name Age Yiftah Ron Tal (Chairman) ....................................................................................................................................... 58 Ophir Bashan ............................................................................................................................................................. 41 Ziv Reich* ................................................................................................................................................................. 41 Rochelle Don-Yechiya Gurevich .............................................................................................................................. 61 Gideon Frank ............................................................................................................................................................. 71 Mordechai Muki Ben Ami ........................................................................................................................................ 50 Varda Samet .............................................................................................................................................................. 66 Arie Rapoport* .......................................................................................................................................................... 60 Raiek Abu-Rish ......................................................................................................................................................... 44 Yehuda Adler ........................................................................................................................................................... 52

——————

* External Director

Yiftah Ron Tal is the Chairman of the Board of Directors and has held this position since October 2010. In October 2013, Mr. Ron-Tal was reappointed for an additional term of three years. Mr. Ron Tal holds an LL.B from the Faculty of Law — Hebrew University of Jerusalem and is a member of the Israel Bar (membership is restricted according to Section 52b of the Chamber of Advocates Law – 1961 due to non-occupation in the profession between 1997 and 2001 and as of 2011). Mr. Ron Tal also holds an Executive MBA from Bar-Ilan University. Mr. Ron Tal served as Chairman of the Board of Israel Ports Development and Assets Company (I.P.C) from 2007 to 2010. From 2006 to 2010, he served as CEO and Chairman of R-Ticam Ltd — Investment and Consultancy Management. From 2001 to 2005, Mr. Ron Tal served as Commander of the IDF Ground Forces. Mr. Ron-Tal retired with the rank of Major General and serves in the IDF Reserves.

Mr. Ron-Tal is a member of the following committees of the Board of Directors: Chairman of the Strategy, Organizational Change and Image Committee; Regulation Committee, Business Development, Marketing and Services Committee; Human Resources and Organization Committee; Budget, Financial Management and Risk Management Committee; Engagements and Assets Committee; and Corporate Governance and Ethical Code Committee.

Dr. Ophir Bashan has been serving as a director of the Company since October 2012 . Dr. Bashan holds a PhD in Economics from IUBL University, an MBA from Heriot-Watt University and a BsC in Industrial Engineering from Coventry University. Dr. Bashan has served as director of IMI since August 2011. Dr. Bashan has served as a director of MI-holdings from 2010 to 2012 and of Israeli naval Flotilla Association from 2008 to 2010. He served as Vice President of Marketing and Business Development of Talyam Management & Promotion of Engineering Projects Ltd from 2007 to February 2013 and as CEO of IREM Holdings from 2011 to February 2013.

Dr. Ophir Bashan is a member of the following committees of the Board of Directors: Strategy, Structural Change and Image Committee; Business Development, Marketing and Service Committee; Committee for Reviewing Financial Statements; Budget, Financial Management and Risk Management Committee; and Corporate Responsibility Committee.

Dr. Ziv Reich has been serving as an external director of the Company since December 2009. Dr. Reich has a PhD in Business Administration from Warnborough University London, a MA in Internal Auditing from Bar-Ilan University and a BA in Management and Accounting from The College of Management Academic Studies. Dr. Reich also is a certified public accountant. Dr. Reich has been the Dean of School of Insurance in Netanya Academic College since 2007 and Head of the Accounting Fields in Netanya

116

Academic College since 2004 and the Open University Center in Ramla since 2006. Dr. Reich was a member of the Advisory Committee at the Ethics Center of Financial Institutes; Deputy Chair of the Advisory Committee for Supervision of Financial Institutions in the Ministry of Finance; Chair of the National Training and Advanced Studies Committee of the Institute of Internal Auditors; CEO of The Ramla Foundation for Education, Culture and Development; member of the Executive at the Enterprise Promotion Center; a member of the Board in the Company of the Development Sites (2007 to 2009), a member of the Board and Chairman of the Finance Committee in the Government Tourism Company (2004 to 2007) and a member of the Consulting Committee for Regulation in the Israel Securities Authority. Dr. Reich served as President of the Institute of Internal Auditors (Israel) (2001 to 2013). Dr. Reich served as Chairman of the Investments Committee at Tamir Fishman & Co.; director of Pilat Technologies International Ltd.; External Director of A. B Trans Ltd; Chairman of the Finance Board of Directors of the Government Tourism Company; director of Holy Sites Development Company; and External Director of B. Yair Group. Dr. Reich is an External Director of Shlomo Insurance Company Ltd.

Dr. Reich is a member of the following committees of the Board of Directors: Chairman of the Financial Statements Review Committee; Audit Committee; Budget, Financial Management and Risk Management Committee; Engagements and Assets Committee; and Compensation Committee.

Rochelle Don-Yechiya Gurevich has been serving as a director of the Company since October 1998 and was reappointed in January 2002, January 2005, January 2010 and February 2013. Mrs. Gurevich is an attorney specializing in commercial law and mediation. Mrs. Gurevich serves as a Director of the News Company of Channel 2 of Israeli television. Mrs. Gurevich also served as Co-Head of the Research Team of the Jerusalem Television Institute for Israel Studies, which published her book on women in the Israeli justice system. Mrs. Don-Yechiya also is a member of the management of the Israel Women’s Network.

Ms. Gurevich is a member of the following committees of the Board of Directors: Chairwoman of the Engagements and Assets Committee; Strategy, Organizational Change and Image Committee; Human Resources and Organization Committee; and Regulation Committee.

Gideon Frank has been serving as a director of the Company and has held this position since January 2010. Mr. Frank has been involved in research and development for the Government and the business sectors, management and international nuclear policy and non-proliferation issues. Mr. Frank has a BSc in Mechanical Engineering and an MSc in Nuclear Science from the Technion, Israel Institute of Technology. After joining the Israel Atomic Energy Commission (the “IAEC”), he became the Director of the Research Reactor in the Soreq Nuclear Research Center (1970), afterwards assumed the position of Deputy General Manager for Engineering and Technology of the Soreq Center and from 1982 served as the General Manager of the Center. Since 1990 he served in the IAEC first as the Deputy Director General then (from 1993 until September 2007) as the Director General of the IAEC and from 2008 to 2012 he served as Vice Chair of the of the IAEC. Mr. Frank’s international experience includes designation as an Inspector in the Department of Safeguards at the International Atomic Energy Agency, Vienna; appointment as the Scientific Counselor to the Israel Embassy in Washington; participating in different expert forums and representing the State of Israel as head of delegation in international conferences. Mr. Frank is currently a member of the Executive of the Board of Directors of the Technion (since 2011), the board of Van-Leer Group Foundation (since 2010) and he serves as the Chairman of the Board of Crecor (wholly-owned by Van Leer Group Foundation).

Mr. Frank is a member of the following committees of the Board of Directors: Strategy, Organizational Change and Image Committee; Business Development, Marketing and Services Committee; Corporate Governance and Ethical Code Committee; and Audit Committee.

Mordechai Muki Ben Ami has been serving as a director and employee of the Company since February 2012. Mr. Ben Ami is serving as a coordinator of the work team for management of budgetary control and prior to that served as coordinator of the Company’s operational budget. Mr. Ben Ami also serves as a director of Mahog, the pension plan for the Company’s employees. Mr. Ben Ami received his BA in Economics from the University of Haifa.

Mr. Ben Ami is a member of the following committees of the Board of Directors: Strategy, Organizational Change and Image Committee; Budget, Financial Management and Risk Management Committee; Business Development, Marketing and Service Committee; and Human Resources and Organization Committee.

Varda Samet has been serving as a director of the Company since March 2012. Prior to serving as a director of the Company, Ms. Samet served as a judge in the Tel Aviv District Labor Court. Ms. Samet has a BSc in Chemistry, a MSc in Biochemistry and a LL.B from Tel Aviv University. Ms. Samet also has a mediator certificate from Gome Institute.

Ms. Samet is a member of the following committees of the Board of Directors: Strategy, Organizational Change and Image Committee; Human Resources and Organization Committee; Corporate Governance and Ethical Code Committee; Compensation Committee; and Regulation Committee.

Arie Rapoport has been serving as an external director of the Company since August 2011. Mr. Rapoport graduated the Tel Aviv University with a BA in economics and accounting. Mr. Rapoport is a certified public accountant, specializing in consulting in the fields of financing, business valuations, mergers and acquisitions in Israel and overseas. Mr. Rapoport serves as a professional expert in Israeli court cases by court appointment. Mr. Rapoport serves as a director of several companies and nonprofit organizations in Israel and overseas. He serves as a director of Rapoport & Co., C.P.A., Arie Rapoport Investments and Management Ltd., Arie Rapoport Trust Company Ltd., TMG Trade Finance (2008) Ltd., ATP

117

Trade Finance Ltd., First Global Finance (2008) Ltd., Ragua VeYafe Ltd., Allium Medical Inc. (American Company), Newgrand Properties Ltd., (British Company), Patrice Services Limited (Cypriot Company), KSR Properties 1 Ltd. (Cypriot Company), Variety Jerusalem Club Fund Ltd., Variety Israel (registered society), Moadon Yaakov Society (registered society) and Arthur Rubinstein Society (registered society). Mr. Rapoport is the Chairman of the Ethics Committee of the Institute of Chartered Accountants in Israel

Mr. Rapoport is a member of the following committees of the Board of Directors: Chairman of the Compensation Committee Strategy, Organizational Change and Image Committee; Audit Committee; Financial Statements Review Committee; Budget, Financial Management and Risk Management Committee; and Engagements and Assets Committee.

Raiek Abu-Rish has been serving as a director of the Company since May 2010. Mr. Abu-Rish has provided auditing and business consulting services for Israeli and foreign companies and has been involved in international fund raising. Mr. Abu-Rish also is a director of ZIM Integrated Shipping Services and is an active member of several Druze community organizations. Mr. Abu-Rish has an accounting degree from Hebrew University and has been a CPA since 1996.

Dr. Yehuda Adler has been serving as a director of the Company since October 2013. Dr. Adler also currently serves as the Director of the Talpiot Medical Leadership Program and Director of the Internship Committee of the Chaim Sheba Medical Center. Dr. Adler is a member of the National Council for Prevention and Treatment of Cardiovascular Diseases at the Ministry of Health of Israel and serves as the Chairperson of ESC Guidelines on the Diagnosis and Management of Pericardial Diseases of the European Society of Cardiology. Dr. Adler also serves as Chairman of the Administration of the Biomedical Research in the Galil, Israel; Vice Dean of Health Administration of the Academic Center in Or Yehuda; Director of the BA Studies of the Master of Health Administration at the Academic Center of Or Yehuda; and a member of the National Forum for the Prevention of Diabetes and Obesity in Children at the Gertner Institute of Epidimology and the Ministry of Health, Israel. Dr. Adler’s previous professional experience includes General Director of the Misgav-Ladach Hospital, Jerusalem, Israel; Medical Director, Center Region, Leumit Health Fund; and member of the Task Force for Pericardial Disease in Europe. Dr. Adler also has served as Director of the Working Group on Cardiac Rehabilitation at the Israel Heart Society; Assistant to the Director General at the Sheba Medical Center; Senior Physician at the Cardiac Rehabilitation Institute of the Chaim Sheba Medical Center; member of the National Stirring Committee at The Bar-Ilan University School of Medicine; General Secretary of the Working Group on Cardiac Rehabilitation at the Israel Heart Society; and member of the Board of Directors and the Executive Committee of Magen David Adom, Israel.

Dr. Yehuda Adler is a member of the following committees of the Board of Directors: Strategy Committee; Restructuring and Image Committee; Business Development, Committee of Human Resources and Organization.

Committees of the Board of Directors

The committees of the Board of Directors consist of the following:

Agreements and Assets Committee is responsible for approving agreements with suppliers and consultants above a certain amount, and agreements with suppliers whose offers are not the cheapest. The Engagements and Assets Committee is also responsible for handling any agreement procedure submitted to it by the Chief Executive Officer, for monitoring insurance cover of Company property, examining and approving insurance agreements, handling the appointment of the independent accountants and external legal counsel for the Company and determining the policy of purchasing and selling property, investments in property in the framework of the Company’s budgets and specific projects concerning Company properties.

Audit Committee, which operates by virtue of the law, is responsible for discussing the audit reports, recommending approval of the internal auditor’s work plan, discussing and monitoring handling of employee complaints and public complaints, and discussing any anomalous event as required by the chairman of the Board of Directors, the chairman of the Audit Committee, the Chief Executive Officer or the internal auditor.

Budget, Financial Management and Risk Management Committee is responsible, among other things, for loans and cash flows issues in Israel and overseas. It is also responsible for approving the budget, monitoring and updating its implementation, defining ways to measure improved efficiency, preparing long-term plans and forecasts as the basis for work plans and for various projects, lasting one or more years, in the fields of generation, transmission, transforming and delivery. This Committee is also responsible for handling and reviewing risks and Company exposure, supervising Company investments in business ventures or financial investments. The Committee also operates as a supreme tenders committee to approve the appointment and employment of consultants by the Company for its areas of activity. This committee has an advisory role and does not have decision making power.

Human Resources and Organization Committee is responsible for, among other things, discussing the perception of principles in the organization of the Company and the definition of its main functions. This Committee also recommends the appointment of senior employees, discusses the Company’s wage policy, examines Company procedures and adapts them to the policy determined by the Board of Directors, and discusses various human resources matters. It is also responsible for preparing an orderly plan to promote women and the employment of minorities in the Company. This committee has an advisory role and does not have decision making power. The Committee’s recommendations with respect to wages policy are subject to approvals by the relevant regulatory authorities.

Business Development, Marketing and Services Committee is responsible for the structure of customer rates, relations with customers, community projects and the subject of private electricity producers. The Business Development, Marketing and Services Committee is also responsible to supervise the Company in the Communication Infrastructure project. This committee has an advisory

118

role and does not have decision making power.

Regulation Committee is responsible for relations between the Company and the various regulatory bodies that govern it, including the Electricity Committee and various planning and construction entities. This committee has an advisory role and does not have decision making power.

Corporate Governance and Ethical Code Committee is responsible for implementing the Corporate Governance and Ethical Codes. This committee is an ad hoc committee. It is also responsible for handling the public aspects of operating the generating units from the environmental quality aspect, standards and licensing, actions to be taken to prevent air pollution from Company facilities, and monitoring compliance with environmental quality standards. This committee has an advisory role and does not have decision making power.

Strategy, Structural Change and Image Committee is responsible for determining the Company’s vision according to the conditions in which the Company operates and the Board of Director’s policies, consolidating the Company strategic plan, taking into account relevant factors, observing operational and administrative flexibility in the business environment in which the Company operates. Within this context, it audits the activity of the management team designated to create the Company’s strategic plan, and examines the requirement of an external consultant for strategic matters. This committee has an advisory role and does not have decision making power.

Financial Statements Review Committee is responsible for discussing the annual and quarterly reports of the Company and recommending to the Board of Directors on whether or not to approve the financial statements. This committee has an advisory role and does not have decision making power.

Compensation Committee, which was established in December 2012 following Amendment No. 20 of the Israeli Companies Law, is responsible for formulating and updating the Company’s compensation policy and, under certain circumstances prescribed by the Israeli Companies Law, recommending to the Board of Directors the approval of the terms of employment of the Company’s senior management.

Corporate Liability Committee is responsible for the adoption and implementation of the Company’s internal enforcement plan and preparing corporate sustainability and responsibility reports.

119

Executive Officers

The following persons currently serve as executive officers of the Company:

Name Age Office Eliyahu Glickman(1) 53 President and Chief Executive Officer Tamir Polikar 49 Senior Vice-President, Finance and Economics and Chief Financial Officer Dr. Adrian Bianu 66 Senior Vice-President, Corporate Sustainability Yakov Hain

59

Deputy CEO and Senior Vice-President, Customer and Business Development Division

Adv. David Yahav(2) 64 General Counsel and Secretary Niza Rogozinski 41 Internal Auditor and Ombudsman Tzvi Harpak 67 Senior Vice-President, Organization, Logistics, Security and Emergency Economy Ron Weiss 49 Senior Vice-President, Engineering Projects Amir Livne 47 Head of the Organizational Restructuring Directorate and member of the Company’s

management Oren Helman 46 Senior Vice-President, Regulation Yitzhak Balmas 50 Senior Vice-President, Generation and Energy Division David Elmakias 64 Senior Vice-President and Director of Planning, Development and Technology Yossi Shnek 63 Senior Vice-President, Information and Communication Group Amit Oberkovitch 50 Head of the Human Resources Division

———

(1) On September 22, 2014, Eliyahu Glickman, the Chief Executive Officer of the Company, announced that he intends to resign due to the Company’s lack of progress in instituting the Sector Reform. Mr. Glickman’s resignation will become effective within a few months in order to enable the election of the next Chief Executive Officer of the Company in an orderly manner. The Board of Directors of the Company resolved to commence a process to identify a successor Chief Executive Officer and appointed a selection committee. For additional information on the appointment procedure of the Chief Executive Officer, see “Relationship with the State of Israel – The Company as a Government Company.”

(2) On March 13, 2014, David Yahav, the General Counsel and Secretary of the Company, announced that he intends to resign at the end of 2014. The exact date of the resignation will be coordinated with the Chairman of the Board of Directors and the Chief Executive Officer of the Company in order to enable the selection of the next General Counsel and Secretary of the Company in an orderly manner. Eliyahu Glickman has been serving as President and Chief Executive Officer of the Company since April 2011. Mr. Glickman holds a MSc in Financial Management from the US Naval Postgraduate School in Monterey, California (1992) and a MA in International Business Management from Georgetown University in Washington, D.C. (2000). Mr. Glickman served in the Israel Defense Forces for over 20 years (1979 to 2002) in many diverse roles, including Commander in the Israel Navy, Special Operations (1997 to 1999). He was a Naval Attaché in the United States for three years and was awarded the US Legion of Merits. Mr. Glickman has had more than ten years of managerial experience in commercial Israeli companies in the communication and logistics industries. Mr. Glickman also served as Chief Customers Officer (2005 to 2009) and as Deputy CEO (2010 to 2011) of Partner Communications Ltd.

Tamir Polikar has been serving as Senior Vice-President, Finance and Economics and Chief Financial Officer of the Company since April 2013. Mr. Polikar is a licensed as a certified public accountant in Israel and holds an MBA degree and a BA degree in Accounting and Business Management. During 2012 to 2013, Mr. Polikar acted as CFO of Better Place Israel Ltd., which established an electric vehicle charging infrastructure in Israel. During 2011 to 2012, Mr. Polikar acted as independent consultant in the field of investment banking. During 2007 to 2010, Mr. Polikar acted as CEO of Sonol Israel Ltd. Prior to 2007, Mr. Polikar served as VP & CFO of the Azrieli Group (2000 to 2006), CFO of The Petrolgaz Group (1995 to 2000) and CFO of Eldan Electronic Equipment Ltd. & Eldan Tech Ltd.

Dr. Adrian Bianu has been serving as Senior Vice-President, Corporate Sustainability of the Company since December 2013. Dr. Bianu also has been serving as Senior Vice-President of Strategic Resources of the Company since April 2003. Dr. Bianu was head of the Planning, Development and Technology Division and Vice-President of the Company (1996 to 2003). During this period, Dr. Bianu was responsible for the long-term planning of generation and transmission systems, implementation of major IT, technical and R&D projects, environmental issues, development of the technological incubators and until 2008, was also in charge of Human Resources tasks. As part of the technological incubator of the Company, Dr. Bianu serves as a Director in the ventures Burning Solar Ltd., P.V. Nano Cell Ltd., Metrical Communication Ltd., Bright LED Ltd. and Bird Vision. Dr. Bianu holds Bachelor’s degree in Electrical Engineering from Bucharest Polytechnic (Romania) and Master’s and DSc degrees in Electrical Engineering from Technion — Israel Institute of Technology and has published many professional reports, technical papers. Dr. Bianu has had more than 20 years managerial and extensive professional interdisciplinary experience.

120

Yakov Hain has been serving as the Deputy CEO and Senior Vice-President of the Customer and Business Development Division of the Company since January 2013. Prior to this position, Mr. Hain was Senior Vice-President and Acting Manager of the Generation and Conduction Division of the Company (2012 to 2013), Vice-President for Engineering Projects (2007 to 2012), General Manager of the Generation Division and Vice-President of the Company (2004 to 2007), Superintendent of Gas Turbine Power Stations (2002 to 2004) and Deputy Vice-President and Head of Electricity, Control and IT Group in the Generation Division (1996 to 2002). Mr. Hain has published many internationally recognized papers in the field of electricity, power control and the management of power systems. Mr. Hain holds BA in Electrical Engineering from Riga Polytechnic and an MBA from the University of Derby. Since January 2012, Mr. Hain serves as Chairman of the Board of The National Coal Supply Corporation, Ltd., which is a subsidiary of the Company.

Adv. David Yahav has been serving as the General Counsel and Secretary of the Company since September 1996. Prior to this position, Adv. Yahav served as Secretary and Legal Advisor of the Company. In addition, he serves as the Secretary Legal Advisor to Jordan Investment Company Ltd., Migrate Hakablanim Ltd. Adv Yahav is a shareholder in Jordan Investment Company Ltd., Land of Israel Building Company Ltd. and Ma’abarot HaYarden Ltd. Adv. Yahav holds a LL.B from Tel-Aviv University and a LL.M from the Judge Advocate General’s School of the U.S. Army at the University of Virginia.

Niza Rogozinski has been serving as the Internal Auditor and Ombudsman of the Company since April 2014. Mrs. Rogozinski is a CPA and served as the Internal Auditor and Ombudsman of the pension fund Amitim since January 2010. Mrs. Rogozinski has a BA in Business Administration and an L.L.M from Bar Ilan University. Mrs. Rogozinski also is a certified internal auditor.

Tzvi Harpak has been serving as the Senior Vice-President, Organization, Logistics, Security and Emergency Economy since January 2009, and has previously held the position of Head of the Company Information Systems and Communications for 12 years. During this period, Mr. Harpak was responsible for the “millennium bug” (Y2K) projects and was in charge of implementing major projects such as Enterprise Resource Planning (ERP), Distribution Management System (DMS) and the annual master plans for computerization in the Company. Prior to working at the Company, Mr. Harpak was a Lieutenant Colonel in the IDF and held a number of positions involving computer information systems development. Mr. Harpak has won a number of awards: the Air Force Award for Initiation and Implementation of Operational Computer Systems and the System Analyst Chamber Award for Outstanding Chief Information Officer. Mr. Harpak has a BSc in Natural Science from the Hebrew University of Jerusalem and MSc in Technology and Information Systems Management from Tel Aviv University.

Ron Weiss has been serving as the Senior Vice-President of Engineering Projects since January 2013. Prior to this position, Mr. Weiss served as the Company’s Director of Transmission and Transformation (2010 to 2013) and Deputy Director of Transmission and Transformation (2000 to 2010). Mr. Weiss has a BSc in Electrical Engineering from Ben Gurion University and a MSc in Engineering from the Technion, Haifa.

Amir Livne has been serving as the Head of the Organizational Restructuring Directorate and a member of the Company’s management since April 2011. Prior to this position, Mr. Livne served as Executive Assistant to the President and CEO, Legal Consultant to Mahog, the Pension Fund of Israel Electric Corporation Employees (2001 to 2011), and Assistant to the Company’s Legal Counsel (1999 to 2003). Mr. Livne has a LL.B and a LL.M (Cum Laude) from the University of Haifa.

Oren Helman has been serving as the Senior Vice-President of Regulation since December 2011. Prior to this position, Mr. Helman served as a director of the “Chamber of Press at the Prime Minister’s Office” (2010 to 2011), a Strategic Advisor at “Goren Amir” Company (2008 to 2010) and a self-employed consultant. Mr. Helman has a BA in Political Science and a MA in Public Policy from Tel-Aviv University.

Yitzhak Balmas has been serving as the Senior Vice-President of the Generation and Energy Division since January 2013. Prior to this position, Mr. Balmas had served as the Acting Manager of the Division of Engineering Projects and Business Development and the Manager of the Division of Engineering Planning at the Company. Mr. Balmas has a BSc in Electrical Engineering and Computer science from Ben Gurion University and a ME in Mechanical Engineering and Business Administration from the Technion, Haifa.

David Elmakias has been serving as the Senior Vice-President, Planning, Development and Technology since December 2013. Prior to this position, Mr. Elmakias served for ten years as the Director of Planning, Development and Technology for the Company. Mr. Elmakias has a BSc and a MSc in Electrical Engineering from the Technion, Haifa and a PhD in Electrical Engineering from Tel-Aviv University.

Yossi Shnek has been serving as the Senior Vice-President of the Information and Communication Group of the Company since July 2013. Prior to this position, Mr. Shnek served as the acting manager of the Division of Information Systems and Teleprocessing of the Company from April 2009 to July 2013. Mr. Shnek has a BA in Computer Science from Champlain College and a MBA from Derbi College.

Amit Oberkovitch was appointed as Head of the Human Resources Division in 2014. Prior to this position, Mr. Oberkovitch served as Deputy Head of Planning and Development Resources in the Human Resources Division since 2011. Mr. Oberkovitch has a MA in Political Science from Tel Aviv University and an MBA from Derbi College.

121

Compensation of Directors and Officers

For the years ended December 31, 2011, 2012 and 2013, the aggregate amount of compensation paid to the executive officers of the Company was approximately NIS 13 million, NIS 11.1 million and NIS 14 million, respectively, and the aggregate amount of compensation paid to the directors of the Company was approximately NIS 1.1 million, NIS 1.5 million and NIS 1.6 million, respectively.

122

TRANSACTIONS WITH RELATED PARTIES

The State of Israel and companies and other entities controlled by it (including, but not limited to, Government Companies, Governmental and local authorities, Government ministries and other corporations wholly or partially owned by the Government), are considered related parties and interested parties of the Company.

As the sole vertically integrated electricity generation, transmission and distribution company in the State of Israel, and as one of the largest industrial companies in the State of Israel, the Company routinely, and in its ordinary course of business, enters into transactions and derives revenues from the State of Israel and other interested parties, mainly from: sales of electricity, electricity connections and works according to execution contracts. Further, as part of its ongoing day to day business the Company purchases goods and receives services from the State of Israel and such interested parties, primarily transmission of natural gas and water and land leasehold services. The Company is also required to make payments to the State of Israel and its authorities in their sovereign capacity, such as taxes and fees. These transactions and payments do not deviate from the Company’s ordinary course of business.

For information regarding non-negligible transactions with the State of Israel and such interested parties, other than as set forth, see Note 33.b.3 to the Annual Financial Statements. For information regarding the transaction with EMG, see “Business — Fuel — Purchase of Natural Gas from EMG.”

Other Transactions with the State of Israel and Other Government-Owned Entities

The Company has outstanding bonds and loans from banks which are partially owned by the State of Israel, all of which borrowings the Company believes are on an arm’s-length basis. In addition, the Company has borrowed directly from the State of Israel and has received the State of Israel’s guarantee for certain of its borrowings, as provided below:

Loans Secured by State of Israel Guarantee

Repayment Period Outstanding Balance as of

June 30, 2014

Bank Loan Loan

Currency First

Repayment Last

Repayment Loan

Currency NIS Citibank NY 250 mil. U.S.$ 17/12/2010 17/06/2025 U.S.$ 163,383,733.36 561,713,275.29 Bank Hapoalim 600 mil. NIS 25/01/1997 25/07/2016 NIS 119,322,130.97 119,322,130.97 Bank Hapoalim 750 mil. NIS 31/03/2015 31/03/2015 NIS 750,000,000.00 750,000,000.00 Bank Mizrahi Tefahot 250 mil. NIS 31/03/2015 31/03/2015 NIS 250,000,000.00 250,000,000.00 Israel Discount Bank 200 mil. NIS 31/03/2015 31/03/2015 NIS 200,000,000.00 200,000,000.00 Israel Discount Bank 200 mil. NIS 31/03/2015 31/03/2015 NIS 200,000,000.00 200,000,000.00 Bank Leumi 700 mil. NIS 31/03/2015 31/03/2015 NIS 700,000,000.00 700,000,000.00 Bank Leumi 300 mil. NIS 31/03/2015 31/03/2015 NIS 300,000,000.00 300,000,000.00 Total U.S.$ 163,383,733.36 NIS 3,081,035,406.26 NIS 2,519,322,130.97

Bonds Secured by State of Israel Guarantee

Series

Currency

Date of maturity Outstanding Balance as of

June 30, 2014 Series 24 NIS 09/07/2015 2,034,521,519.31 Series 25 NIS 09/07/2017 1,019,031,326.58 Total 3,053,552,845.89

Loans Borrowed Directly from the Government

Repayment Period Outstanding Balance as of

June 30, 2014

Borrower Loan Loan

Currency First

repayment Last

repayment U.S. Dollars NIS State of Israel (transferred from Israel Industrial Bank Ltd.)

800 mil. U.S.$ 25/05/2002 25/05/2023 475,569,708.04 1,635,008,656.24 250 mil. U.S.$ 10/09/2000 10/09/2020 119,365,599.01 410,378,929.39 180 mil. U.S.$ 10/09/2003 10/09/2024 120,120,156.10 412,973,096.66 270 mil. U.S.$ 10/08/2005 10/08/2025 151,463,414.70 520,731,219.74

Total 866,518,877.85 2,979,091,902.03

123

Perpetual Debentures Issued to the Government(1)

Series

Issued amount (in NIS)

Coupon

Outstanding Balance as of June 30, 2014 (in NIS)

Series 1 ......................................................................................... 342,940.69 5% 220,338,294.12 Series 2 ......................................................................................... 2,348,640.00 5.75% 149,488,213.44 Series 3 ......................................................................................... 702,538.71 5% 345,741,538.27 Series 4 ......................................................................................... 558,981.66 5% 232,819,548.14 Series 5 ......................................................................................... 834,185.81 5% 347,511,141.89 Series 6 ......................................................................................... 710,312.09 5% 196,147,644.70 Series 7 ......................................................................................... 759,335.64 5% 209,685,150.26 Series 8 ......................................................................................... 1,146,203.97 5% 316,516,095.14 Series 9 ......................................................................................... 8,064,000.00 5.75% 513,264,252.14 Total ............................................................................................. 15,467,138.57 2,531,511,878.10

——————

(1) Pursuant to an arrangement with the Ministry of Finance, during the period from 1983 through 1985, the Company issued perpetual debentures to the State of Israel for an aggregate consideration of NIS 15.5 million. Certain of these perpetual debentures bear interest at a rate of 5% per annum and the others bear interest at a rate of 5.75% per annum, in each case with the interest linked to the CPI. The principal amount of the perpetual debentures is not linked to the CPI. The perpetual debentures are secured by fixed charges on certain deposits of the Company, the real value of which is negligible. Other than in respect of these fixed charges, the perpetual debentures do not have priority over other debt of the Company. As a result of their terms, the perpetual debentures were treated until December 31, 2005 as equity under Israeli GAAP. Following the implementation of the Israeli Accounting Standard 22, commencing January 1, 2006 and subsequently pursuant to IAS 32, the perpetual debentures are treated as an extended-term liability (NIS 2,532 million as of June 30, 2014).

124

DESCRIPTION OF THE NOTES

The Notes will be issued under the Program pursuant to the amended and restated fiscal agency agreement, dated as of October 29, 2014 (together with any amendments or supplements thereto, the “Fiscal Agency Agreement”) and made by and between the Company and Hermetic Trust (1975) Ltd. (“Hermetic”), in its capacity as fiscal agent (together with any successor to or substitute for Hermetic in such capacity, the “Fiscal Agent”). The Company will serve as the initial calculation agent (together with any successor to or substitute for the Company in such capacity and any additional calculation agents appointed in accordance with the Fiscal Agency Agreement, a “Calculation Agent”) for any Notes that are not listed on the TACT Institutional. The Company will serve as the initial paying agent (together with any successor to or substitute for the Company in such capacity and any additional paying agents appointed in accordance with the Fiscal Agency Agreement, a “Paying Agent”) for any Notes that are denominated in U.S. Dollars or Shekels. The Company will serve as the initial transfer agent (together with any successor to or substitute for the Company in such capacity and any additional transfer agents appointed in accordance with the Fiscal Agency Agreement, a “Transfer Agent”) and as the initial registrar (together with any successor to or substitute for the Company in such capacity and any additional registrars appointed in accordance with the Fiscal Agency Agreement, a “Registrar”). The Notes will be issued with the benefit of the Note Floating Charge (as defined below under “General”) and the related Collateral Trust Agreement (as defined below under “General”). Capitalized terms used and not otherwise defined herein have the meanings set forth below under “Certain Definitions.”

Copies of the Fiscal Agency Agreement, the Note Floating Charge and the Collateral Trust Agreement are available upon request at the specified offices of the Fiscal Agent, the Registrar and each Paying Agent (other than the Company). The following summaries of certain provisions of the Notes, the Fiscal Agency Agreement and the Charge Documents do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the terms and conditions of the Fiscal Agency Agreement, including the definitions therein contained, the Notes of each Series and the Pricing Supplements related to the Notes of such Series, and the Charge Documents. References herein to the “Terms and Conditions” of the Notes are to the terms and conditions set forth in Exhibit A to the Fiscal Agency Agreement as supplemented, replaced and/or modified by the Pricing Supplement applicable to the relevant Series or Tranche of Notes.

General

The aggregate principal amount of Notes at any time outstanding under the Program will not exceed U.S.$5,000,000,000 (or the equivalent thereof in other currencies or composite currencies as determined on the Business Day (as defined below under “Interest Rates, Calculation of Interest, Business Day”) preceding their respective Issue Dates), including Notes issued pursuant to Fiscal Agency Agreement, dated as of April 23, 2008, by and among the Company, The Bank of New York Mellon (previously The Bank of New York), London branch, in its capacity as fiscal agent, calculation agent, paying agent and transfer agent, and The Bank of New York Mellon (previously The Bank of New York), New York branch, as registrar and transfer agent, as amended by the First Amendment to the Fiscal Agency Agreement, dated as of February 1, 2012, and the Second Amendment to the Fiscal Agency Agreement, dated as of June 10, 2013, subject to the right of the Company to increase such amount upon the satisfaction of certain conditions set forth in the program agreement, dated April 23, 2008, by and among the Company and the several Dealers named therein (as amended and together with any further amendments or supplements thereto, the “Program Agreement”). For the purpose of calculating the U.S. Dollar equivalent of the aggregate nominal amount of Notes issued under the Program from time to time:

(a) the U.S. Dollar equivalent of any Notes denominated in a Specified Currency (as defined below) other than U.S. Dollars will be determined as of the Business Day prior to the day such Notes are issued on the basis of (i) the noon buying rate in New York City for cable transfers in such currency as certified for customs purposes by the Federal Reserve Bank of New York, (ii) in the event the Federal Reserve Bank of New York does not certify a noon buying rate for such currency, on the basis of the rate quoted or published by the relevant central bank as the rate for buying such currency in U.S. Dollars or (iii) if no such rate is quoted or published, the rate determined by the Calculation Agent based on a quotation or an average of quotations given to the Calculation Agent by commercial banks that conduct foreign exchange operations or based on such other method as the Calculation Agent may reasonably determine to calculate a market exchange rate, unless otherwise specified in the applicable Pricing Supplement (the rate determined in accordance with clause (i), (ii) or (iii) above being the “Market Exchange Rate” for such currency) on the Business Day prior to the day such Notes are issued (or if such Market Exchange Rate is not then available, the Market Exchange Rate most recently available prior thereto);

(b) the U.S. Dollar equivalent of Dual Currency Notes, Indexed Notes and Partly-Paid Notes (each as defined below under “Dual Currency Notes,” “Indexed Notes” and “Partly-Paid Notes,” respectively) will be calculated in the manner specified above by reference to the original nominal amount of such Notes (in the case of Partly-Paid Notes regardless of the subscription price paid or the amount paid up on such Notes); and

(c) the nominal amount of Zero Coupon Notes (as defined below under “Zero Coupon Notes and Original Issue Discount Notes”) and other Notes issued at a discount or a premium will be calculated in the manner specified above by reference to the net proceeds received by the Company for the relevant issue.

The Notes will be issued in one or more Series, which, as used herein, means each original issue of Notes together with any further issues expressed to form a single Series with the original issue issued by the Company and which are denominated in the same

125

Specified Currency, have the same date on which the principal is due and payable (the “Maturity Date”), bear interest (if any) on the same basis and at the same rate and the terms of which, other than the date on which such Notes are issued (the “Issue Date”), the date from which such Notes bear interest (the “Interest Commencement Date”) and/or the price (expressed as a percentage of the aggregate principal amount) at which such Notes are issued (the “Issue Price”), are otherwise identical (including whether or not the Notes are listed).

The Notes of each Series will be denominated in the Specified Currency, subject to any laws or regulations applicable to such currency or composite currency, as may be agreed upon between the Company and the relevant Dealer or Dealers and specified in the applicable Pricing Supplement, and payments in respect of each Note will be made in the Specified Currency for such Note.

The Notes of each Series will have such maturities as may be agreed between the Company and the relevant Dealer or Dealers and indicated in the applicable Pricing Supplement, subject to such minimum or maximum maturities as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the Company or the Specified Currency. Notes having a maturity of less than one year will, if the proceeds of the issue are accepted in the United Kingdom, constitute deposits for the purposes of the prohibition on accepting deposits contained in section 19 of the FSMA unless they are issued to a limited class of professional investors and have a denomination of at least £100,000 or its equivalent.

The Notes will bear interest, if at all, at a fixed rate (“Fixed Rate Notes”) or floating rate (“Floating Rate Notes”) or by reference to an index or formula, in each case as specified in the applicable Pricing Supplement.

The Notes will be general obligations of the Company and will be secured by the Note Floating Charge on the present and future assets of the Company that are charged under any other floating charge created by the Company, whether now existing or hereafter created (the “Collateral”), in favor of the Charge Agent for the benefit of the Holders, as provided in the Charge Documents.

The Note Floating Charge will be granted to The Bank of New York Mellon, as charge agent (together with any successors to or substitute for The Bank of New York Mellon, in such capacity, the “Charge Agent”) for the benefit of the Holders, and the New York Bank will serve as Charge Agent thereunder pursuant to the collateral trust agreement, dated as of April 23, 2008, by and between the Company and the Charge Agent (the “Collateral Trust Agreement”). As a result of the Note Floating Charge, the Notes will effectively rank (a) senior to all existing and future unsecured indebtedness of the Company, other than indebtedness receiving priority in right of payment by operation of law (e.g., certain claims for taxes, wages and rent), (b) pari passu with all existing and future Indebtedness of the Company secured by Floating Charges on the assets of the Company (unless such charges by their terms are subordinate to the Note Floating Charge) and (c) subordinate to all existing and future Indebtedness of the Company to the extent secured (whether by law or contract) by Fixed Charges on the assets of the Company (unless such charges by their terms are pari passu or subordinated to the Note Floating Charge). For an explanation of the operation of the Note Floating Charge, see “— Note Floating Charge” below. As of December 31, 2013, the Company had an aggregate of NIS 36,698 million of Indebtedness secured by pari passu Floating Charges and NIS 1,755 million of Indebtedness secured by Fixed Charges ranking prior to the Note Floating Charge. As of June 30, 2014, the Company had an aggregate of NIS 35,385 million of Indebtedness secured by pari passu Floating Charges and NIS 1,815 million of Indebtedness secured by Fixed Charges ranking prior to the Note Floating Charge.

The Pricing Supplement relating to any Series of Notes (the form of which is set out in Annex B to this Offering Circular) will be prepared by or on behalf of the Company and attached to, endorsed on or incorporated by reference into the Notes of such Series. Each Pricing Supplement will supplement the terms and conditions of the Notes and may specify other terms and conditions which will, to the extent so specified or to the extent inconsistent with the terms and conditions attached to, endorsed on or incorporated by reference into the related Series of Notes, for the purposes of such specific Series of Notes only, replace or modify such terms and conditions. The Pricing Supplement relating to any Series of Notes which is to be listed on a stock exchange will be delivered to such exchange and a copy of each such Pricing Supplement will be available at the specified offices of the Fiscal Agent, the Paying Agents, the Transfer Agents and the Registrars.

Ranking

The Notes will be general obligations of the Company and will be secured by the Note Floating Charge on the present and future assets of the Company that are charged under any other floating charge created by the Company, whether now existing or hereafter created. As of June 30, 2014, the aggregate principal amount of indebtedness of the Company secured by floating charges on such assets was NIS 35,358 million. The Notes will be effectively subordinated with respect to assets encumbered by fixed charges. As of June 30, 2014, the amount of indebtedness secured by fixed charges was approximately NIS 1,815 million. The Company is restricted in its ability to secure future indebtedness with fixed charges but is not restricted in its ability to secure future indebtedness with floating charges ranking pari passu with or subordinate to the floating charge securing the Notes. These restrictions are imposed by the Note Floating Charge’s prohibition against creating or permitting a lien to subsist on collateral, other than as provided in the negative pledge provisions in the Terms and Conditions of the Fiscal Agency Agreement and by the negative pledge covenant described in “Description of the Notes,” both of which contain identical restrictions.

Moreover, because the Notes will not be guaranteed by any existing or future subsidiaries of the Company, the Holders’ only claim against such subsidiaries is through the Company’s equity ownership of those subsidiaries (except if the Company is a creditor of such subsidiaries – in which case it may have access to the assets of the subsidiaries with respect to the sums owed by such

126

subsidiaries to the Company). Therefore, the Notes will be “structurally subordinated” in right of payment to the rights of any creditors of such subsidiaries (especially if the Company becomes a holding Company and transfers all or materially all of its assets to its subsidiaries), which means Holders will not have access to the assets of the Company's subsidiaries until after all of the subsidiaries’ creditors have been paid and the remaining assets have been distributed up to the Company as the equity holder.

As of December 31, 2013 and June 30, 2014, there were 44 and 43 Floating Charges, respectively, outstanding with respect to IEC, all of which rank pari passu with the Note Floating Charge and cover substantially all the assets of IEC. The total Indebtedness secured by the Floating Charges as of December 31, 2013 and June 30, 2014 was NIS 36,698 million and NIS 35,385 million, respectively. The holders of Indebtedness secured by these Floating Charges (and any other Indebtedness secured by Floating Charges created in the future) have the right, upon liquidation, to be repaid in full prior to any other Indebtedness, other than Indebtedness to the extent secured by Fixed Charges and certain obligations which have preference by law (e.g., certain taxes, payments to or on behalf of employees and lease obligations). The total Indebtedness secured by Fixed Charges as of December 31, 2013 and June 30, 2014 was NIS 1,755 million and NIS 1,815 million, respectively. The Notes will restrict the ability of the Company to secure future Indebtedness with Fixed Charges, but will not restrict the ability of the Company to secure future Indebtedness with Floating Charges ranking pari passu with or subordinated to the Note Floating Charge.

Each Holder, by its acceptance of a Note, consents and agrees to the terms of the Charge Documents, appoints the Charge Agent to hold the security created by the Charge Documents on its behalf and authorizes and directs the Charge Agent to enter into the Charge Documents and to perform its obligations and exercise its rights thereunder in accordance therewith.

The Charge Agent may, in its sole discretion and without the consent of the Holders, but subject to the Charge Documents, take all actions it deems necessary or appropriate in order to (a) enforce or effect the Charge Documents and (b) collect and receive any and all amounts payable in respect of the obligations of the Company under the Notes, to the extent realized pursuant to the Note Floating Charge. Subject to the provisions of the Charge Documents, the Charge Agent will have the power to institute and to maintain such suits and proceedings as it may deem expedient to prevent any impairment of the assets of the Company by any acts which may be unlawful or in violation of the Charge Documents or the Fiscal Agency Agreement and to preserve or protect its interest and the interest of the Holders in the assets of the Company. The Charge Agent is authorized to receive any funds for the benefit of Holders distributed under the Charge Documents and to make further distributions of such funds to the Holders (through the Paying Agent) according to the provisions of the Notes and the Fiscal Agency Agreement.

Certain Changes to Program Terms

Terms included in issuances of Notes under the Program prior to June 10, 2013 relating to the substitution of the Company as the obligor under the Notes by the successor to its transmission business in connection with Structural Change will not be included in issuances of Notes under the Program after June 10, 2013. As a result, Notes issued after the date hereof will be “structurally subordinated” to Notes issued prior to June 10, 2013 to the extent the successor is a subsidiary of the Company. Notes issued after the date hereof also have the benefit of different Put Events. See “— Redemption” for more information on these provisions.

Replacement of Charge Agent

On October 21, 2014, the Company received notice from The Bank of New York Mellon regarding its intention to resign as charge agent under the Collateral Trust Agreement due to the local listing and settlement of Notes issued under the Program. Pursuant to the Collateral Trust Agreement the Company shall promptly appoint a successor charge agent and the resignation shall become effective upon acceptance of appointment by the successor Charge Agent. The Company has begun the process of identifying a successor charge agent, but as of the date hereof a successor has not been appointed.

Note Floating Charge

In Israel, companies generally secure obligations by granting Fixed Charges or Floating Charges (each as defined hereinafter) on their assets. The Notes when issued will be secured by the Note Floating Charge, which is a valid and enforceable perfected floating charge on the present and future assets of IEC that are charged under any other floating charge created by IEC, whether now existing or hereafter created.

A Fixed Charge is similar to a security interest or mortgage in the United States where the charge attaches to the assets covered by the Fixed Charge when the charge documentation is executed and filed with the appropriate authorities in the State of Israel. The assets subject to a Fixed Charge must be held by the grantor of the charge as security for the secured indebtedness and, generally, may not be sold, transferred or otherwise disposed of without the consent of the secured party. A Floating Charge, although effective when the charge documentation is executed and filed with the appropriate authorities in the State of Israel, floats over the subject assets until certain events occur which cause it to attach to the assets existing at such time. A Floating Charge attaches or “crystallizes” either (a) automatically upon a company entering into liquidation, whether voluntarily by way of resolution of the shareholders or involuntarily upon a liquidation order being entered by a court or (b) upon appointment of a receiver over some or all of the assets of a company upon application to the court by a creditor following an event of default on indebtedness or other obligations.

Until the occurrence of a crystallization event, a company that has granted a Floating Charge over its assets generally may continue to use, sell, transfer or otherwise dispose of the charged assets in the ordinary course of its business (as interpreted under

127

Israeli law) or as otherwise provided by the applicable charge documents and use the proceeds from the sale, transfer or other disposition of such assets for any purpose, including making payments in respect of any indebtedness or other obligations. Upon the occurrence of a crystallization event, the Floating Charge converts to a Fixed Charge, and thereafter a company may only act with respect to the assets subject to a charge in accordance with the directions of a receiver or liquidator, acting pursuant to court orders. In such capacity, a receiver or liquidator has broad powers to act with respect to the charged assets, and typically is granted the authority: (a) to operate the company’s business so as to maximize the proceeds of the sale of the company’s assets, (b) to incur and to collect obligations on behalf of the company or (c) to sell or otherwise dispose of assets of the company and distribute the proceeds therefrom according to the preferences provided by applicable law. Unlike under U.S. law (outside of a bankruptcy proceeding), a secured creditor under Israeli law generally does not have the right to foreclose directly upon the assets securing its obligations and must instead rely on the actions of a court-appointed receiver or liquidator.

The Electricity Sector Law provides that unless approved by the Minister, a license or any part thereof may not be transferred, pledged or confiscated, directly or indirectly. Further, in accordance with the Electricity Sector Law, the Minister may stipulate in a license that certain assets of a license holder which, in the opinion of the Minister, are necessary in order for the license holder to operate in accordance with the terms of license, may not be transferred, pledged or confiscated, directly or indirectly, without approval of the Minister. Accordingly, the Licenses prohibit the pledge, transfer or attachment, directly or indirectly, of assets as stipulated in the Licenses (which include most of the assets of the Company), except with the approval of the Minister In addition, the Licenses state that if any third party is granted rights with respect to any of the assets that are used by the Company for the purposes for which it was granted the Licenses, it will ensure, to the maximum extent possible, that nothing will impair its ability to perform its undertakings in accordance with the Licenses.

In addition, the permit obtained by the Company from the Minister to allow it to create the Note Floating Charge includes certain restrictions on the exercise of remedies under this charge on behalf of the Holders. Pursuant to the terms of this permit, prior to the appointment of any receiver over the assets of the Company in the manner described above, the Minister will be required to approve the identity of the receiver (and the Minister undertook in the permit to respond to any application for approval of the receiver within 30 days of being requested). The appointment of the Receiver shall be subject to fulfillment of the terms of the licenses of the Company. In addition, the permit of the Minister re-affirms that any purchaser of assets of the Company used for any activity licensed under the Electricity Sector Law, including generation, transmission and distribution, must first obtain a license from the Minister to engage in such activities.

Form of Notes

The Notes will be represented initially by one or more global notes in registered form (the “Global Registered Notes”).

The Global Registered Notes will be deposited on the issue date with or on behalf of and registered in the name of Bank Leumi Nominee Company Ltd. (the “Depositary”) and ownership rights in the Notes will be represented by an electronic recordation of book entries in the records of the Tel Aviv Stock Exchange (“TASE”) member through which the beneficial interest (a “Book-Entry Interest”) in the applicable Global Registered Note is held. Citibank, N.A., a member of the TASE, will act as custodian on behalf of investors holding Book-Entry Interests through Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, S.A. (“Clearstream”). The Notes will not be eligible for clearance with The Depository Trust Company (“DTC”).

Holders of Book-Entry Interests will be entitled to receive definitive notes in registered form (“Definitive Registered Notes”) in exchange for their holdings of Book-Entry Interests only in the limited circumstances set forth in “Book-Entry, Delivery and Form” and in the Fiscal Agency Agreement. Title to the Definitive Registered Notes will pass upon registration of transfer in accordance with the provisions of the Fiscal Agency Agreement. In no event will definitive notes in bearer form be issued.

The Registrars or their duly appointed agents will maintain with respect to Global Registered Notes and Definitive Registered Notes of each Series the definitive record (the “Note Register”) in which will be recorded the names and addresses of the Holders of the Notes, the aggregate principal amount held by each of them, the Note numbers and other details with respect to the issuance, transfer and exchange of the Notes. The Company will serve as the initial Registrar for the Notes.

For more information, see “Book-Entry, Delivery and Form.”

Transfer and Exchange

A Holder may transfer or exchange Notes in accordance with the Fiscal Agency Agreement. The Fiscal Agent and the applicable Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents, and the Company may require such Holder to pay any taxes and fees required by law or permitted by the Fiscal Agency Agreement. No service charge will be made for any registration of transfer or exchange of Notes, but the Fiscal Agent may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection therewith.

In case of a partial transfer of a Definitive Registered Note, a Holder will receive new Notes in accordance with the provisions of the Fiscal Agency Agreement.

The Notes will be subject to certain restrictions on transfer and certification requirements as described in “Transfer Restrictions.”

For information regarding transfers of Book-Entry Interests held through different TASE members, or regarding transfers of 128

Book-Entry Interests between participants in Euroclear and/or Clearstream, see “Book-Entry, Delivery and Form — Transfers.”

Subject to the restrictions on transfer described in “Transfer Restrictions,” Notes that are issued as Definitive Registered Notes, if any, may be transferred or exchanged, in whole or in part, in minimum denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof, £200,000 and integral multiples of £1,000 in excess thereof or €200,000 and integral multiples of €1,000 in excess thereof (or the equivalent thereof in the applicable Specified Currency), as the case may be, in excess thereof to persons who take delivery thereof in the form of Definitive Registered Notes. Any such transfer or exchange will be effected in accordance with the Applicable Procedures and the Fiscal Agency Agreement will require the transferring or exchanging Holder, to pay any taxes, duties and governmental charges in connection with such transfer or exchange. Any such transfer or exchange will be made without charge to the Holder, other than any taxes, duties and governmental charges payable in connection with such transfer. “Applicable Procedures” means (i) the bylaws of the TASE and the regulations promulgated thereunder that apply to securities listed for trading on the system of the TASE for trading by institutional investors (“TACT Institutional”), including the relevant provisions of the bylaws of the Tel Aviv Stock Exchange Clearing House Ltd. (“TASECH”), and (ii) any instructions received by the Company from the TASE with respect to the Notes.

Neither any Registrar nor any Transfer Agent will register the transfer of or exchange of a Definite Registered Note for a period of 15 days preceding the due date for any payment of interest on such Note, or during the period of 30 days preceding the due date for any payment of principal on such Note, or register the transfer of or exchange any Notes previously called for redemption.

Further Issues of the Same Series

The Company may from time to time, without the consent of any Holder of a Note, create and issue further Notes having the same terms (other than the Issue Date, the Interest Commencement Date and the Issue Price, if any, specified in the applicable Pricing Supplement) as the Notes of an existing Series (including whether or not such Notes are listed), which are expressed to form a single Series with the Outstanding Notes of such Series.

Denomination, Maturity, Title

Denomination

Subject to the provisions set forth in the Fiscal Agency Agreement and in the applicable Pricing Supplement and the restrictions imposed by any applicable law or regulation relating to any currency or composite currency, Notes of a Series denominated in U.S. Dollars will have such denomination as may be agreed between the Company and the relevant Dealer or Dealers as specified in the applicable Pricing Supplement. Notes initially sold in the United States to QIBs will be in minimum denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof (or the equivalent thereof in the applicable Specified Currency). Notes denominated in pounds Sterling will have a minimum denomination of £200,000 and any integral multiple of £1,000 in excess thereof. Notes in denominations of less than £200,000 will not be available. Notes denominated in Euros will have a minimum denomination of €200,000 and any integral multiple of €1,000 in excess thereof. Notes in denomination of less than €200,000 will not be available. Unless otherwise set forth in the applicable Pricing Supplement, Notes having a maturity of less than one year will, if the proceeds of the issue are accepted in the United Kingdom, constitute deposits for the purposes of the prohibition on accepting deposits contained in section 19 of the FSMA unless they are issued to a limited class of professional investors and have a denomination of at least £100,000 or its equivalent.

Maturity

Notes of each Series will have such maturities as may be agreed between the Company and the relevant Dealer or Dealers and indicated in the applicable Pricing Supplement, subject to such minimum or maximum maturities as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the Company or the Specified Currency.

Title; Treatment of “Holder” as Owner

Subject to the provisions of the Fiscal Agency Agreement, title to Registered Notes will pass upon the registration of transfers in respect thereof in accordance with the Fiscal Agency Agreement. Prior to satisfaction of the applicable requirements for registration of transfer set forth in the Fiscal Agency Agreement, the Company, the Fiscal Agent, any Registrar, any Paying Agent or any Transfer Agent may deem and treat the registered holder of any Registered Note (a “Holder”) as the absolute owner, in each case for the purpose of receiving payment of the principal (including premium or redemption amounts, if any, and, in the case of Original Issue Discount Notes, the Amortized Face Amount or other amount payable in respect thereof) and interest, if any, and Additional Amounts, if any, on such Note and for all other purposes whatsoever; provided, that each person who is for the time being shown in the records of the TASECH as the owner of a particular nominal amount of Registered Notes represented by a Global Registered Note (in which regard any certificate or other document issued by the TASECH as to the nominal amount of such Notes standing to the account of any person will be conclusive and binding for all purposes), will be treated by the Company, the Fiscal Agent, the Charge Agent, any Registrar, any Paying Agent or any Transfer Agent as a holder of such nominal amount of Registered Notes represented by a Global Registered Note, as the case may be, for all purposes other than with respect to the payment of principal (including premium or redemption amounts, if any, and, if a Note is an Original Issue Discount Note, the Amortized Face Amount or other amount payable in

129

respect thereof) or interest, if any, and Additional Amounts, if any, and any other amounts payable on such Registered Notes represented by a Global Registered Note, the right to which will be vested, as against the Company, the Fiscal Agent, the Charge Agent, any Registrar, any Paying Agent or any Transfer Agent, solely in the Depositary as the Holder of the Global Registered Note, in accordance with and subject to its terms and the Fiscal Agency Agreement (and the term “Holders” will be construed accordingly), and none of the Company, the Fiscal Agent, the Charge Agent, any Registrar, any Paying Agent or any Transfer Agent will be affected by notice to the contrary.

Currency of Notes

Notes may be denominated in any Specified Currency as specified in the applicable Pricing Supplement, or such other currency or currencies as may be agreed between the Company and the relevant Dealers, subject to compliance with all applicable legal or regulatory requirements.

Payments

Payments — General

Any interest (other than interest payable at maturity or upon redemption) and any Additional Amounts (as defined below) on Registered Notes of a Series will be payable to the Holders in whose name the Note is registered in the relevant Note Register maintained pursuant to the Fiscal Agency Agreement at the close of business on the 12th calendar day (whether or not a Business Day) next preceding the date such interest is due, unless otherwise specified in the applicable Pricing Supplement (the “Record Date”), and principal (including premium or redemption amounts, if any, and, if a Note is an Original Issue Discount Note, the Amortized Face Amount or other amounts payable in respect thereof) and interest, if any, and Additional Amounts, if any, payable at maturity or upon redemption of such Note will be payable, upon surrender of such Note at the designated office or agency of the Fiscal Agent, to the Holder of such Note.

With respect to any Global Registered Note, the Company, solely in its capacity as the initial Paying Agent, shall, prior to 10:00 a.m. (Tel Aviv time), two Business Days prior to when principal (including premium and redemption amount, if any, and, in the case of Original Issue Discount Notes, the amortized face amount or other amount payable in respect thereof) and interest, if any, in respect of the Notes of a Series (represented by such Global Registered Note) as the same shall become due and payable (or if any such day is not a Business Day, on the next succeeding Business Day), make, or cause to have made, payments by wire transfer of immediately available funds to the Depositary for further payments on the Global Registered Note through the TASECH in accordance with the Applicable Procedures and the provisions of the Fiscal Agency Agreement.

With respect to any Definitive Registered Notes, the Company, solely in its capacity as the initial Paying Agent shall, prior to 10:00 a.m. (Tel Aviv time), two Business Days prior to when principal (including premium and redemption amount, if any, and, in the case of Original Discount Notes, the amortized face amount or other amount payable in respect thereof) and interest, if any, in respect of the Notes of a Series (represented by such Definitive Registered Notes) as the same shall become due and payable (or if any such day is not a Business Day, on the next succeeding Business Day), make, or cause to have made, payments to Holders of such Definitive Registered Notes by (i) wire transfer of immediately available funds to the accounts of such Holders in whose name such Definitive Registered Notes are registered in the relevant Note Register on the relevant Record Date or such accounts that such Holders may from time to time designate in writing to the Paying Agent and Registrar not later than fifteen (15) Business Days prior to such payment date or (ii) check mailed to the registered addresses of such Holders in whose name such Definitive Registered Notes are registered in the relevant Note Register on the relevant Record Date.

Unless otherwise specified in an applicable Pricing Supplement, the first payment of interest on any Note originally issued between a Record Date and an Interest Payment Date (as defined below under “Fixed Rate Notes” and “Floating Rate Notes,” as applicable) will be made on the next succeeding Interest Payment Date.

Any payment made to the Depositary in accordance with the Applicable Procedures will discharge the relevant payment obligation of the Company, the Fiscal Agent and any Paying Agent. None of the Company, the Fiscal Agent or any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Registered Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

For more information, see “Book-Entry, Delivery and Form.”

Payment Business Day

If the date for payment of any amount in respect of any Note is not a Payment Business Day, the Holder thereof will not be entitled to payment of the amount due until the next following Payment Business Day in the relevant place and will not be entitled to any interest or other payment in respect of such delay. For these purposes, unless otherwise specified in the applicable Pricing Supplement, “Payment Business Day” means any day which is both: (a) a day in which commercial banks and foreign exchange markets settle payments in the relevant place of presentation; and (b) a Business Day.

130

Payments in Euro

References to Euro are to the currency which was introduced at the start of the third stage of European Economic and Monetary Union (the “Euro”) pursuant to Article 109(4) of the Treaty establishing the European Communities as amended by the Treaty on European Union (the “Treaty”). Notes denominated in a currency of a country that is a member of the European Economic and Monetary Union may be redenominated into Euro following the giving of notice by the Company to the Holders, the Fiscal Agent, any Paying Agent, any Transfer Agent, any Registrar and the TASECH. Such Notes may also be subject to renominalization, reconventioning and/or consolidation with other Notes then denominated in Euro. The provisions applicable to any such redenomination, renominalization, reconventioning or consolidation will be specified in the relevant Pricing Supplement.

The Fiscal Agent, Paying Agents, Transfer Agents and the Registrar

Unless otherwise specified in the applicable Pricing Supplement, the Company will serve as the initial Paying Agent, Transfer Agent and Registrar for the Notes. The Company reserves the right at any time to appoint additional or other Paying Agents, Transfer Agents or Registrars and to vary or terminate the appointment of the Fiscal Agent, any Paying Agent, any Transfer Agent or any Registrar; provided, that until each Note has been delivered to the Fiscal Agent for cancellation, or moneys sufficient to pay the principal (including premium or redemption amount, if any, and, if a Note is an Original Issue Discount Note, the Amortized Face Amount or other amounts payable in respect thereof) and, interest, if any, on such Note have been made available for payment and either paid or returned to the Company as provided herein, the Company covenants that it will at all times maintain a Paying Agent and Transfer Agent with a specified office in such places as the rules of the TACT Institutional require.

Prescription

Claims against the Company (if any) for payment in respect of the Notes will be prescribed and become void unless made within five years (in the case of principal or interest) from the appropriate Relevant Date (as defined below under “Redemption — Early Redemption Amounts”) in respect thereof.

All moneys held by the Fiscal Agent or any Paying Agent in respect of Notes of a Series which remain unclaimed will be returned to the Company upon request on the earlier of (a) the obligation to make the principal payment in respect of such Notes becoming void or ceasing in accordance with the Terms and Conditions of such Notes and (b) the expiration of two years following the date on which the relevant payment in respect of such Notes will have become due and payable. Upon the return of such funds, a Holder of Notes of such Series thereafter may look only to the Company for payment.

Interest Rates, Calculation of Interest, Business Day

The rate of interest (“Rate of Interest”) on each Note will be equal to:

(a) in the case of a Fixed Rate Note, the fixed rate specified in the applicable Pricing Supplement (which will be zero in the case of Zero Coupon Notes); or

(b) in the case of a Floating Rate Note, the interest rate determined by reference to the Interest Rate Basis as specified in the applicable Pricing Supplement, either (i) plus or minus the Spread, if any, or (ii) multiplied by the Spread Multiplier, if any. The “Spread” is the number of basis points (one one-hundredth of a percentage point) specified in the applicable Pricing Supplement to be added to or subtracted from the Interest Rate Basis of such Floating Rate Note, and the “Spread Multiplier” is the percentage specified in the applicable Pricing Supplement to be applied to the Interest Rate Basis for such Floating Rate Note. The “Interest Rate Basis” is the rate specified, or determined according to a formula specified, in the applicable Pricing Supplement.

Fixed Rate Note

If a Note is a Fixed Rate Note (other than a Zero Coupon Note) interest (in the case of a U.S. Dollar-denominated Note, computed on the basis of a 360-day year of twelve 30-day months (“30/360”), in the case of a Euro-denominated Note, computed on the basis of 30/360, Actual/Actual (ICMA) (as defined below) or as otherwise specified, in each case, in the applicable Pricing Supplement) will accrue from its Interest Commencement Date (or from the most recent date to which interest has been paid or made available for payment) on the unpaid principal amount (and, to the extent lawful, on overdue principal (including premium or redemption amount, if any, and, if a Note is an Original Issue Discount Note, the amortized face amount or other amounts payable in respect thereof) and interest, if any, at the Rate of Interest per annum specified in the applicable Pricing Supplement, and will be payable in arrears on such dates in each year as are specified in the applicable Pricing Supplement (each an “Interest Payment Date”), commencing, unless otherwise specified in the applicable Pricing Supplement, with the first such Interest Payment Date falling at least 15 days after the Issue Date of such Note specified on the face of such Note, and at the Maturity Date or any redemption or repayment date, until the principal thereof will be paid or made available for payment. Unless otherwise specified in the applicable Pricing Supplement, the interest payable on any Interest Payment Date will be the unpaid interest accrued from and including the Issue Date for the Notes or from and including the most recent date in respect of which interest has been paid or made available for payment to, but excluding, such Interest Payment Date and interest payable on the Maturity Date or upon redemption or repayment will include accrued interest from the Issue Date for the Notes or from and including the most

131

recent date in respect of which interest has been paid or made available for payment to, but excluding, the Maturity Date or redemption or repayment date (in each case, an “Interest Period”).

“Actual/Actual (ICMA)” means

(a) in the case of Notes where the number of days in the relevant period from (and including) the most recent Interest Payment Date (or, if none, the Interest Commencement Date) to (but excluding) the relevant payment date (the “Accrual Period”) is equal to or shorter than the Interest Period during which the Accrual Period ends, the number of days in such Accrual Period divided by the product of (1) the number of days in such Interest Period and (2) the number of Interest Payment Dates (as specified in the applicable Pricing Supplement) that would occur in one calendar year; or

(b) in the case of Notes where the Accrual Period is longer than the Interest Period during which the Accrual Period ends, the sum of:

(1) the number of days in such Accrual Period falling in the Interest Period in which the Accrual Period begins divided by the product of (x) the number of days in such Interest Period and (y) the number of Interest Determination Dates (as specified in the applicable Pricing Supplement) that would occur in one calendar year; and

(2) the number of days in such Accrual Period falling in the next Interest Period divided by the product of (x) the number of days in such Interest Period and (y) the number of Interest Determination Dates that would occur in one calendar year.

Floating Rate Note

If a Note is a Floating Rate Note, interest will accrue on such Note from the Interest Commencement Date specified in the applicable Pricing Supplement (or from the most recent date to which interest has been paid or made available for payment) on the unpaid principal amount (and, to the extent lawful, on overdue principal (including premium or redemption amount, if any, and, if a Note is an Original Issue Discount Note, the Amortized Face Amount or other amounts payable in respect thereof)) and interest, if any, at a rate per annum equal to the Rate of Interest specified in the applicable Pricing Supplement until the first Reset Date (as defined below) specified in the applicable Pricing Supplement, or if none is specified, until the first Interest Payment Date following the Issue Date and thereafter at a rate determined in accordance with the applicable provisions set forth below or in the applicable Pricing Supplement, as specified in the applicable Pricing Supplement, and will be payable by the Company monthly, quarterly, semi-annually, annually or at such other intervals specified in the applicable Pricing Supplement under “Interest Periods” and on the dates specified in the applicable Pricing Supplement under “Interest Payment Dates” and at maturity or upon earlier redemption or repayment, until the entire principal amount thereof is paid or made available for payment.

Any Floating Rate Note may provide that the Notes bear interest at a fixed rate for certain interest periods and a floating rate for certain interest periods and may also have either or both of the following, each as may be set forth in the applicable Pricing Supplement: (i) a maximum interest rate limitation, or ceiling, on the rate at which interest may accrue during any interest period (“Maximum Interest Rate”) and/or (ii) a minimum interest rate limitation, or floor, on the rate at which interest may accrue during any interest period (“Minimum Interest Rate”). In addition, the applicable Pricing Supplement will define or particularize for each Floating Rate Note the following terms, if applicable: the period to maturity of the instrument or obligation on which the interest rate formula is based (the “Index Maturity”), the Rate of Interest, the Interest Commencement Date, the Interest Payment Date or Dates and the Reset Dates with respect to such Note.

Unless otherwise specified in the applicable Pricing Supplement, the interest payable on a Floating Rate Note on any Interest Payment Date will be the unpaid interest accrued from and including its Issue Date or from and including the most recent date in respect of which interest has been paid or made available for payment to, but excluding, such Interest Payment Date and interest payable on the Maturity Date or upon redemption or repayment will include accrued interest from the Issue Date or from and including the most recent date in respect of which interest has been paid or made available for payment to, but excluding, the Maturity Date or redemption or repayment date. Unless otherwise specified in the applicable Pricing Supplement, accrued interest will be calculated by multiplying the principal amount of the Note by an accrued interest factor. Such accrued interest factor will be computed, unless otherwise specified in the applicable Pricing Supplement, by adding the interest factor calculated for each day from the Issue Date or from the most recent date to which interest has been paid or made available for payment, as the case may be, to the date for which accrued interest is being calculated. Unless otherwise specified in the applicable Pricing Supplement, the interest factor for each such day (expressed as a decimal rounded, if necessary, as described below) will be computed by dividing the interest rate (expressed as a decimal rounded, if necessary, as described below) applicable to such day by 360 or, in the case of Treasury Rate Notes and Notes denominated or payable in Sterling or Canadian Dollars, by the actual number of days in the year. All percentages resulting from any calculation with respect to such Note will be rounded, unless otherwise specified in the applicable Pricing Supplement, to the nearest one-hundred thousandth of a percentage point, with five or more one-millionths of a percentage point being rounded upwards to the next higher one-hundred thousandth of a percentage point (e.g., 9.876545% (or .09876545) being rounded to 9.87655% (or .0987655)), and all currency or composite currency amounts used in or resulting from such calculations will be rounded to the nearest one-hundredth of a unit of the relevant currency (with .005% of a unit being rounded upwards).

Unless otherwise specified in the applicable Pricing Supplement, the rate of interest on a Floating Rate Note will be calculated

132

with reference to the Interest Rate Basis specified in the applicable Pricing Supplement and reset daily, weekly, monthly, quarterly, semi-annually or annually, or at such other intervals (each an “Interest Reset Period”), in each case as specified in the applicable Pricing Supplement, and such interest rate will be reset on the Reset Dates specified in the applicable Pricing Supplement (each date upon which interest is so reset, a “Reset Date”); provided, however, that (i) the interest rate in effect for the period ending on the first Reset Date, or if none is specified, on the first Interest Payment Date, will be the Rate of Interest specified in the applicable Pricing Supplement, (ii) the interest rate in effect for the ten calendar days immediately prior to the Maturity Date will be that in effect on the tenth calendar day preceding such Maturity Date and (iii) if a Floating Rate Note is designated as a Fixed Rate/Floating Rate Note in the applicable Pricing Supplement, the interest rate commencing on and including the fixed rate commencement date through to the fixed rate termination date, the Maturity Date, redemption date or optional redemption date, as the case may be, will be the fixed interest rate specified therein. Notwithstanding the foregoing, the interest rate on a Floating Rate Note will not be greater than the Maximum Interest Rate, if any, or less than the Minimum Interest Rate, if any, and in no event will be higher than the maximum rate permitted by New York law, as the same may be modified by United States law of general application. Except as provided in the next succeeding sentence or in the applicable Pricing Supplement, the Reset Date with respect to each Floating Rate Note will be: if the Interest Reset Period specified in such Note is daily, each Business Day; if the Interest Reset Period specified in such Note is weekly (unless the Interest Rate Basis specified in such Note is the Treasury Rate), the Wednesday of each week; if the Interest Reset Period specified in such Note is weekly and the Interest Rate Basis specified in such Note is the Treasury Rate, the Tuesday of each week; if the Interest Reset Period is monthly, the third Wednesday of each month; if the Interest Reset Period is quarterly, the third Wednesday of each March, June, September and December; if the Interest Reset Period is semi-annually, the third Wednesday of two months in each year specified in the applicable Pricing Supplement; and if the Interest Reset Period is annually, the third Wednesday of the one month in each year specified in the applicable Pricing Supplement. If, pursuant to the preceding sentence, any Reset Date would otherwise be a day that is not a Market Day (as defined below) with respect to such Note, the Reset Date will be the next succeeding day that is a Market Day with respect to such Note, except that if the Interest Rate Basis is LIBOR and the next succeeding such Market Day falls in the next succeeding calendar month, such Reset Date will be the immediately preceding Market Day. Subject to applicable provisions of law and except as may be provided in the applicable Pricing Supplement for a Floating Rate Note, on each Reset Date the rate of interest on such Note will be the rate determined in accordance with the provisions of the applicable heading below.

“Market Day” means, unless otherwise specified in the applicable Pricing Supplement, with respect to any Note other than a LIBOR or EURIBOR (as defined below under “Determination of EURIBOR”) Note, any Business Day, with respect to a LIBOR Note, any Business Day which is also London Business Day and, with respect to a EURIBOR Note, any TARGET Business Day (as defined below under “Determination of EURIBOR”). “London Business Day” means any day on which dealings in deposits in the Specified Currency are transacted in the London interbank market.

Subject to applicable provisions of law and except as provided herein and in the applicable Pricing Supplement, on each Reset Date the Rate of Interest on each Note will be the rate determined in accordance with the provisions of the applicable Pricing Supplement and as set out below, as applicable.

The interest rate in effect on each day will be (a) if such day is a Reset Date, the interest rate with respect to the date on which the Rate of Interest is to be determined (an “Interest Determination Date”) specified under the applicable heading below, or as otherwise specified in the applicable Pricing Supplement pertaining to such Reset Date, or (b) if such day is not a Reset Date, the interest rate with respect to the Interest Determination Date pertaining to the immediately preceding Reset Date, subject in either case to any Maximum or Minimum Interest Rate referred to above, to any adjustment by a Spread or a Spread Multiplier referred to above and to the provisions of the applicable Pricing Supplement.

Determination of CD Rate

If the Interest Rate Basis of a Note provides for payment of interest at a rate to be determined by reference to the CD Rate, the interest rate with respect to such Note for any Reset Date will equal (a) the rate on the second Market Day with respect to such Note immediately preceding such Reset Date (the “CD Rate Determination Date”) for negotiable certificates of deposit having the Index Maturity designated in the applicable Pricing Supplement (i) as published by the Board of Governors of the United States Federal Reserve System in the weekly statistical release entitled “Statistical Release H.15(519), Selected Interest Rates,” or any successor publication (“H.15(519)”), under the heading “CDs (Secondary Market),” or (ii) if such rate is not so published by 9:00 a.m., New York City time, on the calculation date pertaining to such CD Rate Determination Date, then as published in H.15 Daily Update, or any other recognized electronic source used for displaying that rate, or (b) if such rate is not published in H.15(519), H.15 Daily Update, or any other recognized electronic source used for displaying that rate, by 3:00 p.m., New York City time, on such calculation date, the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards), as calculated by the Calculation Agent on such calculation date, of the secondary market offered rates as of approximately 10:00 a.m., New York City time, on such CD Rate Determination Date, of three leading non-bank dealers in negotiable U.S. Dollar certificates of deposit in The City of New York (which may include the Dealers) selected by the Calculation Agent, for negotiable certificates of deposit of major United States money market banks with a remaining maturity closest to the Index Maturity designated in the applicable Pricing Supplement in denominations of U.S.$5,000,000, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified in the applicable Pricing Supplement or by

133

multiplication by the Spread Multiplier, if any, specified in the applicable Pricing Supplement; provided, however, that if the dealers selected as aforesaid by the Calculation Agent are not quoting as mentioned in this sentence, the CD Rate will remain the CD Rate then in effect on such CD Rate Determination Date.

“H.15 Daily Update” means the daily update of H.15(519), available through the website of the Board of Governors of the Federal Reserve System at http://www.federalreserve.gov/releases/h15/update/h15upd.htm or any successor site or publication.

Determination of CMS Rate

If the Interest Rate Basis of a Note provides for payment of interest at a rate to be determined by reference to the CMS Rate, the interest rate with respect to such Note for any Reset Date will equal (a) the rate on the second Market Day with respect to such Note immediately preceding such Reset Date (the “CMS Rate Determination Date”) for U.S. Dollar swaps having the Index Maturity designated in the applicable Pricing Supplement as displayed on Reuters Screen ISDAFIX1 Page as of approximately 11:00 a.m., New York City time, or (b) if such rate is not so displayed, the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards), as calculated by the Calculation Agent on such calculation date, of at least three mid-market Semi-Annual Swap Rate quotations provided by five leading swap dealers in the New York City interbank market at approximately 11:00 a.m., New York City time, on the CMS Rate Determination Date, and in calculating this arithmetic mean the Calculation Agent will eliminate the highest and lowest quotations or, in the event of equality, one of the highest and one of the lowest quotations, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified in the applicable Pricing Supplement or by multiplication by the Spread Multiplier, if any, specified in the applicable Pricing Supplement; provided, however, that if fewer than three quotations are provided, the Calculation Agent will determine the CMS Rate in its sole discretion.

“Reuters Screen ISDAFIX1 Page” means the display on the Reuters 3000 Xtra service, or any successor or replacement service, ISDAFIX1 page, or any successor or replacement page or pages on that service for the purpose of displaying the CMS Rate.

“Semi-Annual Swap Rate” means the mean of the bid and offered rates for the semi-annual fixed leg, calculated on a 30/360 day count basis, of a fixed-for-floating U.S. Dollar interest rate swap transaction with a term equal to the specified Index Maturity, commencing on the Reset Date, with an acknowledged dealer of good credit in the swap market, where the floating leg, calculated on an Actual/360 day count basis, is equivalent to LIBOR with a designated maturity of three months, as such rate may be determined in accordance with the provisions set forth below under “Determination of LIBOR.” The Calculation Agent will select the five swap dealers in its sole discretion and will request the principal New York City office of each of those dealers to provide a quotation of its rate.

Determination of CMT Rate

If the Interest Rate Basis of a Note provides for payment of interest at a rate to be determined by reference to the CMT Rate, the interest rate with respect to such Note for any Reset Date will equal (a) the rate on the second Market Day with respect to such Note immediately preceding such Reset Date (the “CMT Rate Determination Date”) displayed on the Designated CMT Reuters Page by 3:30 p.m., New York City time, under the heading “Constant Maturity Treasury,” under the column for the Index Maturity designated in the applicable Pricing Supplement, or (b) if such rate is not so displayed by 3:30 p.m., New York City time, on such calculation date, the treasury constant maturity rate for the Index Maturity, as published in H15(519) by 3:30 p.m., New York City time, on the Calculation date, or (c) if such rate is not so published, the treasury constant maturity rate (or other United States Treasury rate) for the Index Maturity for the CMT Rate Determination Date as may then be published by either the Board of Governors of the Federal Reserve System or the United States Department of the Treasury that the Calculation Agent determines, in its sole discretion, to be comparable to the rate formerly displayed on the Designated CMT Reuters Page and published in H.15(519), or (d) if such information is not provided, a yield to maturity based on the arithmetic average of the secondary market offered rates as of approximately 3:30 p.m., New York City time, on the CMT Rate Determination Date reported, according to their written records, by three leading primary United States government securities dealers in New York City (each, a “reference dealer”) selected by the Calculation Agent, which will select (i) five reference dealers and will eliminate the highest quotation (or, in the event of equality, one of the highest quotations) and the lowest quotation (or, in the event of equality, one of the lowest quotations) for Treasury Notes or (ii) if fewer than five but more than two such prices are provided as requested, all of the provided prices without eliminating the highest or the lowest of such quotations or (iii) if fewer than three such prices are provided as requested, the secondary market offered rates of three reference dealers selected by the Calculation Agent (using the same method described above) as of approximately 3:30 p.m., New York City time, on the CMT Rate Determination Date, with an original maturity of the number of years that is the next highest to the Index Maturity and a remaining term to maturity closest to the Index Maturity and in an amount of at least U.S.$100 million or (iv) if two Treasury Notes with an original maturity of the number of years that is the next highest to the Index Maturity have remaining terms to maturity equally close to the Index Maturity, the Calculation Agent will obtain from three reference dealers, selected as discussed above, quotations for the Treasury Note with the shorter remaining term to maturity, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified in the applicable Pricing Supplement or by multiplication by the Spread Multiplier, if any, specified in the applicable Pricing Supplement; provided, however, that if fewer than three reference dealers selected by the Calculation Agent are quoting as described above, the CMT Rate will remain the CMT Rate for the immediately preceding Interest Reset Period, or, if there was no Interest Reset Period, the Rate of Interest payable will be the initial interest rate.

134

http://www.federalreserve.gov/releases/h15/update/h15upd.htm

“Designated CMT Reuters Page” means the display on the Reuters (or any successor service) page specified in the applicable Pricing Supplement, or any other page that replaces that page on that service for the purpose of displaying treasury constant maturities as reported in H.15(519). If such page is FRBCMT, the CMT Rate will equal the rate displayed for the CMT Rate Determination Date. If such page is FEDCMT, the CMT Rate will equal the average for that week or the month, as specified in the applicable Pricing Supplement, ended immediately preceding the week or month in which the CMT Rate Determination Date occurs. If no page is specified in the applicable Pricing Supplement, the CMT Rate will equal the rate displayed on page FEDCMT for the most recent week.

“Treasury Notes” means the most recently issued direct noncallable fixed rate obligations of the United States with an original maturity of approximately the Index Maturity and a remaining term to maturity of not less than the Index Maturity minus one year.

Determination of Commercial Paper Rate

If the Interest Rate Basis of a Note provides for the payment of interest at a rate to be determined by reference to the Commercial Paper Rate, the interest rate with respect to such Note for any Reset Date will equal (a) the Money Market Yield (calculated as described below) on such date of the rate on the second Market Day with respect to such Note immediately preceding such Reset Date (the “Commercial Paper Rate Determination Date”) for commercial paper having the Index Maturity designated in the applicable Pricing Supplement (i) as published in H.15(519) under the caption “Commercial Paper-nonfinancial” or (ii) if such rate is not published by 9:00 a.m., New York City time, on the calculation date pertaining to such Commercial Paper Rate Determination Date, then as published in H.15 Daily Update, or any other recognized electronic source used for displaying that rate, under the heading “Commercial Paper/Nonfinancial,” or (b) if such yield is not published in H.15(519), H.15 Daily Update or any other recognized electronic source used for displaying that rate by 3:00 p.m., New York City time, on such calculation date, the Money Market Yield of the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards), as calculated by the Calculation Agent on such calculation date, of the offered per annum rates (quoted on a bank discount basis), as of approximately 11:00 a.m., New York City time, on such Commercial Paper Rate Determination Date, of three leading dealers in commercial paper in The City of New York, selected by the Calculation Agent, for commercial paper having the Index Maturity designated in the applicable Pricing Supplement placed for an industrial issuer whose bond rating is “AA,” or the equivalent, from a nationally recognized statistical rating agency, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified in the applicable Pricing Supplement or by multiplication by the Spread Multiplier, if any, specified in the applicable Pricing Supplement; provided, however, that if fewer than three dealers selected as aforesaid by the Calculation Agent are quoting as mentioned in this sentence, the Commercial Paper Rate with respect to such Commercial Paper Rate Determination Date will remain the Commercial Paper Rate then in effect on such Commercial Paper Rate Determination Date.

“Money Market Yield” means a yield (expressed as a percentage rounded to the nearest one hundred-thousandth of a percentage point) calculated in accordance with the following formula:

Money Market Yield = D × 360

× 100 360-(D × M)

where “D” refers to the per annum rate for commercial paper, quoted on a bank discount basis and expressed as a decimal; and “M” refers to the actual number of days in the period for which interest is being calculated.

Determination of EURIBOR

If the Interest Rate Basis of a Note provides for payment of interest at a rate to be determined by reference to the Euro-zone (as defined below) interbank offered rate (“EURIBOR”), the Interest Determination Date pertaining to a Reset Date for such Note (the “EURIBOR Determination Date”) will be the second TARGET Business Day (as defined below) preceding such Reset Date, and such Note will bear interest in accordance with the following provisions:

(a) With respect to any EURIBOR Determination Date, EURIBOR will be the rate for deposits in Euro having the Index Maturity designated in the Note and/or the applicable Pricing Supplement, commencing on the second TARGET Business Day immediately following such EURIBOR Determination Date which appears on the Designated EURIBOR Page (as defined below) specified in the Note and/or the applicable Pricing Supplement as of 11:00 a.m., Brussels time, on that EURIBOR Determination Date. Notwithstanding the foregoing, if no rate appears, EURIBOR in respect of the related EURIBOR Determination Date will be determined as if the parties had specified the rate described in clause (b) below; and

(b) With respect to any EURIBOR Determination Date on which no rate appears on the Designated EURIBOR Page as specified above, the Calculation Agent will request the principal Brussels office of each of four major reference banks in the Euro-zone interbank market, selected by the Calculation Agent, to provide the Calculation Agent with its offered rate quotation for deposits in Euro having the Index Maturity designated in the Note and/or the applicable Pricing Supplement, commencing on the second TARGET Business Day immediately following such EURIBOR Determination Date to prime banks in the Euro-zone interbank market as of approximately 11:00 a.m., Brussels time, on such EURIBOR Determination Date and in a principal

135

amount that is representative for a single transaction in Euro in such market at such time. If at least two such quotations are provided, EURIBOR determined on such EURIBOR Determination Date will be the arithmetic mean (rounded, if necessary, to the nearest 0.01 Euro, with halves being rounded upwards) of such quotations. If fewer than two quotations are provided, EURIBOR determined on such EURIBOR Determination Date will be the arithmetic mean (rounded, if necessary, to the nearest 0.01 Euro, with halves being rounded upwards) of the rates quoted as of approximately 11:00 a.m. (or such other time specified in the applicable Pricing Supplement) Brussels for Euro on such EURIBOR Determination Date by leading banks in Brussels, selected by the Calculation Agent, for loans in Euro to leading European banks, having the Index Maturity designated in the Note and/or the applicable Pricing Supplement and in a principal amount that is representative for a single transaction in Euro in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, EURIBOR determined on such EURIBOR Determination Date will remain EURIBOR then in effect on such EURIBOR Determination Date.

“Designated EURIBOR Page” means the display on the Reuters 3000 Xtra service, or any successor or replacement service, EURIBOR01 page, or any successor or replacement page or pages on that service for the purpose of displaying the Euro-zone interbank rates of major banks for Euro.

“Euro-zone” means the region comprised of Member States of the European Union that adopt the single currency in accordance with the Treaty establishing the European Communities, as amended by the Treaty on European Union.

“TARGET” means the Trans-European Automated Real-Time Gross Settlement Express Transfer System.

“TARGET Business Day” means a day on which TARGET is operating.

Determination of Federal Funds Rate

If the Interest Rate Basis of a Note provides for the payment of interest at a rate to be determined by reference to the Federal Funds Rate, the interest rate with respect to such Note for any Reset Date will equal (a) the rate on the second Market Day with respect to such Note immediately preceding such Reset Date (the “Federal Funds Rate Determination Date”) for Federal Funds (i) as published in H.15(519) under the heading “Federal Funds (Effective)” as that rate is displayed on the Reuters Screen FEDFUNDS1 Page for that day or (ii) if such rate is not so published by 9:00 a.m., New York City time, on the calculation date pertaining to such Federal Funds Rate Determination Date, then as published in H.15 Daily Update, or any other recognized electronic source used for displaying that rate, under the heading “Federal Funds (Effective)” or (b) if such rate is not published by 3:00 p.m., New York City time, on the calculation date pertaining to such Federal Funds Rate Determination Date, the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards), as calculated by the Calculation Agent on such calculation date, of the rates for the last transaction in overnight Federal Funds arranged by three leading brokers of Federal Funds transactions in The City of New York, selected by the Calculation Agent, as of 9:00 a.m., New York City time, on such Federal Funds Rate Determination Date, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified in the applicable Pricing Supplement or by multiplication by the Spread Multiplier, if any, specified in the applicable Pricing Supplement; provided, however, that if fewer than three brokers selected as aforesaid by the Calculation Agent are quoting as mentioned in this sentence, the Federal Funds Rate with respect to such Federal Funds Rate Determination Date will remain the Federal Funds Rate then in effect on such Federal Funds Rate Determination Date.

“Reuters Screen FEDFUNDS1 Page” means the display on the means the display on the Reuters 3000 Xtra service, or any successor or replacement service, FEDFUNDS1 page 1 under the heading “EFFECT,” or any other page that replaces that page on that service for the purpose of displaying the Federal funds (effective) rate as reported in H.15(519).

Determination of LIBOR

If the Interest Rate Basis of a Note provides for payment of interest at a rate to be determined by reference to LIBOR, the Interest Determination Date pertaining to a Reset Date for such Note (the “LIBOR Determination Date”) will be the second London Business Day (except in the case of Notes denominated in Sterling, for which the LIBOR Determination Date will be the first day of the relevant Interest Reset Period) preceding such Reset Date, and such Note will bear interest in accordance with the following provisions:

With respect to any LIBOR Determination Date, (a) LIBOR will be “LIBOR Reuters,” the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards) of the offered rates (unless the Designated LIBOR Page by its terms provides only for a single rate, in which case such single rate will be used) for deposits in the Specified Currency having the Index Maturity designated in the Note and/or the applicable Pricing Supplement, commencing on the second London Business Day immediately following the LIBOR Determination Date (or, in the case of Notes denominated in Sterling, on such LIBOR Determination Date), which appear on the Designated LIBOR Page specified in the Note and/or the applicable Pricing Supplement as of 11:00 a.m., London time, on that LIBOR Determination Date, if at least two such offered rates appear (unless, as aforesaid, only a single rate is required) on such Designated LIBOR Page. Notwithstanding the foregoing, if no rate appears, LIBOR in respect of the related LIBOR Determination Date will be determined as if the parties had specified the rate described in clause (b) below; and

(b) With respect to any LIBOR Determination Date on which fewer than two offered rates appear, or if no rate appears, as the

136

case may be, on the Designated LIBOR Page as specified above, the Calculation Agent will request the principal London office of each of four major reference banks in the London interbank market, selected by the Calculation Agent, to provide the Calculation Agent with its offered rate quotation for deposits in the Specified Currency having the Index Maturity designated in the Note and/or the applicable Pricing Supplement, commencing on the second London Business Day immediately following such LIBOR Determination Date (or, in the case of Notes denominated in Sterling, on such LIBOR Determination Date), to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount that is representative for a single transaction in such Specified Currency in such market at such time. If at least two such quotations are provided, LIBOR determined on such LIBOR Determination Date will be the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards) of such quotations. If fewer than two quotations are provided, LIBOR determined on such LIBOR Determination Date will be the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards) of the rates quoted as of approximately 11:00 a.m. (or such other time specified in the applicable Pricing Supplement) in the applicable Principal Financial Center (as defined below) for the Specified Currency on such LIBOR Determination Date by three major banks in such Principal Financial Center, selected by the Calculation Agent, for loans in the Specified Currency to leading European banks, having the Index Maturity designated in the Note and/or the applicable Pricing Supplement and in a principal amount that is representative for a single transaction in such Specified Currency in such market at such time; provided, however, that if the banks so selected by the Calculation Agent are not quoting as mentioned in this sentence, LIBOR determined on such LIBOR Determination Date will remain LIBOR then in effect on such LIBOR Determination Date.

“Designated LIBOR Page” means the display on the Reuters 3000 Xtra service, or any successor or replacement service, LIBOR01 page or LIBOR02 page, as specified in the applicable Pricing Supplement, or any replacement page or pages on which London interbank rates of major banks for the applicable Specified Currency are displayed.

“Principal Financial Center” means, as with respect to any LIBOR Note, unless otherwise specified in the Note and the applicable Pricing Supplement, the capital city of the country that issues as its legal tender the Specified Currency of such Note, except that with respect to U.S. Dollars, the Principal Financial Center will be The City of New York and, with respect to Euro, the Principal Financial Center will be Brussels.

Determination of Prime Rate

If the Interest Rate Basis of a Note provides for the payment of interest at a rate to be determined by reference to the Prime Rate, the interest rate with respect to such Note for any Reset Date will equal (a) the rate on the second Market Day with respect to such Note immediately preceding such Reset Date (the “Prime Rate Determination Date”) as published in H.15(519) under the heading “Bank Prime Loan” or (b) if such rate is not so published by 9:00 a.m., New York City time, on the calculation date pertaining to such Prime Rate Determination Date, then as published in H.15 Daily Update, or any other recognized electronic source used for displaying that rate, or (c) if such rate is not published in H.15(519), H.15 Daily Update or any other recognized electronic source used for displaying that rate by 9:00 a.m., New York City time, on the calculation date pertaining to such Prime Rate Determination Date, the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards) of the rates of interest publicly announced by each bank named on the Reuters Screen USPRIME1 Page as such bank’s prime rate or base lending rate as in effect on such Prime Rate Determination Date or (d) if fewer than four such rates appear on the Reuters Screen USPRIME1 Page for such Prime Rate Determination Date, the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards) of the prime rates or base lending rates (quoted on the basis of the actual number of days in the year divided by 360) as of the close of business on such Prime Rate Determination Date publicly announced by three major banks in The City of New York, selected by the Calculation Agent, as each of their prime rates or base lending rates, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified in the applicable Pricing Supplement or by multiplication by the Spread Multiplier, if any, specified in the applicable Pricing Supplement; provided, however, that if the Prime Rate is not published in H.15(519) or fewer than three banks selected as aforesaid by the Calculation Agent are quoting as mentioned in this sentence, the Prime Rate with respect to such Prime Rate Determination Date will remain the Prime Rate then in effect on such Prime Rate Determination Date.

“Reuters Screen USPRIME1 Page” means the display on the Reuters Monitor Money Rates Service, or any successor or replacement service, page USPRIME1, or any replacement page or pages for the purpose of displaying prime rates or base lending rates of major United States banks.

Determination of Treasury Rate

If the Interest Rate Basis of a Note provides for the payment of interest at a rate to be determined by reference to the Treasury Rate, the interest rate with respect to such Note for any Reset Date will equal (a) the rate for the auction on the relevant Treasury Rate Determination Date (as defined below) of direct obligations of the United States (“Treasury Bills”) having the Index Maturity specified on the Note and in the applicable Pricing Supplement as such rate is published on the Reuters Screen USAUCTION10 Page or USAUCTION11 Page under the heading “INVEST RATE” or (b) if such rate is not so published by 3:00 p.m., New York City time, on the calculation date pertaining to such Treasury Rate Determination Date, the auction average

137

rate (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) as otherwise announced by the United States Department of the Treasury or (c) in the event that the results of the auction of Treasury Bills having the specified Index Maturity are not published or reported as provided in (a) or (b) above, by 3:00 p.m., New York City time, on such calculation date, or if no such auction is held during such week, then the rate as published in H.15(519) (or if not published in H.15(519), in H.15 Daily Update) under the heading “U.S. Government Securities/Treasury Bills/Secondary Market” or in any other recognized electronic source used for the purpose of displaying that rate on the Treasury Rate Determination Date for the Index Maturity specified on the Note and in the applicable Pricing Supplement or (d) in the event no such rate is published as provided in (c) above, by 3:00 p.m., New York City time, on such calculation date, the yield to maturity (expressed as a bond equivalent on the basis of a year of 365 or 366 days, as applicable, and applied on a daily basis) of the arithmetic mean (rounded, if necessary, to the fourth decimal place, with 0.00005 being rounded upwards) of the secondary market bid rates, as of approximately 3:30 p.m., New York City time, on such Treasury Rate Determination Date, of three leading primary United States government securities dealers in The City of New York, selected by the Calculation Agent, for the issue of Treasury Bills with a remaining maturity closest to the applicable Index Maturity, in each of the above cases adjusted by the addition or subtraction of the Spread, if any, specified in the applicable Pricing Supplement or by multiplication by the Spread Multiplier, if any, specified in the applicable Pricing Supplement; provided, however, that if fewer than three dealers selected as aforesaid by the Calculation Agent are quoting as mentioned in this sentence, the Treasury Rate with respect to such Treasury Rate Determination Date will remain the Treasury Rate then in effect on such Treasury Rate Determination Date.

“Reuters Screen USAUCTION 10 Page” and “Reuters Screen USAUCTION11 Page” mean the display on the Reuters 3000 Xtra service, or any successor or replacement service, page USAUCTION10 or USAUCTION11, respectively, or any other page that replaces the applicable page on that service for the purpose of displaying the rate for the auction.

The “Treasury Rate Determination Date” pertaining to a Reset Date will be the day of the week in which such Reset Date falls on which Treasury Bills would normally be auctioned. Treasury Bills are usually sold at auction on Monday of each week, unless that day is a legal holiday, in which case the auction is usually held on the following Tuesday, except that such auction may be held on the preceding Friday. If, as a result of a legal holiday, an auction is so held on the preceding Friday, such Friday will be the Treasury Rate Determination Date pertaining to the Reset Date occurring in the next succeeding week. If an auction date will fall on any Reset Date, then such Reset Date will instead be the first Market Day immediately following such auction date.

Calculation Agent

Unless otherwise specified in the applicable Pricing Supplement, the Company will act as the initial Calculation Agent for all purposes under the Notes, and, by way of amplification but not limitation, for each CD Rate Determination Date, CMS Rate Determination Date, CMT Rate Determination Date, Commercial Paper Rate Determination Date, Federal Funds Rate Determination Date, LIBOR Determination Date, Prime Rate Determination Date or Treasury Rate Determination Date, as the case may be, in the case of Floating Rate Notes, or Interest Payment Date in the case of Fixed Rate Notes, will determine the interest rate as described above or in the applicable Pricing Supplement, and if applicable will determine the Redemption Amount if provided for in the applicable Pricing Supplement, and will notify Holders in accordance with the provisions of the Fiscal Agency Agreement. The Calculation Agent’s determination, or the determination of any other calculation agent or redemption calculation agent specified in the applicable Pricing Supplement, of any interest rate or redemption or other amounts will be, in the absence of manifest error, conclusive for all purposes and binding on all Holders of Notes.

Notification of Rate of Interest and Interest Amount

The Calculation Agent will cause the Rate of Interest and the amount of interest payable (the “Interest Amount”) for each Interest Period and the relevant Interest Payment Date to be notified to the Company (if the Company no longer acts as Calculation Agent), and the Fiscal Agent, the Paying Agents (excluding the Company, if applicable), the Registrars (excluding the Company, if applicable) and any stock exchange on which the relevant Floating Rate Notes are for the time being listed, and to be notified in accordance with “Notices by the Company” below as soon as possible after their determination but in no event later than the fourth London Business Day thereafter. Each Interest Amount and Interest Payment Date so notified may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without notice in the event of an extension or shortening of the Interest Period. Any such amendment will be promptly notified to each stock exchange on which the relevant Floating Rate Notes are for the time being listed. For the purposes of this paragraph, the expression “London Business Day” means a day (other than Saturday or Sunday) on which banks and foreign exchange markets are open for business in London.

Certificates to be Final

All certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of determinations of interest rates by the Calculation Agent will (in the absence of negligence, willful misconduct, bad faith or manifest error) be binding on the Company (if the Company no longer acts as the Calculation Agent), the Fiscal Agent, the Paying Agents and all Holders of Notes, and (in the absence as aforesaid) no liability to the Company or the Holders of Notes will attach to such agent in connection with the exercise or non-exercise by it of its powers, duties and discretions.

138

Business Day

If any Interest Payment Date (or other date) which is specified in the applicable Pricing Supplement to be subject to adjustment in accordance with a Business Day convention would otherwise fall on a day which is not a Business Day, then, if the Business Day convention specified is:

(a) the “Floating Rate Convention,” such Interest Payment Date (or other date) will be postponed to the next day which is a Business Day unless it would thereby fall into the next calendar month, in which event (1) such Interest Payment Date (or other date) will be brought forward to the immediately preceding Business Day and (2) after the foregoing (1) will have applied, each subsequent Interest Payment Date (or other date) will be the last Business Day of the last month of each subsequent Interest Period; or

(b) the “Following Business Day Convention,” such Interest Payment Date (or other date) will be postponed to the next day which is a Business Day; or

(c) the “Modified Following Business Day Convention,” such Interest Payment Date (or other date) will be postponed to the next day which is a Business Day unless it would thereby fall into the next calendar month, in which event such Interest Payment Date (or other date) will be brought forward to the immediately preceding Business Day; or

(d) the “Preceding Business Day Convention,” such Interest Payment Date (or other date) will be brought forward to the immediately preceding Business Day.

Zero Coupon Notes and Original Issue Discount Notes

If the Rate of Interest specified in the applicable Pricing Supplement is “zero,” such Note is a “Zero Coupon Note” and will not bear interest; provided, that from the Maturity Date or any other due date for repayment of such Note, any overdue amount payable on such Note will bear interest at a rate per annum (expressed as a percentage) equal to the Accrual Yield (as defined below) specified in the applicable Pricing Supplement (computed on the basis of a 360-day year of twelve 30-day months, unless otherwise specified in the applicable Pricing Supplement) until all amounts due in respect of such Note have been paid.

The applicable Pricing Supplement will specify whether a Note is an Original Issue Discount Note. An Original Issue Discount Note is a Note (including any Zero Coupon Note) that is treated as having been issued with Original Issue Discount for United States federal income tax purposes (an “Original Issue Discount Note”) and, in the event of acceleration of maturity of such Note, the amount payable thereon in lieu of the principal amount due at the Maturity Date thereof will be the amount (the “Amortized Face Amount”) equal to (a) the Issue Price (as defined below) plus (b) that portion of the difference between the Issue Price and the principal amount that has accrued at the Accrual Yield (calculated in accordance with the method set forth in the applicable Pricing Supplement) at the date as of which the Amortized Face Amount is calculated, but in no event will the Amortized Face Amount exceed the principal amount of such Note due at the Maturity Date thereof. As used herein, (x) “Issue Price” means (a) the principal amount of a Note less (b) the Original Issue Discount thereof, (y) “Accrual Yield” means the yield-to-maturity stated in the applicable Pricing Supplement for the period from the Issue Date stated in the Pricing Supplement to the Maturity Date on the basis of the Issue Price and principal amount and (z) “Original Issue Discount,” means the Original Issue Discount stated in the Pricing Supplement multiplied by a fraction, the numerator of which is the principal amount of a Note and the denominator of which is the initial principal amount stated in the applicable Pricing Supplement.

Indexed Notes

If the amount of principal, premium and interest, if any, and in the case of Original Issue Discount Notes, the Amortized Face Amount or other amounts payable on the Notes of a Series of which such Note is a part is to be determined by reference to (a) a currency exchange rate or rates, (b) a securities or commodities exchange index, (c) the value of a particular security or commodity, (d) any other index or indices or (e) formula or formulae, then such Note is an Indexed Note and the applicable Pricing Supplement will specify the method by and terms on which the amount of principal (whether at or prior to the Maturity Date thereof), premium and interest, if any, and in the case of Original Issue Discount Notes, the Amortized Face Amount or other amount payable in respect of such Note will be determined and other information relating to the Tranche of which such Note is a part.

An investment in Indexed Notes entails significant risks that are not associated with similar investments in a conventional fixed-rate debt security. If the interest rate of such a Note is so indexed, it may result in an interest rate that is less than that payable on a conventional fixed-rate debt security issued at the same time, including the possibility that no interest will be paid, and if the principal amount of such a Note is so indexed the principal amount payable at maturity may be less than the original purchase price of such Note if allowed pursuant to the terms of such Note, including the possibility that no principal will be paid. The secondary market for such Notes will be affected by a number of factors, independent of the creditworthiness of the Company and the value of the applicable currency, commodity or securities exchange index, including the volatility of the applicable currency, commodity or securities exchange index, the time remaining to the maturity of such Notes, the amount outstanding of such Notes and market interest rates. The value of the applicable currency, commodity or securities exchange index depends on a number of interrelated factors, including economic, financial and political events, over which the Company has no control. Additionally, if the formula used to determine the principal amount or interest payable with respect to such a Note contains a multiple or leverage factor, the effect of any change in the applicable currency, commodity or interest rate index will be increased. The historical experience of the relevant

139

currencies, commodities or securities exchange indices should not be taken as an indication of future performance of such currencies, commodities or securities exchange indices during the term of any Note. Accordingly, prospective investors should consult their own financial and legal advisors as to the risks entailed by an investment in such Notes and the suitability of such Notes in light of their particular circumstances.

Dual Currency Notes

The Company may from time to time offer Notes of a Series (“Dual Currency Notes”) as to which the Company has a one-time option, exercisable on any one of the dates specified in the applicable Pricing Supplement, of thereafter making all payments of principal, premium, if any, and interest (which payments would otherwise be made in the Specified Currency of such Notes) in the optional currency specified in the applicable Pricing Supplement. The applicable Pricing Supplement will specify, among other things, the Specified Currency, the optional payment currency, the designated exchange rate, the option election dates and the Interest Payment Dates for the Notes of the Series of which such Dual Currency Note is a part. The amounts payable and the method for calculating such amounts (whether in respect of principal, premium, if any, or interest and whether at maturity or otherwise) in respect of the Notes of the Series of which such Dual Currency Note is a part and any additional terms and conditions of such Series of Notes will be specified in the applicable Pricing Supplement.

Amortizing Notes

The Company may from time to time offer Notes of a Series which are Notes that pay a level amount in respect of both interest and principal amortized over the life of such Notes (“Amortizing Notes”). Such Amortizing Notes will be redeemable in installments in the installment amounts (each an “Installment Amount”) and on the installment dates (each an “Installment Date”) specified in the applicable Pricing Supplement. Payments with respect to the Notes of the Series of which such Amortizing Note is a part will be applied first to interest due and payable thereon and then to the reduction of the unpaid principal amount thereof. Further information concerning additional terms and conditions and a table or formula setting forth repayment information in respect of any Amortizing Note will be included in the Pricing Supplement applicable to such Notes.

Accrual of Interest; Interest on Overdue Amounts; Limitation on Interest Rate

Each Note (or in the case of the redemption of only part of a Note, that part only) will cease to bear interest (if any) from the due date or date of its redemption unless, upon due presentation thereof, payment of principal is improperly withheld or refused. If all or a portion of the principal amount of any Note (other than a Zero Coupon Note) is not paid when due, upon redemption or acceleration or otherwise, such overdue principal amount will continue to bear interest at the Rate of Interest specified in the applicable Pricing Supplement until payment thereof has been made or duly provided for in full. In the case of Zero Coupon Notes, any overdue amount payable on such Notes will bear interest as set forth above under “Zero Coupon Notes and Original Issue Discount Notes.”

Redemption

Notes of a Series will not be subject to redemption prior to maturity at the option of the Company or at the option of the Holder of any Note of such Series except as set forth in the applicable Pricing Supplement and as set forth below. Notice of redemption will be provided as set forth below under “Notices by the Company” or “Notice by Holders,” as applicable.

At Maturity. Unless otherwise set forth in the applicable Pricing Supplement and unless previously redeemed, or purchased and canceled, each Note will be redeemed by the Company at its Final Redemption Amount set forth in the applicable Pricing Supplement in the relevant Payment Currency on the Maturity Date set forth in the applicable Pricing Supplement.

Early Redemption for Taxation Reasons. Subject to the conditions described below, the Notes of any Series may be redeemed, as a whole but not in part, at the option of the Company, at any time, upon not more than 60 days’ nor less than 30 days’ prior notice (given in accordance with the provisions governing the giving of notices set forth below) to the Holders thereof at a redemption price equal to the applicable Early Redemption Amount, together with interest accrued (but unpaid), if any, to but excluding the date fixed for redemption (which date, in the case of Floating Rate Notes, must be an Interest Payment Date), if the Company determines that on the next succeeding Interest Payment Date, as a result of any change in or amendment to the laws or treaties, or any regulations or rulings promulgated thereunder, of Israel, or any political subdivision thereof or any taxing authority therein, or any proposed change in such laws, treaties, regulations or rulings, or any change in the official application, enforcement or interpretation of such laws, treaties, regulations or rulings (including a holding by a court of competent jurisdiction in Israel), which change or amendment becomes effective or is proposed on or after the Issue Date of the first Tranche of Notes of such Series, in the case of Israeli taxes, the Company has or will become obligated to pay Additional Amounts (or, if Additional Amounts are payable by the Company as of the Issue Date, the Company has or will become obligated to pay Additional Amounts in excess of any Additional Amounts which are payable by the Company as of the Issue Date) on any Note and such obligation cannot be avoided by the Company by the taking of measures which (in the good faith opinion of the Company) are reasonable under the circumstances. Prior to the distribution of any notice of redemption pursuant to this paragraph, the Company will deliver to the Fiscal Agent an officer’s certificate stating that the all conditions have been duly and timely fulfilled and that the Company is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Company so to redeem have occurred, and an opinion of an independent tax counsel to the effect that there has been such change, expiration, amendment or treaty which would entitle the

140

Company to redeem the Notes.

Notwithstanding the foregoing, the Company will have no right to redeem the Notes unless and until it has used its best efforts to obtain an exemption from any deduction or withholding obligation and its request has been denied by the relevant authorities.

Redemption at the Option of the Company. If so set forth in the applicable Pricing Supplement, the Company may, having given not more than 60 days’ nor less than 30 days’ prior notice to the Holders of Notes of a Series (given as provided herein), redeem all or any part of the Notes of such Series then outstanding on the dates and at the amounts specified or determined in the manner set forth in the applicable Pricing Supplement together with interest accrued, if any, to but excluding the date fixed for redemption (which date, in the case of Floating Rate Notes, must be an Interest Payment Date). In the event of a partial redemption of a Series of Notes, such redemption must be of a principal amount of such Series of Notes equal to or higher than the minimum principal amount of the Notes of such Series permitted to be so redeemed (if any) (the “Minimum Redemption Amount”) and less than or equal to the maximum principal amount of the Notes of such Series permitted to be so redeemed (if any) (the “Maximum Redemption Amount”), both as set forth in the applicable Pricing Supplement. In the case of a partial redemption of Definitive Registered Notes, such Notes will be selected individually by lot not more than 60 days prior to the date fixed for redemption and a list of the Notes called for redemption will be notified in accordance with the provisions governing the giving of notices set forth under “Notices by the Company” below not less than 30 days prior to such date. In the case of a partial redemption of Global Registered Notes, such Notes will be selected in accordance with the rules of the relevant clearing system or systems, as the case may be.

Redemption at the Option of the Holders. Subject to the prior delivery of a Put Event Confirmation (as defined below) by the Company in accordance with the terms of the Fiscal Agency Agreement, each Holder will have the option upon the giving of a Put Notice (as defined below) (the “Put Option”) to require the Company to redeem or, at the option of the Company, purchase (or procure the purchase of) each Note of which it is the holder on the Put Date (as defined below) at the principal amount outstanding of such Note plus (in the case of a Put Event described in clause (b) below) Foregone Margin in respect of such Note, together in any case with accrued interest to the Put Date if:

(a) at any time during the term of such Note, such Note is downgraded by S&P, for any reason, to a rating level two notches below IEC’s international long-term corporate credit and senior debt ratings level assigned by S&P (“IEC’s S&P’s Rating”), and is downgraded by Moody's, for any reason, to a rating level two notches below IEC's international long-term corporate credit and senior debt rating level assigned by Moody’s ("IEC’s Moody’s rating"), and the rating level of such Note is not restored by either S&P or Moody’s to the level of IEC’s S&P Rating or IEC’s Moody’s Rating, as applicable, within the three month period beginning on (i) the date of the downgrade (if S&P and Moody’s downgrade such Note on the same date) or (ii) the date of the later downgrade (if S&P and Moody’s downgrade such Note on different dates); provided that the new rating level of such Note assigned by S&P is a level lower than BB+ and assigned by Moody’s is a level lower than Baa3;

(b) a Change of Control occurs; or

(c) an event or circumstance occurs which could reasonably be expected to have a Material Adverse Effect, (each such event, a “Put Event”).

The terms “best endeavors” and “material adverse effect” are used in determining whether or not a Put Event has occurred. Although there is a limited body of case law interpreting the terms “best endeavors” or “best efforts” and “material adverse effect,” there is no precise established definition of the terms under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to whether a particular transaction would involve the “best endeavors,” “best efforts” or a “material adverse effect.” As a result, it may be unclear as to whether a Put Event has occurred and whether a Holder will have the option to require the Company to redeem or, at the option of the Company, purchase (or procure the purchase of) each Note of which it is the holder on the Put Date as described above.

Promptly upon the Company or Holders representing at least 10% of the aggregate principal amount of the relevant Series of Notes becoming aware that an event has occurred or is subsisting which could, subject to the voting of the Holders of the relevant Series of Notes, constitute a Put Event, the Company shall, or any such Holders may give to the Company which then shall, give notice (a “Put Event Notice”) to the Holders of the relevant Series in respect of all of the Notes (with a copy to the Fiscal Agent). If the Holders of more than 25% in aggregate principal amount of the relevant Series of Notes vote that there has been a Put Event, the Company shall give notice (a “Put Event Confirmation”) to the Holders of such relevant Series of Notes (with a copy to the Fiscal Agent) in accordance with the Fiscal Agency Agreement specifying the nature of the Put Event and the procedure set forth below for exercising the option contained in this section.

The Fiscal Agent will not be responsible for ascertaining or monitoring whether or not a Put Event has occurred and, unless and until it has actual knowledge to the contrary in writing, will be entitled to assume that no such event has occurred.

To exercise the option of redemption of a Note above, the Holder must deliver a duly signed and completed notice of exercise in the form obtainable from the specified office of the Fiscal Agent upon request during usual business hours (a “Put Notice”), which form the Company shall provide to the Fiscal Agent within thirty (30) days from the date of issuance of the Notes, in which

141

the Holder shall, among other information, provide such Holder’s bank account information to which payment is to be made (together with (i) in the case of Definitive Registered Notes, such Definitive Registered Notes endorsed in blank or with an executed certificate of transfer and a Put Event Confirmation and (ii) in the case of Global Registered Notes, a Put Event Confirmation and either (A) a bank statement evidencing that the entity providing the Put Notice is the beneficial owner of the principal amount of Notes specified in the Put Notice or (B) a confirmation from a TASE Member that such person is the beneficial owner of the principal amount of Notes specified in the Put Notice) to the specified office of the Fiscal Agent on any Business Day falling within the period (the “Put Period”) of 45 days after a Put Event Confirmation is given. Payment in respect of the Notes to be redeemed shall be made by the Paying Agent to the duly specified bank account in the Put Notice on the date falling seven Business Days following the expiry of the Put Period (the “Put Date”) by transfer of redemption moneys therefor and interest (if any) accrued to such date. A Put Notice, once given, will be irrevocable. The Company shall redeem the relevant Notes on the Put Date unless previously redeemed or purchased.

A Put Notice, once given, will be irrevocable. For the purposes of the Terms and Conditions and the Collateral Trust Agreement, receipts issued pursuant to this section will be treated as if they evidenced ownership of Notes. The Company will redeem the relevant Notes on the Put Date unless previously redeemed or purchased.

In addition, if so set forth in the applicable Pricing Supplement, the Company will, at the option of the Holder of any Note who has given to the Company not more than 60 days’ nor less than 30 days’ notice in accordance with the provisions governing the giving of notices set forth under “Notices by the Holders” below (unless otherwise specified in the applicable Pricing Supplement), which notice will be irrevocable, redeem such Note, subject to, and in accordance with, the terms specified in the applicable Pricing Supplement on the date or dates set forth in the applicable Pricing Supplement and at the amount set forth or determined in the manner specified in the applicable Pricing Supplement, together with interest accrued, if any, to but excluding the date fixed for redemption (which date, in the case of Floating Rate Notes, must be an Interest Payment Date).

Notwithstanding any other provision of the Fiscal Agency Agreement, each holder of a relevant Series of Notes will independently exercise its right to deliver a Put Notice.

Presentation of Notes. If notice of redemption has been given in the manner set forth in the Fiscal Agency Agreement, the Notes so to be redeemed will become due and payable on the date fixed for redemption specified in such notice and, upon presentation and surrender of the Notes at the place or places specified in such notice maturing subsequent to the redemption date, the Notes will be paid and redeemed by the Company, at the places and in the manner and currency therein specified and at the redemption price therein specified together with accrued interest, if any, to the redemption date.

If the due date for redemption of any Note is not a due date for payment of interest, interest accrued from the preceding due date for payment of interest or the Issue Date, unless there is a different Interest Commencement Date, as the case may be, will only be payable against presentation (and surrender if appropriate) of the relevant Note. Interest accrued on a Note which bears interest after its Maturity Date will be payable on redemption of such Note against presentation thereof. From and after the redemption date, if moneys for the redemption of Notes called for redemption will have been made available at the office of the Paying Agent for redemption on the redemption date, the Notes called for redemption will cease to bear interest (and in the case of Original Issue Discount Notes, the Amortized Face Amount or other amounts payable in respect thereof will cease to increase), and the only right of the Holders of such Notes will be to receive payment of the redemption price together with accrued interest, if any, to the redemption date as aforesaid. If moneys for the redemption of the Notes are not made available for payment until after the redemption date, the Notes called for redemption will not cease to bear interest (and in the case of Original Issue Discount Notes, the Amortized Face Amount or other amount payable in respect thereof will not cease to increase) until such moneys have been so made available.

Early Redemption Amounts. For the purposes of “Early Redemption for Taxation Reasons” above and “Events of Default and Acceleration Events” below, Notes which are redeemed prior to their Maturity Date will be redeemed at a redemption price (each an “Early Redemption Amount”) computed as follows, unless otherwise set forth in the applicable Pricing Supplement:

(a) in the case of Notes (other than Indexed Notes or Partly Paid Notes) issued at an Issue Price of 100% of their principal amount, at their principal amount in the relevant Specified Currency, together with, in the case of Fixed Rate Notes, interest accrued to the date fixed for redemption;

(b) in the case of Notes (other than Original Issue Discount Notes, Indexed Notes or Partly Paid Notes), issued with an Issue Price greater or less than 100% of their principal amount, at the amount set forth in the applicable Pricing Supplement;

(c) in the case of Original Issue Discount Notes (other than Indexed Notes or Partly Paid Notes), at an amount (the “Amortized Face Amount”) equal to:

(1) the sum of (x) the Reference Price set forth in the applicable Pricing Supplement and (y) the product of the Accrual Yield set forth in the applicable Pricing Supplement (compounded annually) being applied to the Reference Price from (and including) the Issue Date to (but excluding) the date fixed for redemption pursuant to the provisions described under “Early Redemption for Taxation Reasons” above or (as the case may be) the date upon which such Note becomes due and repayable as provided under “Events of Default and Acceleration Events” below; or

142

(2) if the amount payable in respect of any Original Issue Discount Note upon redemption of such Note pursuant to the provisions described under “Early Redemption for Taxation Reasons” above or upon its becoming due and repayable as provided under “Events of Default and Acceleration Events” below is not paid when due, the amount due and repayable in respect of such Note will be the Amortized Face Amount of such Note computed as provided above, except that sub-paragraph (A) will have effect as though the references in sub-paragraph (A) to the date fixed for redemption or the date upon which the Original Issue Discount Note becomes due and repayable were replaced by references to the date (the “Relevant Date”) that is the earlier of:

(A) the day on which all sums due in respect of such Note up to that day are received by or on behalf of the Holder of such Note; and

(B) the date on which the full amount of the moneys repayable has been received by the Paying Agent and notice to that effect has been given in accordance with the terms of the Fiscal Agency Agreement.

The computation of the Amortized Face Amount in accordance with sub-paragraph (2) will continue to be made, to the extent permitted by applicable law after as well as before judgment, until the Relevant Date unless the Relevant Date falls on or after the Maturity Date, in which case the amount due and repayable will be the principal amount of such Note together with interest at a rate per annum equal to the Accrual Yield and computed as set forth above under “Zero Coupon Notes.”

(d) in the case of Indexed Notes, the Early Redemption Amount will be determined in accordance with the index and/or the formula set forth in the applicable Pricing Supplement, and each such Indexed Note will be redeemed at the Early Redemption Amount; or

(e) in the case of Partly Paid Notes, the Early Redemption Amount will be as set forth in the applicable Pricing Supplement.

Amortizing Notes. If the Notes are Amortizing Notes, they will be redeemed in the Installment Amounts and on the Installment Dates specified in the applicable Pricing Supplement.

Partly Paid Notes. If the Notes are Partly Paid Notes, they will be redeemed, whether at maturity, early redemption or otherwise in accordance with the provisions of the Terms and Conditions as amended by the applicable Pricing Supplement.

Repurchase

The Company may at any time purchase Notes in any manner and at any price. Notes purchased by the Company may be held or surrendered to the Fiscal Agent for cancellation. Any purchase by tender will be made available to the Holders of all Notes of a Series alike. The Notes so purchased, while held by or on behalf of the Company, will not entitle the Holder to vote at any meetings of the Holders and will not be deemed to be outstanding for the purposes of calculating quorums at meetings of Holders.

Additional Payment Amounts

All payments of principal of, and interest and premium (if any) on, the Notes by the Company will be made without deduction or withholding for or on account of (i) any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of Israel or by or within any political subdivision thereof or any authority therein having power to tax (“Israeli Tax”), (ii) changes to the Ruling or (iii) the involuntary delisting of the Notes from the TACT Institutional, unless deduction or withholding of such Israeli Tax is required by law. In the event the Company is required to deduct or withhold tax, the Company will pay such additional amounts (“Additional Amounts”) as specified in the applicable Pricing Supplement, except that no such Additional Amounts will be payable in respect of any Note:

(a) to or on behalf of a Holder who is subject to such Israeli Tax by reason of his being or having been connected with Israel, otherwise than merely by holding such Note or receiving principal or interest in respect thereof; or

(b) to or on behalf of a Holder who would not be liable for or subject to such deduction or withholding by making a declaration of non-residence or other similar claim for exemption to the relevant tax authority if, after having been requested to make such a declaration or claim, such Holder fails to do so; or

(c) presented for payment by or on behalf of a Holder who would have been able to avoid such deduction or withholding by presenting the relevant Note to another Paying Agent in a Member State of the European Union; or

(d) with respect to any tax, assessment, or other governmental charge that is imposed or withheld by reason of the application of Section 1471 through 1474 of the United States Internal Revenue Code of 1986, as amended (or any successor provisions), any regulation, pronouncement, or agreement thereunder, official interpretations thereof, or any law implementing an intergovernmental approach thereto, whether currently in effect or as published and amended from time to time.

The obligation to pay Additional Amounts in respect of (i) taxes, duties, assessments and governmental charges, (ii) changes to the Ruling or (iii) the involuntary delisting of the Notes from the TACT Institutional, will not apply to (a) any estate, inheritance, gift, sales, transfer, personal property or any similar tax, assessment or other governmental charge or (b) any tax, assessment or other governmental charge which is payable otherwise than by deduction or withholding from payments of principal or interest on the Notes; provided that, except as otherwise set forth in the Notes, the Company will pay all stamp

143

and other duties, if any, which may be imposed by Israel, the United States or any respective political subdivision thereof or any taxing authority of or in the foregoing, with respect to the Fiscal Agency Agreement or the Charge Documents or as a consequence of the issuance of the Notes.

Any reference herein to principal and/or interest in respect of Notes of a Series will also be deemed to refer to any Additional Amounts which may be payable hereunder.

Certain Covenants

Except to the extent modified, removed or supplemented in a Pricing Supplement, the Notes will contain various covenants, including those set forth below.

Negative Pledge. The Notes will provide that other than Permitted Security Interests, the Company will not incur or suffer to exist any Security Interest upon any of its revenues, property or assets whether now owned or hereafter acquired as security for any Indebtedness, except that the Company may grant one or more Floating Charges if at the same time or prior thereto provision is made to secure the Indebtedness due under the Notes equally and ratably with the Indebtedness secured by such Floating Charge for so long as such Indebtedness is so secured.

Impairment of Floating Charge. The Notes will provide that IEC will not take or omit to take any action which could adversely affect the validity or enforceability of, or the effectiveness or ranking of, the Note Floating Charge.

Taxes. The Notes will provide that the Company will pay, prior to delinquency, all taxes, assessments and governmental levies, except as the same are being contested in good faith and by appropriate proceedings or where the failure to pay would not have a material adverse effect on the Company and its subsidiaries as a whole.

Conduct of Business. The Notes will provide that the Company will (a) conduct its business in the ordinary course and (b) maintain its business in accordance with its constitutive documents and all applicable laws and regulations.

The Notes will also provide that the Company will perform its obligations under and comply with the terms of each of the Program Documents to which it is a party.

Public Rating. The Notes will provide that for so long as Notes with an aggregate principal amount of at least U.S.$25,000,000 remain outstanding, the Company will procure, at its own cost and expense, that a public long-term corporate rating of the Company is obtained from each Rating Agency and will take all action that may be required of it, at its own cost and expense, to maintain a rating.

Reports and Notifications. The Notes will provide that the Company will furnish within the periods specified below (and within seven Business Days thereafter in English, if the original information was provided in Hebrew) to the Holders, with a copy to the Fiscal Agent and to the Paying Agent:

(a) as soon as practicable and not later than five Business Days after so becoming aware, details of any event or circumstances that could, with the passage of time, giving of notice, the making of any determination or any combination thereof, give rise to a Put Event, Event of Default or an Acceleration Event;

(b) as soon as practicable and not later than five Business Days after so becoming aware, written notice of a material acquisition, disposition, merger (including in respect of any material Electricity Assets), restructuring, senior management change at the Company or change in its auditors; and

(c) simultaneously with such reporting, any matter notified by or on behalf of the Company to an Israeli or other stock exchange or securities regulatory authority in Israel or elsewhere.

All notices referred to above will be available for inspection at the respective offices of the Paying Agents. Any Holder may request that a copy of any such report be mailed to such Holder, at the expense of the Company, by written request to any Paying Agent.

The Program Agreement also provides that at any time when the Company is neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, upon request of a Holder, the Company will promptly furnish or cause to be furnished Rule 144A Information to such Holder or to a prospective purchaser of such Note designated by such Holder, as the case may be, in order to permit compliance by such Holder with Rule 144A in connection with the resale of such Note by such Holder. “Rule 144A Information” will be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto).

Events of Default and Acceleration Events

Events of Default

Each of the following constitutes an “Event of Default” with respect to the Notes:

(a) Non-Payment of Interest the Company defaults in any payment of interest on the Notes when the same becomes due and payable, and such default continues for a period of three Business Days;

144

(b) Non-Payment of Principal the Company defaults in the payment of the principal of the Notes when the same becomes due and payable at maturity, upon acceleration, redemption or otherwise, and such default with respect to any principal payment other than the final payment continues for a period of three Business Days;

(c) Insolvency or Bankruptcy (i) the Company is unable or admits inability to pay its debts as they fall due or is deemed to or declared to be unable to pay its debts under Applicable Law, suspends or threatens to suspend making payments on any of its debts, or, by reason of actual or anticipated financial difficulties, commences negotiations with one or more of its creditors with a view to rescheduling any of its indebtedness; or (ii) a moratorium is declared in respect of any indebtedness of the Company provided that the ending of the moratorium will not remedy any Event of Default caused by that moratorium; or (iii) the Company (A) adopts a resolution for winding-up, entry into receivership or administration, or (B) an order of liquidation is issued in respect of the Company; or the Company enters into receivership.

(d) Insolvency Proceedings (i) Any corporate action, legal proceedings or other procedure or step is taken in relation to: (A) the suspension of payments, a moratorium of any indebtedness, winding-up, dissolution (whether temporary or permanent), administration or reorganization (by way of voluntary arrangement, scheme of arrangement or otherwise) of the Company; (B) a composition, compromise, assignment or arrangement with any creditor of the Company, other than any such arrangement entered into for the purpose of a solvent restructure or merger which (i) does not require the consent of any creditor or (ii) if the consent of a creditor is required, where such consent has been given by the relevant creditor, including, in each case, a solvent restructure or merger pursuant to Section 350 and/or Section 351 of the Israeli Companies Law - 1999; (C) the appointment of a liquidator, receiver, administrative receiver, administrator, compulsory manager, custodian, trustee or other similar officer (each such appointment, whether temporary or permanent) in respect of the Company; (D) crystallization or enforcement of any security over a substantial part of the assets of the Company which is not discharged, stayed or dismissed within 14 days of commencement provided that the aggregate amount secured by any such security interests so enforced exceeds U.S.$25,000,000 (or its equivalent in any other currency or currencies); or (E) any analogous procedure or step is taken in any jurisdiction. (ii) Paragraph (i) will not apply to any winding-up petition which is frivolous or vexatious and is discharged, stayed or dismissed within 14 days of commencement or, if earlier, the date on which it is advertised.

If any Event of Default occurs, then the Fiscal Agent (subject to being indemnified and/or secured to its satisfaction), upon the request of Holders of at least 25% in aggregate principal amount of the relevant Series of Notes will, or the Holders of at least 25% in aggregate principal amount of the relevant Series of Notes may, give written notice to the Company declaring the relevant Series of Notes to be immediately due and payable, whereupon they will become immediately due and payable at their principal amount outstanding together with accrued interest without further action or formality.

No delay by the Fiscal Agent or Holders to give or cause to be given a notice to the Company declaring the relevant Series of Notes to be immediately due and payable upon any occurrence of an event that actually or potentially constitutes an Event of Default will constitute a waiver by the Holders of such Series of Notes of their rights under the Fiscal Agency Agreement or the Notes or in any other way prejudice their ability to enforce their rights and remedies under the Notes, the Program Documents and the Charge Documents.

Acceleration Events

Each of the following constitutes an “Acceleration Event” with respect to the Notes:

(a) Breach of Covenants the Company does not comply with the covenants described above under the captions “Description of the Notes — Certain Covenants — Negative Pledges,” “Description of the Notes — Certain Covenants — Reports and Notifications,” “Description of the Notes — Redemption — Redemption at the Option of the Holders” and “Description of the Notes —Additional Payment Amounts,” and (other than in the case of “Description of the Notes — Redemption — Redemption at the Option of the Holders”) such event or circumstance (i) is, in the opinion the Holders of more than 25% in aggregate principal amount of the relevant Series of Notes, incapable of remedy or (ii) is an event or circumstance which is, in the opinion of the Holders of more than 25% in aggregate principal amount of the relevant Series of Notes, capable of remedy, but remains unremedied for five days after the Holders of more than 25% in aggregate principal amount of the relevant Series of Notes have given written notice of such event or circumstances.

(b) Breach of other Obligations the Company does not comply with any provisions (other than those referred to in paragraph (a) above) or agreements in the Notes or the Charge Documents and (unless otherwise giving rise to a Put Event or an Event of Default), such event or circumstance (i) is, in the opinion of the Holders of more than 25% in aggregate principal amount of the relevant Series of Notes, incapable of remedy or (ii) is an event or circumstance which is, in the opinion of the Holders of more than 25% in aggregate principal amount of the relevant Series of Notes, capable of remedy, but remains unremedied for 30 days after the Holders of more than 25% in aggregate principal amount of the relevant Series of Notes have given written notice of such event or circumstance.

(c) Unlawfulness and invalidity (i) it is or becomes unlawful for the Company to perform any of its obligations (A) under the Program Documents which is material in the context of the Notes or (B) under the Note Floating Charge; or (ii) any obligation or obligations of the Company under the Program Documents are not or cease to be legal, valid, binding or enforceable and the cessation individually or cumulatively materially and adversely affects the interests of the Holders; or the Note Floating Charge ceases to be

145

legal, valid, binding, enforceable or effective or is alleged by the Company to be ineffective.

(d) Cross Default (i) any Indebtedness of the Company is not paid within 15 days after the expiration of any applicable grace period or within 30 days after final maturity; or (ii) any Indebtedness of the Company is declared to be or otherwise becomes due and payable prior to its specified maturity as a result of an event of default or an acceleration event (however described); provided that no Acceleration Event will occur under this paragraph (d) if the aggregate amount of Indebtedness or commitment for Indebtedness falling within sub-paragraphs (i) to (ii) above is less than U.S.$25,000,000 (or its equivalent in any other currency or currencies).

(e) Creditors’ process any expropriation, attachment, sequestration, distress or execution or any analogous process in any jurisdiction affects any asset or assets of the Company provided that the aggregate amount of the affected asset or assets exceeds U.S.$25,000,000 (or its equivalent in any other currency or currencies).

If any Acceleration Event occurs, then the Fiscal Agent (subject to being indemnified and/or secured to its satisfaction), upon the request of Holders of at least 25% in aggregate principal amount of the relevant Series of Notes will, or the Holders of at least 25% in aggregate principal amount of the relevant Series of Notes may, give written notice to the Company declaring the relevant Series of Notes to be immediately due and payable, whereupon they will become immediately due and payable at their principal amount outstanding together with accrued interest without further action or formality.

No delay by the Fiscal Agent or Holders to give or cause to be given a notice to the Company declaring the relevant Series of Notes to be immediately due and payable upon any occurrence of an event that actually or potentially constitutes an Acceleration Event will constitute a waiver by the Holders of such Series of Notes of their rights under the Fiscal Agency Agreement or the Notes or in any way prejudice their ability to enforce their rights and remedies under the Notes, the Program Documents and the Charge Documents.

Meetings of Holders and Modification

The Fiscal Agency Agreement contains provisions, which are binding on the Company and the Holders of Notes, for convening meetings of the Holders of Notes of any Series to consider matters affecting their interests, including to modify, amend or supplement the terms of the Notes of such Series, the Fiscal Agency Agreement or the Charge Documents or to waive future compliance with or past default under, such Notes.

A meeting of Holders of Notes of one or more Series may be called at any time and from time to time by the Company to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Agreement or the Notes of such Series to be made, given or taken by Holders of Notes of such Series or to modify, amend or supplement the terms of the Notes of such Series, the Charge Documents or the Fiscal Agency Agreement as hereinafter provided. The Fiscal Agent may at any time, and shall upon the written request of the Company or the Charge Agent, call a meeting of Holders of Notes of one or more Series for any such purpose to be held at such time and at such place as the Fiscal Agent (after consulting with the Company) shall determine. Notice of every meeting of Holders of Notes of a Series, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting, shall be given not less than 30 nor more than 60 days prior to the date fixed for the meeting. In case at any time the Holders of at least 10 percent in aggregate principal amount of the Outstanding Notes of a Series shall have requested the Company or the Fiscal Agent to call a meeting of the Holders of Notes of such Series to make, give or take any request, demand, authorization, direction, notice, consent, waiver or other action provided by the Fiscal Agency Agreement or the Notes of such Series, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, the Fiscal Agent (after consulting with the Company) shall call such meeting for such purposes by giving notice thereof. All such meetings shall be held in New York City or in such other location acceptable to the Fiscal Agent. The Fiscal Agent shall not have any responsibility to locate the Holders. Holders may attend the meeting in person, by means of teleconference or by proxy.

To be entitled to vote at any meeting of Holders of Notes of a Series, a Person must be a Holder of Outstanding Notes of such Series or a Person appointed by an instrument in writing as proxy for a Holder or Holders of Outstanding Notes of such Series by such Holder or Holders, which proxy need not be a Holder of Notes. The Fiscal Agent shall have the right to require any Holder, or proxy of such Holder, participating in a meeting of Holders of the Note to provide reasonable evidence of the Holder’s ownership of the Notes. The Persons entitled to vote a majority in aggregate principal amount of the Outstanding Notes which may be affected by the action to be taken at such meeting, except as hereinafter provided, will constitute a quorum for the transaction of all business specified above. No business shall be transacted in the absence of a quorum unless a quorum is represented when the meeting is called to order. In the absence of a quorum within 30 minutes of the time appointed for any such meeting, the meeting shall, if convened at the request of the Holders of Notes (as provided above), be dissolved. In any other case the meeting may be adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. In the absence of a quorum at any such adjourned meeting, such adjourned meeting may be further adjourned for a period of not less than 10 days as determined by the chairman of the meeting prior to the adjournment of such meeting. At the reconvening of any meeting adjourned for a lack of a quorum the Person or Persons entitled to vote 25% in aggregate principal amount of the Outstanding Notes which may be affected by the action to be taken at such meeting will constitute a quorum for the taking of any action set forth in the notice of the original meeting. The chairman of the meeting of Holders of the Notes shall be the Fiscal Agent and the meeting shall be conducted in accordance with the Fiscal Agent’s customary procedures. The Fiscal Agent may make such reasonable and customary regulations as

146

it will deem advisable for any meeting of Holders of Notes of any Series with respect to the proof of the holding of Notes of such Series, the adjournment and chairmanship of such meeting, the appointment and duties of inspectors of votes, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it will deem appropriate, subject to the terms of the Fiscal Agency Agreement.

Except as otherwise provided below, any modifications, amendments, supplements or waivers to the Fiscal Agency Agreement or the Terms and Conditions of the Notes of a Series will require the written consent or approval of the Company, the Fiscal Agent and (a) the written consent of Holders of a majority in aggregate principal amount of the Outstanding Notes of such Series or (b) the approval of a majority of the aggregate principal amount of such Notes represented at a meeting of the Holders of Notes of such Series (each such majority in the foregoing clauses (a) and (b) being referred to herein as a “Requisite Majority”); provided, however, that any such modification, amendment, supplement or waiver which affects the Outstanding Notes of more than one Series (as determined by the Company) will require (i) the written consent of Holders of a majority in aggregate principal amount of the Outstanding Notes affected thereby or (ii) the approval of a majority of the aggregate principal amount of such Outstanding Notes affected thereby represented at such meeting of the Holders of Notes. Any modifications, amendments, supplements or waivers to the Charge Documents will require the consent of the Company, the Charge Agent and the Requisite Majority of each Series of Notes secured thereby voting separately.

Except as otherwise provided below, any such modification, amendment, supplement or waiver with respect to the Notes, the Fiscal Agency Agreement and the Charge Documents will be conclusive and binding on all Holders of Notes affected thereby, whether or not they have given such consent or were present at such meeting and whether or not notation of such modification, amendment, supplement or waiver is made upon the Notes, and on all future Holders of Notes. Any instrument given by or on behalf of any Holder of a Note in connection with any consent to any such modification, amendment, supplement or waiver will be irrevocable once given and will be conclusive and binding on all subsequent Holders of such Note.

Notwithstanding anything herein to the contrary, the approval of any release of the Note Floating Charge with respect to such Series or any modification, amendment, supplement or waiver to such Series or to the Charge Documents with respect to such Series, in each case in connection with such approval, requires the approval of the Requisite Majority of such Series of Notes voting separately. In addition, any instructions provided by the Holders secured by the Note Floating Charge with respect to the Note Floating Charge or the Collateral Trust Agreement require the approval of the Holders of a majority in aggregate principal amount of the Outstanding Notes so secured voting together.

Notwithstanding anything herein to the contrary, no action at any meeting of Holders of Notes, and no modification, amendment, supplement or waiver to the Notes, the Fiscal Agency Agreement or the Charge Documents may (i) change the maturity of the principal (including premium or redemption amounts, if any, and, in the case of Original Issue Discount Notes, the Amortized Face Amount or other amounts payable in respect thereof) or interest, if any, in respect of any Note of such Series, or reduce the principal amount (including premium or redemption amounts, if any, and, in the case of Original Issue Discount Notes, the Amortized Face Amount or other amounts payable in respect thereof) thereof, or reduce the rate or extend the time of payment of any installment of interest thereon, (ii) change the place of payment of principal of, or interest on, any Notes of such Series, (iii) change the currency of payment of principal of, or interest on, any Notes of such Series, (iv) change the Company’s obligation to pay Additional Amounts, (v) impair or affect the right of any Holder to institute suit for the enforcement of any such payment on or after the due date therefor (or in the case of redemption, on or after the redemption date), (vi) permit the creation of any Charge (other than Permitted Security Interests) or release the Note Floating Charge (other than as provided in the preceding paragraph) or deprive the Holders of the Notes of the security afforded by the Note Floating Charge (other than as provided in the preceding paragraph), (vii) waive an Event of Default in the payment of principal of, or interest on, the Notes of such Series, (viii) reduce the proportion of the principal amount of Notes of such Series the consent of the Holders of which is necessary to modify or amend the Fiscal Agency Agreement, the Terms and Conditions of the Notes of such Series or the Charge Documents or to make, take or give consent, waiver or other action provided hereby or thereby to be made, taken or given or (ix) reduce the percentage of aggregate principal amount of Notes outstanding required for the adoption of a resolution or the quorum required at any meeting of Holders of Notes at which a resolution is adopted, in each case, unless such action or modification, amendment or supplement is approved by an extraordinary resolution (“Extraordinary Resolution”) which may only be passed by the affirmative vote of the registered Holder of each Note of such Series; provided, however, that the currency of payment of principal of, or interest on, any Notes of such Series that are listed for trading on the TACT Institutional may not be changed in any circumstances so long as such Notes are listed thereon.

It shall not be necessary for the vote or consent of the Holders of Notes to approve the particular form of any proposed modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action, but it shall be sufficient if such vote or consent shall approve the substance thereof. Any instrument given by or on behalf of any Holder of a Note of a Series in connection with any consent to or vote for any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action shall be irrevocable once given and shall be conclusive and binding on all subsequent Holders of such Note or any Note issued directly or indirectly in exchange or substitution therefor or in lieu thereof. Notice of any modification or amendment of, supplement to, or request, demand, authorization, direction, notice, consent, waiver or other action with respect to the Notes of a Series or the Fiscal Agency Agreement (other than for purposes of curing any ambiguity or of curing, correcting or supplementing any defective provision hereof or thereof) shall be

147

given, in all cases, as provided in the Notes of such Series.

The Company and the Fiscal Agent may agree, without the vote or consent of any Holder of Notes, to any modifications, amendments, supplements or waivers to the Fiscal Agency Agreement or the Terms and Conditions of the Notes and the Company and the Charge Agent may agree, without the vote or consent of any Holder of Notes to any modifications, amendments, supplements or waivers to the Charge Documents, in each case subject to the preceding paragraph and solely for the purposes of (a) adding to the covenants of the Company for the benefit of the Holders, (b) surrendering any right or power conferred upon the Company, (c) correcting or supplementing any defective provision or manifest error contained in the Fiscal Agency Agreement or the Notes or (solely with the consent of the Company and the Charge Agent) correcting or supplementing any defective provision or manifest error contained in the Charge Documents, each in a manner which does not adversely affect the interests of any Holders of the Notes in any respect, (d) amending the certification requirements set forth in the Fiscal Agency Agreement in order to allow the Company to comply with the certification requirements with respect to nationality or status as required by applicable laws, (e) making technical and other amendments that do not adversely affect the interest of any Holder of Notes in order to allow or facilitate the listing or acceptance for listing for trading or quoting of the Notes on the TACT Institutional or another exchange or platform, or (f) making any modification, or granting any waiver or authorization of any breach or proposed breach of, any of the Terms and Conditions of the Notes or any other provisions of the Fiscal Agency Agreement or the Charge Documents in any manner which the Company and the Fiscal Agent or the Charge Agent, as the case may be, may determine, provided that such modification, waiver or authorization does not adversely affect the interests of any Holders of Notes in any material respect.

Notes of a Series authenticated and delivered after the effectiveness of any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action may bear a notation in the form approved by the Fiscal Agent and the Company as to any matter provided for in such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action. New Notes of such Series modified to conform to any such modification, amendment, supplement, request, demand, authorization, direction, notice, consent, waiver or other action may be prepared by the Company, authenticated by the Fiscal Agent and delivered in exchange for the Outstanding Notes of such Series.

Prior to executing any amendment to the Fiscal Agency Agreement, the Fiscal Agent, each Paying Agent (other than the Company), each Calculation Agent (other than the Company), each Transfer Agent and each Registrar shall be entitled to receive an opinion of counsel, at the Company’s expense, stating that such amendment is permitted by the terms of the Fiscal Agency Agreement.

For purposes of the provisions of the Fiscal Agency Agreement and the Terms and Conditions of the Notes, any Note authenticated and delivered pursuant to the Fiscal Agency Agreement will, as of any date of determination, be deemed to be “outstanding,” except:

(a) Notes theretofore canceled by the Fiscal Agent or delivered to or to the order of the Fiscal Agent for cancellation;

(b) Notes which have been called for redemption in accordance with their terms or which have become due and payable at maturity or otherwise and with respect to which moneys sufficient to pay the principal thereof (including premium and redemption, if any, and in the case of Original Issue Discount Notes, the Amortized Face Amount or other amounts payable in respect thereof) and interest, if any, in respect thereof will have been made available to the Paying Agent; or

(c) Notes in lieu of or in substitution for which other Notes will have been authenticated and delivered pursuant to the Fiscal Agency Agreement;

provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Notes of a Series are present at a meeting of Holders of Notes of such Series for quorum purposes or have consented to or voted in favor of any request, demand, authorization, direction, notice, consent, waiver, amendment, modification or supplement hereunder, Notes of such Series owned directly or indirectly by the Company or any Affiliate (as defined below) of the Company will be disregarded and deemed not to be outstanding, except that for the purposes of determining whether the Fiscal Agent will be protected in relying on any such request, demand, authorization, direction, notice, consent, waiver, amendment, modification or supplement, only Notes that the Fiscal Agent knows are so owned will be so disregarded.

The Holder of a Note may, at any meeting of Holders of a Series of Notes at which such Holder is entitled to vote, cast one vote for each currency unit in principal amount of the Notes held by such Holder in which such Notes are denominated. Notwithstanding the foregoing, at any meeting of Holders of more than one Series of Notes, a Holder of a Note which does not specify regular payments of interest, including, without limitation, Original Issue Discount Notes, will be entitled to one vote at any such meeting for each such currency unit of the redemption value of such Note calculated as of the date of such meeting. Where Notes are denominated in one or more currencies other than U.S. Dollars, the U.S. Dollar equivalent of such Notes will be calculated at the respective Market Exchange Rates on the date of such meeting or, in the case of written consents or notices, on such date as the Company will designate for such purpose, and each Holder of such a Note will have one vote for every U.S. Dollar of Notes (converted as aforesaid) which it holds.

148

Notices by the Company

The Company will (i) for so long as any Notes are represented by Global Registered Notes, deliver any notice to redeem Registered Notes and all other communications to Holders of Registered Notes to the Depositary, for the purpose of delivery to the relevant clearing system for further communication to their entitled account holders; (ii) for so long as any Notes are listed for trading on the TACT Institutional, publish such notice through the newswire service of Bloomberg, or if Bloomberg does not then operate, any similar agency; and (iii) for so long as any Notes are listed for trading on the TACT Institutional and to the extent and in the manner permitted by the Applicable Procedures, post such notice on the official website of the TASE (http://maya.tase.co.il or any successor website thereto). If publication as provided above is not practicable, notice will be given in such other manner and shall be deemed to have been given on such date, in writing and sent first class postage pre-paid, and will be addressed to such Holders at their respective addresses appearing in the Note Register maintained pursuant to the Fiscal Agency Agreement. In the case of Definitive Registered Notes, notices will be mailed to Holders at their respective addresses as they appear on the records of the applicable Registrar. The Fiscal Agent shall furnish Put Notices and notices to Holders regarding meetings of Holders by publishing such notices on the TACT Institutional System; provided that if such publication is not practicable, notices will be mailed to the Holders at their respective addresses as they appear on the records of the applicable Registrar.

Neither the failure to give notice nor any defect in any notice given to any particular Holder of a Note will affect the sufficiency of any notice with respect to other Notes.

Notices by the Holders

Notices to be given by any Holder of a Note will be in writing and given by lodging the same to the Fiscal Agent, any Paying Agent, any Registrar or any Transfer Agent. So long as any of the Notes are represented by a Global Registered Note, such notice may be given by any Holder of a Note to the Fiscal Agent in such manner as the Fiscal Agent (if notices are given to the Fiscal Agent) and the TASECH may approve for this purpose.

Replacement of Notes

The Fiscal Agent or its duly authorized agents are authorized from time to time in accordance with the provisions of the Fiscal Agency Agreement to authenticate or cause to be authenticated and deliver or cause to be delivered back to the Company (i) Notes of a Series in exchange for or in lieu of Notes of such Series of like tenor and of like form which become mutilated, destroyed, defaced, stolen or lost upon payment by the claimant of the expenses incurred in connection therewith and on such terms as to evidence and indemnity as the Company may reasonably require, and mutilated or defaced Notes must be surrendered before replacements will be issued; (ii) Notes of a Series in any authorized denominations and of equal aggregate principal amount of Notes of such Series, subject to the requirements as to minimum denomination; and (iii) if specifically so provided by the applicable Pricing Supplement, Notes of such Series in exchange for Notes of another Series.

Each Note surrendered for exchange will be dated the date of its original issuance. Each Note executed, authenticated and delivered upon any transfer or exchange for or in lieu of the whole or any part of any Note will carry all rights, if any, to the principal amount (including premium or redemption amounts, if any, and, in the case of Original Issue Discount Notes, the Amortized Face Amount or other amount payable in respect thereof) and to interest, if any, accrued and unpaid and to accrue which were carried by the whole or such part of such Note. No such exchanges, however, will be made by the applicable Registrar or Transfer Agent, and no Holder of any Note may require such an exchange, during the period of 30 days preceding the due date for any payment of principal (including premium or redemption amounts, if any, and, in the case of Original Issue Discount Notes, the Amortized Face Amount or other amount payable in respect thereof) on such Note.

Governing Law; Service of Process; Jurisdiction

The Fiscal Agency Agreement, the Notes and the Collateral Trust Agreement will be governed by, and construed in accordance with, the laws of the State of Israel of New York and the Note Floating Charge will be governed by, and construed in accordance with, the laws of the State of Israel, in each case without regard to that state’s principles of conflicts of laws. Each party to the Fiscal Agency Agreement and the Collateral Trust Agreement has irrevocably submitted to the non-exclusive jurisdiction of any United States Federal or New York State court sitting in New York City, the Borough of Manhattan, and further submits to the jurisdiction of any competent court in the place of its corporate domicile for the purpose of any suit, action or proceeding arising out of or related to the Fiscal Agency Agreement, the Collateral Trust Agreement, or any Note (“Proceedings”). The Collateral Trust Agreement also states that nothing contained in the Collateral Trust Agreement prevents the Charge Agent or any of the Holders from taking Proceedings in any other courts with jurisdiction and that, to the extent allowed by law, the Charge Agent or any of the Holders may take concurrent Proceedings in any number of jurisdictions, and in such event the Company (or IEC) may take counter proceedings in such jurisdictions. Each such party will waive, to the fullest extent permitted by law, any objection which it may have to the laying of the venue of any such Proceedings brought in such a court and any claim that any such Proceedings have been brought in an inconvenient forum. Each such party will agree that a final judgment in any Proceedings brought in such a court will be conclusive and binding upon it and may be enforced in any court to the jurisdiction of which it is subject by a suit upon such judgment; provided that in the case of the Company, service of process is effected on it in accordance with the provisions set forth herein or as otherwise

149

permitted by law. With respect to the Note Floating Charge, the District Court of Israel sitting in Haifa will have exclusive jurisdiction to which all parties will submit.

As long as any Note remains outstanding, the Company will at all times have an authorized agent in New York City, the Borough of Manhattan upon whom process may be served in connection with any Proceedings. Service of process upon such agent and written notice of such service delivered to the Company will, to the fullest extent permitted by applicable law, be deemed in every respect effective service of process upon the Company in any Proceedings. The Company has appointed Corporation Service Company, 1180 Avenue of the Americas, Suite 210, New York, NY 10036, USA, as its agent for such purposes.

The Company will consent in respect of any Proceedings to the giving of any relief or the issue of any process in connection with such Proceedings including, without limitation, the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) of any order or judgment which may be made or given in such Proceedings. To the extent that the Company may in any jurisdiction claim for itself or its assets immunity from suit, execution, attachment (whether in aid of execution, before judgment, or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), the Company will irrevocably agree not to claim and will irrevocably waive such immunity to the full extent permitted by the laws of such jurisdiction and will agree that the waivers set forth in this paragraph will have the fullest extent permitted under the United States Foreign Sovereign Immunities Act of 1976 and are intended to be irrevocable for purposes of such act.

Service of process personally delivered upon the agent specified above and written notice of such service delivered to the Company will be deemed in every respect effective service of process upon the Company; provided, however, that no notice by mail on the Company or any of its agents will be deemed effective service of process.

Notwithstanding anything to the contrary above, the Note Floating Charge will be governed by, and construed in accordance with the laws of the State of Israel and any Proceedings and matters related thereto will be submitted to the exclusive jurisdiction of the district court of Haifa.

Judgment Currency Indemnity

The Company agrees that, if a judgment or order given or made by any court for the payment of any amount in respect of any Note is expressed in a currency (the “judgment currency”) other than the currency (the “denomination currency”) in which such Note is denominated or in which such amount is payable, it will indemnify the relevant Holder against any deficiency arising or resulting from any variation in rates of exchange between the date as of which the amount in the denomination currency is notionally converted into the amount in the judgment currency for the purposes of such judgment or order and the date of actual payment thereof. This indemnity will constitute a separate and independent obligation from the other obligations contained in the Terms and Conditions, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted from time to time and will continue in full force and effect notwithstanding any judgment or order for a liquidated sum or sums in respect of amounts due in respect of the relevant Note or under any such judgment or order.

Fiscal Agent; Other Agents

The Fiscal Agency Agreement and the Charge Documents contain provisions for the indemnification of the Fiscal Agent, the Charge Agent, the Calculation Agent (if the Company no longer acts as Calculation Agent), the Paying Agents (excluding the Company, if applicable), the Transfer Agents and the Registrars. The Fiscal Agent, the Charge Agent, the Calculation Agent, the Paying Agents, the Transfer Agents and the Registrars are entitled to enter into business transactions with the Company without accounting for any profit resulting therefrom. The Fiscal Agent may, with the consent of the Company, appoint one or more agents to act on its behalf for the purpose of authenticating and delivering Notes.

Certain Definitions

Except to the extent modified, removed or supplemented in a Pricing Supplement or expressly defined otherwise in the context of a particular provision described in this “Description of the Notes,” the following terms have the meanings set forth below:

“Acceleration Event” means any one of the circumstances described in “‒ Events of Default and Acceleration – Acceleration.”

“Affiliate” of any specified Person means (a) any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person, (b) any other Person which beneficially owns or holds 10% or more of any class of the voting stock of such specified Person, (c) any other Person of which 10% or more of the voting stock is beneficially owned or held by such specified Person or a Subsidiary of such specified Person or (d) any other Person who is a director or officer (i) of such specified Person, (ii) of any Subsidiary of such specified Person or (iii) of any Person described in clause (a) above. For purposes of this definition, (x) “control” of a Person means the power, direct or indirect, to direct or cause the direction of the management and policies of such Person whether by contract or otherwise and (y) “voting stock” means equity interests of a company entitled to vote in the election of directors of such company.

“Applicable Law” means all laws (including Environmental Law), rules and regulations applicable to the Company, including

150

without limitation the Israeli Companies Law, the Electricity Sector Law, the Israeli Government Companies Law — 1975, Israeli Anti-trust Law and the Budgetary Principles law, the Licenses, all regulations, binding resolutions of competent authorities and orders promulgated under any of the foregoing and any replacements to or amendments of any of the foregoing.

“Authorization” means an authorization, consent, approval, resolution, license, exemption, filing, notarization or registration.

“Authorized Representative” means such officers authorized to provide the Fiscal Agent and the Registrar with instructions for completing and issuing Notes and having the requisite authority to execute Notes on behalf of the Company, as certified to the Fiscal Agent in accordance with the Fiscal Agency Agreement.

“Business Day” means (unless otherwise stated in the applicable Pricing Supplement) a day which is both: (a) a day (other than a Saturday or Sunday) on which commercial banks and foreign exchange markets settle payments in New York or Tel Aviv, it being understood that commercial banks and foreign exchange markets in Tel Aviv generally settle payments on those Fridays that are not holidays; and (b) either (1) in relation to amounts payable in a Specified Currency other than Euro, a day on which commercial banks and foreign exchange markets settle payments in the principal financial center of the country of the relevant Specified Currency (if other than New York or Tel Aviv) or (2) in relation to amounts payable in Euro, a TARGET Business Day on which commercial banks and foreign exchange markets are open for business in the place of presentation and are open for business and carrying out transactions in Euro in the jurisdiction in which the Euro account specified by the payee is located.

“Capital Stock” means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) corporate stock, including any preferred stock.

“Change of Control” means the Company ceases to be directly or indirectly Controlled by the Government.

“Charge Documents” means each document, agreement or instrument evidencing, perfecting or assuring the Note Floating Charge, including the Collateral Trust Agreement, as each may be amended or supplemented from time to time in accordance with the terms of the Collateral Trust Agreement.

“Company” means IEC.

“Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes to be purchased that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturities to the remaining term of the Notes.

“Control” means the ability to direct the business of a corporation and the holding of more than 50% of the voting rights of such corporation and “Controlled” will be construed accordingly.

“Dealer” means each of Barclays Capital Inc., Citigroup Global Markets Inc., Credit Suisse Securities (Europe) Limited, Merrill Lynch International, Morgan Stanley & Co. International plc, UBS Limited, Goldman, Sachs & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and any other entity which the Company may appoint as a Dealer under the Program Agreement in accordance with the terms thereof and notice of whose appointment is given to the Fiscal Agent, and “Dealers” will be construed accordingly and references to the “relevant Dealer or Dealers” will be to the Dealers appointed to act as such in respect of a particular Series of Notes.

“Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.

“Electricity Assets” any assets relating to the generation, transmission, distribution, supply and trading of electricity and for administration of the electricity system in the State of Israel and for the carrying on of all other activities related to electricity in the State of Israel, and any and all Licenses with respect thereto.

“Electricity Law” means the Israeli Electricity Sector Law - 1996 and all amendments thereto and replacements thereof and all regulations and/or orders promulgated thereunder.

“Environmental Law” means any applicable law, regulation, covenants, conditions, restrictions or agreements which directly or indirectly relates to: (a) the pollution, contamination or protection of the environment or the release or discharge of any toxic or hazardous substance; (b) harm to or the protection of human health; (c) the conditions of the workplace; or (d) any emission or substance capable of causing harm to any living organism or the environment.

“Environmental Permits” means any permit and other Authorization and the filing of any notification, report or assessment required under any Environmental Law for the operation of the business of the Company conducted on or from the properties owned or used by any of them.

“Event of Default” means any one of the circumstances described in “‒Events of Default and Acceleration – Events of Default.”

“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

“Fixed Charge” means a charge created under Israeli law that attaches to the assets covered thereby when the charge documentation is executed and filed with the appropriate authorities in Israel (Shiabud Kavua).

151

“Floating Charge” means a floating charge created under Israeli law that attaches to the assets covered thereby when the charge documentation is executed and filed with the appropriate authorities in Israel (Shiabud Tzaf).

“Foregone Margin” means the present value of the Spread calculated at the Put Date in respect of all remaining scheduled Interest Payment Dates up to and including the final Interest Payment Date computed using a discount rate equal to the Treasury Rate plus 30 basis points as determined by the Calculation Agent.

“Indebtedness” means any indebtedness of any Person for money borrowed or raised including (without limitation) any indebtedness for or in respect of:

(a) moneys borrowed and debit balance at banks or other financial institutions;

(b) amounts raised by acceptance under any acceptance credit facility;

(c) amounts raised under any note purchase facility or the issue of bonds, notes, debentures, loan stock, certificates or any similar instrument;

(d) the amount of any liability in respect of leases or hire purchase contracts which would, in accordance with applicable law and generally accepted accounting principles, be treated as finance or capital leases;

(e) any counter indemnity obligation in respect of a guarantee, bond, standby or documentary letter of credit or any other instrument issued by a bank or a financial institution;

(f) any amount raised by the issue or redeemable shares which are redeemable (other than at the option of the issuer) before the final Interest Payment Date or are otherwise classified as borrowings under the accounting principles as applicable to the Company;

(g) the amount of any undisputed liability in respect of any purchase price for assets or services the payment of which is deferred for a period in excess of 180 days;

(h) amounts raised under any other transaction (including, without limitation, any forward sale or purchase agreement) having the commercial effect of a borrowing; and

(i) the amount of any liability in respect of any guarantee for any of the items referred to in paragraphs (a) to (h) above.

“Independent Investment Banker” means Barclays Capital Inc. and Citigroup Global Markets Inc. or if such firms are unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the Company with notice of such appointment provided to the Fiscal Agent.

“Investment Grade” means a rating of BBB- or above from S&P and Baa3 or above from Moody’s or such other ratings as S&P or Moody’s may specify as investment grade from time to time.

“Licenses” means the licenses held or required to be held by the Company for the purposes of electricity businesses including, without limitation, licenses necessary for the generation, transmission, distribution, supply and trading of electricity and for administration of the electricity system in Israel and for the carrying on of all other activities related to electricity in Israel.

“Material Adverse Effect” means a material adverse effect on: (a) the business, operations, property, condition (financial or otherwise) or prospects of the Company; or (b) the ability of the Company to perform its obligations under the Notes or the Program Documents; or (c) the validity or enforceability of, or the effectiveness or ranking of the Note Floating Charge or the rights or remedies of the Charge Agent or the Holders under any of the Program Documents; or (d) the Company in respect of any relevant change of law, regulation, license, permit, approval, or other regulatory matter that could affect the ability to perform its financial obligations under the Notes, the Program Documents).

“Moody’s” means Moody’s Investors Service, Inc.

“Permitted Security Interests” means:

(a) Security Interests created by the Charge Documents;

(b) Security Interests in existence as of the Issue Date and set forth in Schedules 1 and 2 to the Collateral Trust Agreement (whether or not registered on such date);

(c) Fixed Charges over bank accounts of the Company in Israel created in the ordinary course of business or otherwise in accordance with applicable law and in an aggregate not exceeding U.S.$25 million (or its then equivalent in an applicable foreign currency) at any time;

(d) deposits made in good faith in connection with bids, tenders, contracts (other than for the payment of Indebtedness) or leases to which the Company is a party, or deposits to secure public or statutory obligations of the Company, or deposits of cash to secure surety or appeal bonds to which the Company is a party, or deposits as security for contested taxes or for the payment of rent;

(e) survey exceptions, easements or reservations of, or rights of others for, rights-of-way, sewers, electric lines, telegraph and telephone lines and other similar purposes, or zoning or other restrictions as to the use of real property, existing on date hereof or

152

arising in future in the ordinary course of business or otherwise in accordance with applicable law;

(f) Security Interests imposed by law, such as carriers’, warehousemen’s and mechanics’ liens, or other Security Interests arising out of judgments or awards against the Company with respect to which the Company will then be prosecuting an appeal or other proceeding for review;

(g) Security Interests for taxes, assessments, or government charges or claims that are not yet delinquent or that are being contested in good faith and by appropriate proceedings; and

(h) Security Interests securing Purchase Money Debt, provided such Security Interests cover only the assets acquired with such Purchase Money Debt.

“Person” means any individual, company, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Principal Purchase Agreement” means any separate agreement between a Dealer and the Company whereby a Dealer may agree with the Company to purchase Notes as principal.

“Program Agreement” means the program agreement, dated as of April 23, 2008 between the Company and the dealers party thereto, as amended from time to time.

“Program Documents” means the Program Agreement, the Fiscal Agency Agreement and the Charge Documents and any Terms/Syndication Agreement.

“Purchase Money Debt” of any Person means all obligations of such Person (a) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement (but excluding trade accounts payable) and other purchase money obligations, in each case where the maturity of such obligation does not exceed the anticipated useful life of the asset being financed and (b) incurred to finance the acquisition of such asset.

“Rating Agency” means S&P or Moody’s and its successors or any rating agency substituted for either of them (or any permitted substitute of them) by the Company from time to time.

“Rule 144A Information” means such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto).

“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. and its successors.

“Security Interest” means any mortgage, charge, pledge, lien or other security interest securing any obligation of any person or any other agreement or arrangement having a similar effect.

“Spread” will have the meaning given to it in subsection (b) of the “‒ Interest Rates, Calculation of Interest, Business Day.”

“Subsidiary” means any corporation or other entity of which Capital Stock or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by the Company.

“Syndicated Offering” means an offering whereby the Company issues Notes on a syndicated basis to two or more Dealers and/or two or more other underwriters.

“Terms/Syndication Agreement” means the Principal Purchase Agreement for a Syndicated Offering.

“Treasury Rate” means the yield to maturity at the time of computation of United States Treasury securities with a weighted average life (as compiled and published in the most recent Federal Reserve Statistical Release H.15 (519) which has become publicly available at least two Business Days (but not more than five Business Days) prior to the relevant date of payment (or, if such Statistical Release is not so published or available, any publicly available source of similar market data selected by the Calculation Agent in good faith)) most nearly equal to the weighted average life of the Notes for period from the relevant date of payment to the final Interest Payment Date in each case as selected and determined by the Calculation Agent.

153

BOOK-ENTRY, DELIVERY AND FORM

General

Notes sold to QIBs in reliance on Rule 144A under the Securities Act and Notes sold to non-U.S. persons outside of the United States in compliance with Regulation S under the Securities Act will initially be represented by one or more global notes in registered form without interest coupons attached (the “Global Registered Notes”). For the avoidance of doubt, the Notes may be sold to persons outside the United States in compliance with Regulation S under the Securities Act. The Notes will be listed for trading on the TACT Institutional. Pursuant to the bylaws of the TASE and the regulations promulgated thereunder that apply to securities listed on the TACT Institutional, including the relevant provisions of the bylaws of the Tel Aviv Stock Exchange Clearing House Ltd. (“TASECH”), collectively, the “TASE Bylaws,” the Global Registered Notes will be deposited, on the Closing Date, with or on behalf of and registered in the name of the Depositary for the TASECH, and will thereafter follow a book-entry system. The Depositary will initially be the only registered holder of the Global Registered Notes. Except under the limited circumstances described below, the Notes will not be issued in definitive certificated form. Please refer to the section below entitled “—Definitive Registered Notes.”

Ownership of beneficial interests in the Global Registered Notes (“Book-Entry Interests”) will be recorded in book-entry form and will be held through participants of the local exchange (each, a “TASE Member”) entitled to hold securities accounts with the TASECH (either directly if such TASE Member is a participant of the TASECH or indirectly through a TASE Member which is a participant of the TASECH) on behalf of owners of book-entry interests in securities listed on the TACT Institutional.

The holding of Book-Entry Interests will be limited to persons that have accounts with a TASE Member or persons who hold interests through a client of a TASE Member (such as Euroclear and Clearstream). Both Euroclear and Clearstream have appointed Citibank, N.A., a TASE Member which is a direct participant of the TASECH, as their custodian in respect of securities listed on the TACT Institutional. As such, Book-Entry Interests held through a participant of Euroclear or Clearstream will be held through Citibank, N.A.. Each TASE Member will record the Book-Entry Interests in the Global Registered Note held by each of its clients on the books of its depositary under individual accounts in the name of each client. Euroclear and Clearstream will hold interests in the Notes on behalf of their respective participants through client securities’ accounts opened in the name of Euroclear or Clearstream, as applicable, with Citibank, N.A. and Book-Entry Interests held by investors through Euroclear or Clearstream participants will be credited to such accounts, as applicable.

So long as the Depositary is the Holder of a Global Registered Note, the Depositary will be considered the sole owner or Holder of the Notes represented by such Global Registered Note for all purposes under the Fiscal Agency Agreement and such Notes. The Applicable Procedures will be applicable to the recordation, transfers and exchanges of Book-Entry Interests in the Global Registered Notes held through Participants. The rules and procedures of Euroclear and Clearstream shall be applicable to any transfer or exchange of Book-Entry Interests in the Global Registered Notes held through Euroclear or Clearstream; provided that neither the Company nor the Fiscal Agent will have any obligation to monitor the application of such rules and procedures. Account holders or participants in Euroclear and Clearstream will have no rights under the Fiscal Agency Agreement with respect to such Global Registered Note, and the Depositary may be treated by the Company, any agent hereunder and any agent of the Company as the absolute owner of such Global Registered Note for all purposes whatsoever.

Holders of Book-Entry Interests in the Notes must rely on the TASE Bylaws, as well as the procedures of the TASE Member through which they hold their Book-Entry Interests, to transfer their interests or to exercise any rights of Holders under the Fiscal Agency Agreement. Investors holding Book-Entry Interests through TASE Member clients (including Euroclear and Clearstream) must rely on the TASE Bylaws, the procedures of the TASE Member and the TASE Member client (including Euroclear or Clearstream) through which they hold their Book-Entry Interests as well as the procedures of any participants of a TASE Member client (including participants of Euroclear or Clearstream) through which they hold Book-Entry Interests, to transfer their interests or to exercise any rights of Holders under the Fiscal Agency Agreement. Accordingly, subject to any applicable laws, recourse of any such person in respect of its rights to the relevant securities may be limited to the relevant financial intermediary through whom such person holds the relevant securities.

Book-Entry Interests will be shown on, and transfers thereof will be effected only through, records maintained in book-entry form by the TASECH and the relevant TASE Members and, where applicable, indirectly through TASE Member clients (including Euroclear and Clearstream). The Book-Entry Interests in the Notes will be issued only in minimum denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof, £200,000 and integral multiples of £1,000 in excess thereof or €200,000 and integral multiples of €1,000 in excess thereof (or the equivalent thereof in another currency specified in the applicable Pricing Supplement), as the case may be. The laws of some jurisdictions, including certain states of the United States, may require that certain purchasers of securities take physical delivery of such securities in definitive certificated form. Except under the limited circumstances described below, Notes will not be issued to investors in definitive certificated form. The Notes will not be eligible for clearance with The Depository Trust Company (“DTC”). The foregoing limitations may impair your ability to own, transfer or pledge Book-Entry Interests. For more information, see “—Definitive Registered Notes,” “—Transfers” and “Transfer Restrictions.”

Neither the Company nor the Fiscal Agent will have any responsibility, or be liable, for any aspect of the records relating to the Book-Entry Interests. The Company will not impose any fees or other charges in respect of the Notes; however, among other things holders of Book-Entry Interests may incur fees normally payable in respect of the maintenance and operation of accounts in the relevant TASE Member and/or Euroclear and Clearstream, as applicable.

154

Redemption of the Global Registered Notes

Pursuant to the terms of the Fiscal Agency Agreement, in the event that all or any of the Notes are redeemed, the Company, in its capacity as the initial Paying Agent, shall make payments to the Depositary for further payments on the Notes to the TASE Members who are credited with Notes through the TASECH in accordance with the TASE Bylaws. Each TASE Member will redeem an equal amount of the Book-Entry Interests in such Notes of such series from the amount received by it in respect of the redemption of such Notes of such series. The redemption price payable in connection with the redemption of such Book-Entry Interests will be equal to the amount received by the TASE Member in connection with the redemption of such Notes of such series. Pursuant to the TASE Bylaws, we understand that if fewer than all of the Notes of a series are to be redeemed at any time, the applicable TASE Members will credit their respective clients’ accounts on a proportionate basis (with adjustments to prevent fractions).

Pursuant to the foregoing, each of Euroclear and Clearstream, as applicable, will redeem an equal amount of the Book-Entry Interests in such Notes of such series from the amount received by it from Citibank, N.A. in respect of the redemption of such Notes of such series. The redemption price payable in connection with the redemption of such Book-Entry Interests will be equal to the amount received by Euroclear or Clearstream, as applicable, in connection with the redemption of such Notes of such series (or any portion thereof). In addition, under the existing practices of Euroclear and Clearstream, we understand that if fewer than all of the Notes of a series are to be redeemed at any time, Euroclear and Clearstream will credit their respective participants’ accounts on a proportionate basis (with adjustments to prevent fractions) or on such other basis as Euroclear and Clearstream deem fair and appropriate unless otherwise required by law or applicable stock exchange or depositary requirements.

Payments on Global Registered Notes

Pursuant to the terms of the Fiscal Agency Agreement, payments of principal, premium (if any) and interest, and all other amounts payable in the Specified Currency will first be made by the Company, acting as the initial Paying Agent, to the Depositary and then by the Depositary, through the TASECH, to the payment accounts of the TASE Members who are credited with Notes. We understand that payment will thereafter be credited by such TASE Members to the accounts of their clients who hold the Notes in their individual securities accounts with such TASE Members and, where such clients are not the ultimate beneficial owners of the Notes, as in the case of Euroclear and Clearstream, the relevant amounts shall be further credited by such TASE Member clients (including Euroclear and Clearstream) to the ultimate beneficial owner (or participant of such client through which such ultimate beneficial owner holds its interest in the Notes) for whom such TASE Member clients hold the Notes, subject to their operations, procedures, any applicable agreements or applicable laws.

We will make payments of all such amounts without deduction or withholding for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature, except as may be required by law and as described under “Description of the Notes — Additional Payment Amounts.” If any such deduction or withholding is required to be made, then, to the extent described under “Description of the Notes — Additional Payment Amounts,” we will pay additional amounts as may be necessary in order for the net amounts received by any Holders after such deduction or withholding to equal the net amounts that such Holder would have otherwise received in respect of such Notes absent such withholding or deduction. We expect that the TASE Bylaws will govern payments by TASE Members to their clients and that standing customer instructions and customary practices will govern payments by clients (such as Euroclear and Clearstream) to the investors who own Book-Entry Interests through such clients.

None of the Company, the Fiscal Agent or any of their respective agents has or will have any responsibility or liability for any aspect of the records of the TASECH, any TASE Member or any client thereof (including Euroclear, Clearstream and participants of Euroclear and Clearstream) relating to, or payments made on account of, a Book-Entry Interest, or for maintaining, supervising or reviewing the records of the TASECH, any TASE Member or any client thereof (including Euroclear, Clearstream and participants of Euroclear and Clearstream) relating to, or payments made on account of, a Book-Entry Interest.

Payments by clients of TASE Members to investors who own Book-Entry Interests through such clients are the responsibility of such clients.

Currency of Payment for the Global Registered Note

The principal, premium, if any, and interest, and all other amounts payable under the Notes will be paid in the Specified Currency.

Action by Owners of Book-Entry Interests

Clients of TASE Members that hold Book-Entry Interests in the Notes can take any action permitted to be taken by a Holder (including the presentation of Notes for exchange as described below) in accordance with the TASE Bylaws, which, in some cases, involve receipt of a proxy from the Depositary, through the relevant TASE Member, for the purpose of exercising rights attached to the Notes. Neither the Depositary nor the TASE Members will exercise any discretion in the granting of consents, waivers or the taking of any other action in respect of the Notes.

Euroclear and Clearstream have advised us that they will take any action permitted to be taken by a Holder (including the presentation of Notes for exchange as described below) only at the direction of one or more of their participants to whose account the Book-Entry Interests are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such participant or participants has or have given such direction. Euroclear and Clearstream will not exercise any discretion in the granting of consents, waivers or the taking of any other action in respect of the Notes.

155

Transfers

The Notes will be subject to certain restrictions on transfer and certification requirements described under “Transfer Restrictions.”

Transfers between clients of TASE Members (including Euroclear and Clearstream) will be effected in accordance with the TASE Bylaws and the respective rules and operating procedures of such clients (including Euroclear and/or Clearstream).

While the Notes are listed on the TACT Institutional, the recordation of interests in the Notes will be effected through a book-entry system.

Initial Settlement

Initial settlement for the Notes will be made in the Specified Currency. Book-Entry Interests held through a TASE Member will follow the settlement procedures applicable to similar securities traded on the TACT Institutional.

The Notes will be registered in the name of the Depositary and Book-Entry Interests will initially be credited to the accounts of the TASE Members by the Depositary through the TASECH in accordance with the holdings of their respective clients for further credit by each TASE Member to the accounts of its clients (including, with respect to Citibank, N.A., Euroclear) on the settlement date. The Notes will not be eligible for clearance with DTC. The securities custody accounts of participants of Euroclear will be credited with beneficial interests in the Notes on the settlement date against payment for value on the settlement date. Book-Entry Interests owned through Euroclear or Clearstream accounts will follow the settlement procedures of Euroclear or Clearstream, as applicable, that are applicable to conventional bonds in registered form.

Secondary Market Trading

Book-Entry Interests on the TACT Institutional are executed anonymously between TASE Members, and settled T+1 in NIS. The TASECH acts as a central counterparty (“CCP”) for on-TACT Institutional transactions executed in the TACT Institutional.

The settlement of trades in Book-Entry Interests between participants of Euroclear will be made through such participants of Euroclear and will settle in the Specified Currency in same-day funds. The settlement of trades in Book-Entry Interests between participants of Clearstream will be made through such participants of Clearstream and will settle in the currency specified in the applicable Pricing Supplement in same-day funds. In each case, the purchaser shall determine the place of delivery and both the purchaser and the seller should establish at the time of trading of any Book-Entry Interests where both the purchaser’s and the seller’s accounts are located to ensure that settlement can be made on the desired value date.

The settlement of trades in Book-Entry Interests between a client of a TASE Member (or a participant of such client, such as a participant of Euroclear or Clearstream) on the one hand and a client of another TASE Member (or a participant of such client, such as a participant of Euroclear or Clearstream) on the other in off-TACT Institutional trades will be made through the TASECH system between the TASE Members holding the accounts for the relevant clients and will be subject to the TASE Bylaws. The settlement of trades in Book-Entry Interests between two clients of the same TASE Member (or the participants of such clients, such as participants of Euroclear or Clearstream) in off-TACT Institutional trades may be effected internally through such TASE Member and will be subject to its internal procedures. As such, settlement of off-TACT Institutional trades between a participant of Euroclear on the one hand and a participant of Clearstream on the other will be effected through Citibank, N.A. and will be subject to its internal procedures. Such trades will either settle (i) “delivery-versus-payment” in NIS, where payment for the transferred Book-Entry Interests must be made prior to or simultaneously with the delivery of the Book-Entry Interests or (ii) “free-of-payment” in the selected currency of the transferring parties (including U.S. dollars), where payment for the transferred Book-Entry Interests follows delivery of the Book-Entry Interests (which will transfer through the relevant TASE Member(s), TASE Member clients (including Euroclear and Clearstream) or participants of such clients, as applicable) and must be independently arranged by the transferring parties.

In each of the foregoing cases, the TASE Member client (or participant of such client) transferring its Book-Entry Interests will be required to notify the relevant TASE Member (or if a transferring participant holds its Book-Entry Interest through Euroclear or Clearstream, notify Euroclear or Clearstream, as applicable, who will notify Citibank, N.A.), through which such TASE Member client (or participant of such client) holds its Book-Entry Interest, of the destination to which the Book-Entry Interests are being transferred and the TASE Member client (or participant of such client) receiving such Book-Entry Interests will be required to notify the relevant TASE Member (or if a receiving participant intends to hold its Book-Entry Interest through Euroclear or Clearstream, notify Euroclear or Clearstream, as applicable, who will notify Citibank, N.A.) through which such TASE Member client (or participant of such client) intends to hold such transferred Book-Entry Interests, of the source from which the Book-Entry Interests are being transferred. The TASECH does not act as CCP for off-TACT Institutional transactions.

For information regarding certain requirements and restrictions that may apply to secondary market trades under certain applicable securities laws and the TASE Bylaws, see “Transfer Restrictions.”

Definitive Registered Notes

Under the terms of the Fiscal Agency Agreement, definitive registered Notes in registered form (“Definitive Registered Notes”) may be issued (i) if the applicable Pricing Supplement so provides, upon initial issuance outside the United States in reliance on Regulation S or within the United States in reliance on Rule 144A or (ii) if (A) the holder of a Book-Entry Interest requests such an

156

exchange for a Definitive Registered Note in writing through the relevant Holder (or participant of Euroclear or Clearstream, if applicable) through which such owner holds its Book-Entry Interest following an Event of Default or Acceleration Event or (B) the TASECH is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or the TASECH announces intentions to cease business permanently or does in fact do so.

In the case of an initial issuance of Notes outside the United States in reliance on Regulation S or within the United States in reliance on Rule 144A, the Fiscal Agent or its duly authorized agent will deliver each Definitive Registered Note, executed and authenticated as provided herein, to the Company, which will then deliver such Definitive Registered Note to the applicable Dealer or its designee, or, in the case of a sale pursuant to an agreement with a syndicate of Dealers, to the lead manager thereof or its designee, for the benefit of the purchaser of such Note against delivery by such Dealer of a receipt therefor or, if so instructed and, upon confirmation from the Company that proper payment by the purchaser has been made, deliver the Notes directly to the Company or its designee for the benefit of the purchaser of such Notes against delivery of a receipt therefor. Notwithstanding the foregoing, if the Fiscal Agent is so instructed otherwise by the Company, delivery of the Notes may be made before actual receipt of payment in accordance with the custom prevailing in the market. Upon the issuance of any Definitive Registered Note, the applicable Registrar will record the person who is designated by the Dealer, the lead manager or the Company, as the case may be, as the Holder of such Definitive Registered Note.

If at any time the Depositary notifies the Company that it is unwilling or unable to continue to act as Depositary for the Global Registered Notes, and the Company shall not have appointed a successor Depositary within 90 days after the Company receives notice or becomes aware of such ineligibility, the Company will issue Definitive Registered Notes in exchange for the Global Registered Notes. Upon the occurrence of any of the events set forth in the preceding sentence, the Company will execute, and, upon receipt of instructions from an Authorized Representative of the Company, the Fiscal Agent shall complete and authenticate or cause to be completed and authenticated, Definitive Registered Notes, in authorized denominations, in an aggregate principal amount equal to the principal amount of the Global Registered Notes in exchange for such Global Registered Notes.

The Holder of a Definitive Registered Note may transfer such Note by inscribing the transfer on the back of the Definitive Registered Note and notifying the transfer to the Registrar and providing relevant certifications. We will bear the cost of preparing, printing, packaging and delivering the Definitive Registered Notes.

The applicable Registrar will not register the transfer of or exchange of a Definitive Registered Note for a period of 15 days preceding the due date for any payment of interest on the Note, or during the period of 30 days preceding the due date for any payment of principal on the Note, or register the transfer of or exchange any Notes previously called for redemption. In the event of the transfer of any Definitive Registered Note, the Fiscal Agent and any Registrar may require a holder, among other things, to furnish appropriate endorsements and transfer documents as described in the Fiscal Agency Agreement. We may require a holder to pay any taxes and fees required by law and permitted by the Fiscal Agency Agreement and the Notes.

The Fiscal Agent or any of its duly authorized agents, as the case may be, is authorized from time to time in accordance with the provisions of the Fiscal Agency Agreement to authenticate or cause to be authenticated and deliver or cause to be delivered back to the Company replacement Definitive Registered Notes of a Series in exchange for or in lieu of Definitive Registered Notes of such Series of like tenor and of like form which become mutilated, destroyed, defaced, stolen or lost upon payment by the claimant of the expenses incurred in connection therewith and on such terms as to evidence and indemnity as the Company may reasonably require, and mutilated or defaced Definite Registered Notes must be surrendered before replacements will be issued.

Once Definitive Registered Notes have been issued and while they are not listed on the TACT Institutional, the special withholding tax exemption regime of the ruling from the Israeli Tax Authority may not apply. See “Taxation — Certain Israeli Income Tax Considerations — Capital Gain on the Sale, Exchange or Disposition of the Notes by Non-Israeli Resident Holders.”

For more information, see “Transfer Restrictions.”

Payment of principal, any repurchase price, premium and interest on Definitive Registered Notes will be payable by the Company to the accounts or registered address of Holders of Definitive Registered Notes pursuant to the terms of the Fiscal Agency Agreement.

To the extent permitted by law, the Company, the Fiscal Agent, any Paying Agent and any Registrar shall be entitled to treat the Holder of any Definitive Registered Notes as the absolute owner thereof and no person will be liable for treating the Holder as such. Ownership of the Definitive Registered Notes will be evidenced through registration from time to time in the books of the Registrar, and such registration is a means of evidencing title to the Notes.

Information Concerning the Clearing Systems and Their Participants

We provide the following summaries of the operations and procedures of the TASECH, Euroclear and Clearstream solely for the convenience of investors. The information in this section includes information from sources that we believe to be reliable, but we take no responsibility for the accuracy thereof. We have been advised by the TASECH, Euroclear and Clearstream, as follows:

TASECH and TASE Members

All Book-Entry Interests held by clients of a TASE Member (including Book-Entry Interests held through Euroclear and Clearstream) will be subject to the TASE Bylaws and the operations and procedures of the relevant TASE Member. The TASE

157

Bylaws and the operations and procedures of each TASE Member may be changed at any time. Neither we nor the initial purchasers are responsible for those operations or procedures.

We understand as follows with respect to each TASE Member: Each TASE Member must be a financial institution (including local or international banks), insurance company or broker. In order to become a TASE Member, an entity must meet certain criteria set forth in the TASE Bylaws. These criteria include: demonstrating a certain level of expertise in capital markets, minimum number of clients, minimum value of client portfolios, insurance requirements, free net liquid assets requirements and certain technological requirements. Once approved as a member, the TASE Member must continue to meet these criteria and also comply with the applicable provisions of the TASE Bylaws, which include, among other requirements, regulated areas of operation, rules regarding relationships with other TASE Members and clients, information security requirements, requirements to conduct risk surveys, reporting obligations to the TASE and documentation requirements. Each TASE Member holds securities for clients either with accounts at the TASECH or through an account with a participant of the TASECH. TASE Members provide various services to their clients, including the safekeeping, administration, brokerage of traded securities on TASE and the TACT Institutional.

Euroclear and Clearstream

All Book-Entry Interests held by participants of Euroclear or Clearstream will be subject to the operations and procedures of Euroclear and Clearstream, as applicable. The operations and procedures of each settlement system are controlled by that settlement system and may be changed at any time. Neither the Company nor any Dealer is responsible for those operations or procedures.

We understand as follows with respect to Euroclear and Clearstream: Euroclear and Clearstream hold securities for participating organizations. They also facilitate the clearance and settlement of securities transactions between their respective participants through electronic book-entry changes in accounts of such participants. Euroclear and Clearstream provide various services to their participants, including the safekeeping, administration, clearance, settlement, lending and borrowing of internationally traded securities. Euroclear and Clearstream interface with domestic securities markets. Euroclear and Clearstream participants are financial institutions such as underwriters, securities brokers and dealers, banks, trust companies and certain other organizations. Indirect access to Euroclear and Clearstream is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Euroclear or Clearstream participant, either directly or indirectly.

Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants and certain banks, the ability of an owner of a beneficial interest to pledge such interest to persons or entities that do not participate in the Euroclear or Clearstream systems, or otherwise take actions in respect of such interest, may be limited by the lack of a definitive certificate for that interest. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer beneficial interests to such persons may be limited. In addition, owners of beneficial interests through the Euroclear system will receive distributions attributable to the Global Registered Notes only through Euroclear participants.

Information Concerning the TACT Institutional

The TACT Institutional is a system for trading bonds and convertible bonds issued in private placements to investors that are considered “institutional investors” under the TASE Bylaws. On-TACT Institutional transactions in the TACT Institutional system are effected through the TASE’s automated system for continuous and simultaneous trading. Transfers of Book-Entry Interests between clients of TASE Members will be effected in the ordinary way in accordance with the TASE Bylaws.

None of the Company, the Fiscal Agent or any Paying Agent will have any responsibility for the performance by any TASE Member or their respective clients of their respective obligations under the TASE Bylaws or the rules and procedures governing their operations.

Global Clearance and Settlement Under the Book-Entry System

The Notes are expected to be listed on the TACT Institutional. Transfers of Book-Entry Interests between participants in Euroclear or participants in Clearstream will be effected in the ordinary way in accordance with its rules and operating procedures. However, transfers of Book-Entry Interests between participants in Euroclear and participants in Clearstream, while in accordance with their rules and operating procedures, will not be effected in the ordinary way. For more information, please refer to the section above entitled “—Transfers—Secondary Market Trading.”

Although Euroclear and Clearstream currently follow the foregoing procedures in order to facilitate transfers of Book-Entry Interests among, in the case of Euroclear, participants of Euroclear, and, in the case of Clearstream, participants of Clearstream, as the case may be, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued or modified at any time. None of the Company, the Fiscal Agent or any Paying Agent will have any responsibility for the performance by Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

158

TAXATION

The following is a general description of certain tax considerations relating to the Notes. It does not purport to be a complete analysis of all tax considerations relating to the Notes. Prospective purchasers of Notes should consult their own tax advisers as to the consequences under the tax laws of the country of which they are resident for tax purposes and the tax laws of Israel of acquiring, holding and disposing of Notes and receiving payments of interest, principal and/or other amounts under the Notes. This summary is based upon the law as in effect on the date of this Offering Circular and is subject to any change in law that may take effect after such date.

Investors should also note that the appointment by an investor in Notes, or any person through which an investor holds Notes, of a custodian, collection agent or similar person in relation to such Notes in any jurisdiction may have tax implications. Investors should consult their own tax advisers with respect to the tax consequences for them of any such appointment.

Israeli Tax Considerations

Certain Israeli Income Tax Considerations

The following is a short summary of the material Israeli tax consequences to which purchasers of Notes in this offering may be subject. This summary is based on the current provisions of Israeli tax law as of the date hereof. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in this discussion will be accepted by the appropriate tax authorities or the courts.

The summary does not address all of the tax consequences that may be relevant to all purchasers of the Notes in light of each purchaser’s particular circumstances and specific tax treatment. The following is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Each prospective investor should consult its own tax or legal adviser.

Capital Gain on the Sale, Exchange or Disposition of the Notes

Overview

Israeli law generally imposes a capital gains tax on the sale of capital assets by residents of Israel, and on the disposal of such assets by non-Israeli residents if those assets either (i) are located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation, or (iii) represent, directly or indirectly, rights to assets located in Israel, unless a specific exemption is available or unless a tax treaty between Israel and the nonresident investor’s country of residence provides otherwise. The Israeli Income Tax Ordinance (New Version), 1961 (the “Ordinance”), distinguishes between the “Real Capital Gain” and the “Inflationary Surplus.” The Inflationary Surplus is a portion of the total capital gain which is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index (“CPI”) or, in certain circumstances, fluctuations in foreign currency exchange rate, between the date of purchase and the date of sale. The Real Capital Gain is the excess of the total capital gain over the Inflationary Surplus.

Capital Gain on the Sale, Exchange or Disposition of the Notes by Israeli Residents

Israeli Resident Individuals. Generally, the tax rate applicable to Real Capital Gains derived by Israeli individuals from the sale of securities (which include the Notes for purposes of this discussion) which have been purchased on or after January 1, 2003, whether or not listed on a stock exchange, is 25%, unless the holder claims a deduction for interest and linkage fluctuation expenses in connection with the purchase and holding of such securities, in which case the gain will generally be taxed at a rate of 30%. Additionally, if a holder is considered to be a “Substantial Shareholder” (i.e., generally, a person who holds, directly or indirectly, alone or together with another, 10% or more of any of the company’s “means of control” (including, among other things, the right to receive profits of the company, voting rights, the right to receive the company’s liquidation proceeds and the right to appoint a director)), at the time of sale or at any time during the preceding 12-month period, such gain will be taxed at the rate of 30%. Holders dealing in securities in Israel for whom the income from the sale of securities is considered “business income” as defined in Section 2(1) of the Ordinance are taxed at the marginal tax rates applicable to business income (up to 48%).

Israeli individuals who have taxable income that exceeds NIS 811,560 (in 2014) (linked to the CPI), will be subject to an additional tax at the rate of 2% on their taxable income for such tax year that is in excess of that threshold. For this purpose, taxable income includes taxable capital gains from the sale of securities and taxable income from interest, discount and linkage differentials.

Upon the sale of securities traded on a stock exchange, a detailed return, including a computation of the tax due, must be filed and an advanced payment must be made by January 31 and July 31 of every tax year in respect of sales of securities made within the previous six months. However, if all tax due was withheld at source according to applicable provisions of the Ordinance and regulations promulgated thereunder, the aforementioned return need not be filed and no advance payment must be made. Capital gain is also reportable on the annual income tax return.

Israeli Resident Corporations. Under present Israeli tax legislation, the tax rate applicable to Real Capital Gain derived by Israeli resident corporations from the sale of securities is the general corporate tax rate (26.5% in 2014).

An exempt public institution, provident fund or other entity that is exempt from tax under section 9(2) of the Ordinance is

159

exempt from tax on capital gains, subject to certain conditions.

Withholding Duties. Payors of consideration for traded securities, including the purchaser, the Israeli stockbroker effectuating the transaction, or the financial institution through which the sold securities are held, are required to withhold tax upon the sale of publicly traded securities from the consideration or from the Real Capital Gain derived from such sale, as applicable, at a rate of 25% for individuals or at the corporate tax rate (currently 26.5%) for corporations, subject to any of the foregoing exemptions or reduced tax rates under applicable tax treaties and/or under the domestic law. The Israel Tax Authority (the “ITA”) may request a recipient to provide documentation or evidence confirming the recipient’s eligibility for reduced tax rates or an exemption from withholding tax.

Capital Gain on the Sale, Exchange or Disposition of the Notes by Non-Israeli Resident Holders

In general, non-Israeli residents are subject to Israeli tax on capital gains derived in Israel, unless exemptions under the domestic law or a tax treaty provide otherwise.

Non-Israeli residents may qualify for an exemption from tax on capital gains derived from the sale, exchange or disposition of securities that are publicly traded on the TASE or on a recognized stock exchange outside of Israel; provided, among other things, that (i) such gains are not generated through a permanent establishment that the non-Israeli resident maintains in Israel, (ii) the securities were purchased after being listed on a recognized stock exchange and (iii) with respect to securities listed on a recognized stock exchange outside of Israel, such non-Israeli residents are not subject to the Inflationary Adjustments Law. In addition, non-Israeli residents may also qualify for an exemption from capital gains tax on dispositions of all types of Israeli securities that are not publicly listed, provided the security was not purchased from a related party in a tax-free transaction. This exemption does not apply to: (i) gains attributable to a permanent establishment (generally a fixed place of business) of the non-Israeli resident in Israel; (ii) shares of a company whose assets are principally Israeli real estate; or (iii) shares of a company the value of which is derived principally from the usufruct in immovable property and royalties for the working of, or the right to work, mineral deposits and other natural resources. A non-Israeli “body of persons” (as defined in the Ordinance, which includes corporations, partnerships, trusts, estates and other entities) will not be entitled to the foregoing exemptions if an Israeli resident (a) has a controlling interest of more than 25% in such non-Israeli body of persons, or (b) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli body of persons, whether directly or indirectly. Such exemption is also not applicable to a person whose gains from selling or otherwise disposing of the securities are deemed to be business income.

In addition, a sale of securities may be exempt from Israeli capital gains tax under the provisions of an applicable tax treaty, such as the treaty between Israel and the United States, which generally provides that such gains upon disposal of the Notes are exempted from Israeli tax, subject to certain exceptions.

In other cases, non-Israeli residents pay capital gains tax in accordance with the rules and the rates applicable to residents, as described above. However, non-Israeli residents investing in foreign currency may elect to apply the relevant exchange rate rather than the inflation rate to compute the inflationary amount.

Payment of Interest, Original Issue Discount and Linkage Differentials Income (“Interest”) to Israeli Residents

Israeli Resident Individuals. Generally, interest will be treated as derived from Israeli sources if the payor is located in Israel. Subject to the eligibility of each individual Israeli resident, interest income may be recognized on a cash basis (i.e., upon receipt) or on an accrual basis. Income from foreign exchange fluctuations should be recognized on an accrual basis, even if the person deriving this income usually reports his or her income on a cash basis. Foreign exchange fluctuations on securities including the issued Notes are taxable at redemption or sale as part of the capital gain. In principle, Israeli resident individuals are subject to capital gain tax on their Real Capital Gain. In a case where the exchange rate is considered to be an “Index,” income derived from foreign exchange fluctuations should not be subject to tax.

Interest income is generally subject to tax at a rate of 25%. Notwithstanding the above, an individual would be subject to tax on interest income, calculated on a marginal rate (with the interest income being the highest bracket), if any of the following occur: (i) the interest is considered business income, or is registered in the individual’s books of accounts; (ii) the individual has deducted interest expenses and linkage fluctuation expenses with respect to the Notes; (iii) the individual is a Substantial Shareholder of the Company; or (iv) the individual is related to the Company (such as an employee or independent contractor), unless it is proven that the interest rate is not influenced by such relationship.

Israeli Resident Corporations. Israeli resident companies are taxable on worldwide interest, original issue discount and linkage differentials income. The tax rate on such income is the standard corporate tax rate (currently 26.5% for 2014 and future years).

An exempt public institution, provident fund or other entity that is exempt from tax under section 9(2) of the Ordinance is exempt from tax on interest and original issue discount, subject to certain conditions.

Withholding Duties. Payors of interest, including an Israeli broker who effectuates a transaction, or a financial institution through which the securities are held, are generally required to withhold tax on payments of interest at a rate of 25% for individuals and at the corporate tax rate (currently 26.5%) for corporations, subject to any applicable exemptions or reduced tax rates under applicable tax treaties and/or under the domestic law. The ITA may request a recipient to provide documentation or evidence confirming the recipient’s eligibility for reduced tax rates or an exemption from withholding tax.

160

Payments of Interest to Non-Israeli Holders

In principle, the same tax rules governing Israeli residents regarding payments of interest, discount and linkage differentials are applicable to non-Israeli residents, unless exemptions under the domestic law or a tax treaty provide otherwise. The ITA may request a non-Israeli resident to provide documentation and/or evidence confirming the non-Israeli resident’s eligibility for reduced tax rates or an exemption from withholding tax. A non-Israeli “body of persons” (as defined in the Ordinance, which includes corporations, partnerships, trusts, estates and other entities) will not be entitled to the exemptions or reduced tax rates that are applicable to Non-Israeli residents under Israeli domestic law, if an Israeli resident (a) has a controlling interest of more than 25% in such non-Israeli body of persons, or (b) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli body of persons, whether directly or indirectly. However, in principle, with respect to transparent entities the eligibility for an exemption or reduced tax rates would be examined at the level of each individual partner or beneficiary.

According to section 9(15D) of the Ordinance, an exemption from Israeli tax is available to non-Israeli residents that receive interest income on bonds issued by Israeli companies traded on the Israeli stock exchange, provided that the income is not attributable to the non-Israeli resident’s permanent establishment in Israel, and the non-Israeli resident is not one of the following: (i) a Substantial Shareholder of the Company; (ii) a relative of the Company, as defined in paragraph (3) to the definition of “relative” in Section 88 of the Ordinance (iii) an employee of the Company or other person who provides services to it, sells products to it, or has a special relationship with it, unless the non-Israeli resident has proved to the Assessing Officer’s satisfaction that the interest or the original discount rate, was set in good faith without being affected by the relationship with the Company. On October 6, 2014, the Company received a ruling (referred to herein as the “Ruling”) from the ITA providing that Notes that are traded on the TASE on the TACT Institutional will be considered securities traded on an exchange in Israel for the purpose of sections 9(15D) and 97(B2) of the Ordinance, and therefore will be exempt from capital gains tax, subject to the fulfillment of the conditions specified in the Ruling and as set out above in this paragraph. Please refer to the section below entitled “—The Ruling.”

The Ruling

The Ruling obtained by the Company from the ITA provides that if the Notes of any series are traded on the TACT Institutional, they shall be considered securities traded on an exchange in Israel for the purpose of sections 9(15d) and 97(B2) of the Ordinance, provided, among other requirements, that (A) the Company is considered a reporting entity as defined under the Companies Law, 5759-1999; (B) the Notes will fulfill the terms and conditions applicable to a debenture traded publicly on the TACT pursuant to the TASE Bylaws and the tax withholding provisions, regarding: (i) the value of public holdings after listing for trading (for this purpose, public holdings shall be the holdings of investors who are not, directly or indirectly, interested parties of the Company); (ii) minimum debenture distribution after listing with respect to the number of holders and the market value of the debentures (for this purpose, in lieu of the minimum number of holders set forth in the TASE Bylaws, a minimum number of 20 institutional investors who are not, directly or indirectly, interested parties of the Company will be required) and (iii) the transfer of the consideration or debentures and registration of the transaction and (C) none of the conditions for removal from trading of debentures listed on the TACT public pursuant to the TASE Bylaws exist with respect to the Notes series.

The Ruling provides that TASE members will be required to withhold tax from the Notes, pursuant to the Income Tax Regulations (Deduction from Consideration, Payment or Capital Gain upon Selling a Security or a Futures Transaction), 2002 and the Income Tax Regulations (Deduction from Interest, Dividends and Certain Profits), 2005.

The Ruling does not comprise an assessment or an opinion as to other tax matters for the Company or Holders and it does not limit the assessing officer when performing an audit, except as related to the issues that are the subject of the Ruling.

The Ruling is not binding on the Capital Markets, Insurance and Savings divisions of the Ministry of Finance, the Bank of Israel, the Israeli Securities Authority, any other tax authority or any other entity.

The Ruling was issued upon facts provided to the ITA and representations made by the Company. The representations made by the Company will be examined by the assessing officer during the assessment process of the Company and/or in withholding tax files and/or in the Holder files, as the case may be. The ITA is bound by the Ruling only as long as the relevant facts are unchanged and the Company complies with all stipulations in the Ruling. If the details presented under the application were found to be incorrect or significantly incomplete, the ITA would be entitled to revoke the Ruling, fully or partially, prospectively or retroactively.

The Ruling would be considered void if the Notes are not issued within one year from the Ruling issuing date, unless it is extended by the ITA.

The Ruling shall remain in force until October 6, 2015 with respect to Notes issued within a year of the Ruling and shall be subject to changes of any law. In the event of changes to any law that may impact the provisions of the Ruling, the Company should contact the ITA to amend the Ruling from that date on.

161

Certain United States Federal Income Tax Considerations

General

The following is a summary of certain U.S. federal income tax consequences to U.S. Holders (as defined below) that acquire, own and dispose of any of the Notes and that are initial purchasers of the Notes in the offering and will hold the Notes as capital assets. This summary does not cover all aspects of U.S. federal income taxation that may be relevant to a particular investor, and does not address state, local or non-U.S. tax issues, nor does it cover issues under the U.S. federal estate or gift tax laws. In particular, this summary does not address tax considerations applicable to U.S. Holders that own or will own (directly or indirectly) 10% or more of the Company’s voting stock, nor does this summary discuss all of the tax considerations that may be relevant to certain types of investors subject to special treatment under the U.S. federal income tax laws (such as dealers or traders in securities, financial institutions, insurance companies, regulated investment companies, real estate investment trusts, investors liable for the alternative minimum tax, tax-exempt organizations, persons that will hold the Notes as part of a straddle, hedging or conversion transaction for U.S. federal income tax purposes, partnerships or other entities classified as partnerships for U.S. federal income tax purposes, persons holding the Notes through partnerships or other pass-through entities, and holders whose functional currency is not the U.S. Dollar). Except as specifically set forth below, this summary does not address any tax considerations applicable to persons that are not U.S. Holders (as defined below).

This summary is based on the United States Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, final, temporary and proposed regulations issued thereunder, published rulings and court decisions, all as currently in effect. All of these laws and authorities are subject to change at any time, possibly with retroactive effect. No assurances can be given that any changes in these laws or authorities will not affect the accuracy of the discussions set forth in this summary.

Each Series of the Notes may be issued with a variety of different terms, the specifics of many of which will not be determined until the issuance of a Pricing Supplement for such Series. Accordingly, certain of the U.S. federal income tax matters relevant to the acquisition, ownership or disposition of a particular Series of the Notes may not be ascertainable until the Pricing Supplement for such Series is issued. The following discussion sets forth certain general U.S. federal tax matters which may be described without the requirement of referring to the specific terms of any particular Series of the Notes. It does not generally address the treatment of Indexed Notes or Dual Currency Notes. Any special U.S. federal income tax considerations relevant to a particular issue of the Notes will be provided in the applicable Pricing Supplement. The discussion below assumes that the Notes will be treated as debt for U.S. federal income tax purposes.

The Company has not sought any opinion of counsel or any ruling from the U.S. Internal Revenue Service (the “IRS”) with respect to the statements made and the conclusions reached in this summary, and there can be no assurance that the IRS will agree with such statements and conclusions.

U.S. Holders Definition

As used herein, the term “U.S. Holder” means a beneficial owner of the Notes that is for U.S. federal income tax purposes (i) an individual citizen or resident of the United States, (ii) a corporation (or any other entity treated as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any state thereof or the District of Columbia, (iii) an estate, the income of which is subject to U.S. federal income tax without regard to its source, or (iv) a trust (a) as to which one or more U.S. persons (as defined for U.S. federal tax purposes) have the authority to control all substantial decisions and over which a court within the United States is able to exercise primary supervision, or (b) that was in existence on August 20, 1996, was considered a U.S. trust as of that date, and has in effect an election to continue to be so treated.

If a partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of the Notes, the treatment of a partner in the partnership will generally depend upon the status of the partner and upon the activities of the partnership.

Payments or Accrual of Interest

Except as set forth below, payments of stated interest, including Additional Amounts (i.e., including amounts withheld in respect of an Israeli Tax), if any, on a Note generally will be taxable to a U.S. Holder as ordinary interest income at the time such amounts are received or accrued, in accordance with the U.S. Holder’s regular method of tax accounting. If the U.S. Holder generally reports taxable income using the accrual method, payments of interest must be included in income as they accrue. If the U.S. Holder generally reports taxable income using the cash method, payments of interest must be included in income as they are received.

For purposes of the foreign tax credit provisions of the Code, interest paid or accrued on a Note generally will constitute foreign source income and will be classified as “passive category income” (or, in certain cases, as “general category income”).

Original Issue Discount U.S. Holders of Original Issue Discount Notes (other than Short-Term Notes, discussed below under “Short-Term Notes”) will

be subject to special tax accounting rules, as described herein. Additional rules applicable to Original Issue Discount Notes which are 162

denominated in or whose payments are determined by reference to a foreign currency are described under “Foreign Currency Notes” below.

For U.S. federal income tax purposes, and subject to the de minimis rule described below, when a debt instrument is issued at discount, the amount of such OID is treated as ordinary interest income. A U.S. Holder must include in gross income amounts of OID on Original Issue Discount Notes as ordinary interest income on an accrual basis under a “constant yield to maturity” method described below (whether the U.S. Holder is a cash or accrual basis taxpayer for U.S. federal income tax purposes). Generally, OID must be included in income in advance of the receipt of cash representing such income.

The total amount of OID on an Original Issue Discount Note will equal the excess of the Note’s “stated redemption price at maturity” over its Issue Price. The stated redemption price at maturity equals the sum of all payments due under the Original Issue Discount Note, other than any payments of “qualified stated interest.” The Issue Price will generally equal the initial public offering price at which a substantial number of Notes are issued in a given offering (excluding sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers), excluding pre-issuance accrued interest (as discussed below under “Treatment of Pre-Issuance Interest”).

The term “qualified stated interest” means stated interest that is unconditionally payable in cash or in property, other than debt instruments of the Company, and the interest to be paid meets all of the following conditions:

• it is payable at least once per year;

• it is payable over the entire term of the Notes; and

• it is payable at a fixed rate or, subject to certain conditions, based on one or more indices.

The Company will provide notice in the applicable Pricing Supplement when it determines that a particular Note will bear interest that is not or may not be qualified stated interest.

The amount of OID on an Original Issue Discount Note that a U.S. Holder must include in income during a taxable year is the sum of the “daily portions” of OID for that Note. The daily portions are determined by allocating to each day in an “accrual period” (generally the period between compounding dates) a pro rata portion of the OID attributable to that accrual period. The amount of OID attributable to an accrual period is the product of the “adjusted issue price” of the Note at the beginning of the accrual period and its yield to maturity. The adjusted issue price of the Note is generally equal to the sum of its Issue Price and all prior accruals of OID less any payments on the Notes other than qualified stated interest. Cash payments on an Original Issue Discount Note are allocated first to any stated interest then due, then to previously accrued OID (in the order of accrual) to which cash payments have not yet been allocated, and then to principal.

A Note issued with “de minimis” OID, which is discount that is not treated as OID because it is less than 0.25% of the stated redemption price at maturity multiplied by the number of complete years to maturity, is not subject to the OID rules. Instead, a U.S. Holder generally must include the de minimis OID in income at the time principal payments on the Note are made in proportion to the amount paid. Any amount of de minimis OID included in income will be treated as capital gain.

A U.S. Holder generally may make an irrevocable election to include in its income the entire return on an Original Issue Discount Note (including payments of qualified stated interest) under the constant yield method applicable to OID.

For purposes of the foreign tax credit provisions of the Code, any OID accrued on a Note and included in a U.S. Holder’s income will constitute foreign source income and will be classified as “passive category income” (or, in certain cases, as “general category income”).

Certain of the Notes may be redeemed prior to their Maturity Date at the option of the Company and/or at the option of a U.S. Holder, or may provide for certain payments which are treated as “contingent” payments under the OID rules. Notes containing such features may be subject to rules that differ from the general OID rules discussed herein. Such rules will be discussed in the applicable Pricing Supplement.

In the case of a Note that is a Floating Rate Note, the OID calculations are generally made as though the Note will bear interest in all periods at a fixed rate generally equal to the rate that would be applicable to interest payments on the Note on its date of issue or, in the case of certain Floating Rate Notes, the rate that reflects the yield to maturity that is reasonably expected for the Note. Actual interest payments in excess of this assumed rate are generally treated as additional qualified stated interest when made. Additional rules may apply if interest on a Floating Rate Note is based on more than one interest index, or such Note is treated as providing for one or more contingent payments.

The U.S. federal income tax, including OID, consequences to a U.S. Holder of an Indexed Note will depend on factors including the specific index or indices used to determine indexed payments on the Note and the amount and timing of any noncontingent payments of principal and interest. Certain instruments that provide for wholly or substantially contingent principal payments may not constitute debt for U.S. federal income tax purposes. The rules applicable to such Notes will be discussed in the applicable Pricing Supplement.

163

Short-Term Notes

In the case of Notes having an original maturity of one year or less from the date of issuance (“Short-Term Notes”), U.S. Holders that report income for U.S. federal income tax purposes on the accrual method, certain other U.S. Holders (for example, banks, regulated investment companies and dealers in securities) and electing cash method U.S. Holders will be required to accrue the “discount” on such Short-Term Notes as ordinary income on a straight-line basis over the remaining life of such Notes (unless an irrevocable election is made for such Notes to accrue such discount according to a constant yield method based on daily compounding). The discount on a Short-Term Note for this purpose equals the excess of the total payments (including all stated interest) to be made on such Note over the Issue Price of (or, if an election is made, the U.S. Holder’s basis in) the Short-Term Note. Discount recognized under this provision is generally in lieu of, and not in addition to, stated interest on the Note.

In general, individuals and certain other cash method U.S. Holders of a Short-Term Note are not required to include accrued discount on such Note in their income currently unless they elect to do so (but may be required to include any stated interest in income as the interest is received). In the case of a U.S. Holder that is not required, and does not elect, to include discount in income currently, any gain realized on the sale, exchange or retirement of a Short-Term Note will generally be ordinary income to the extent of the discount accrued through the date of sale, exchange or retirement of such Note. In addition, a U.S. Holder that is not required, and does not elect, to include accrued discount in income currently may be required to defer deductions for a portion of the U.S. Holder’s interest expense with respect to any indebtedness incurred or continued to purchase or carry the Short-Term Note. The above-described elections available to be made with respect to Short-Term Notes generally apply for the taxable year for which they are made and all subsequent taxable years and may not be revoked without the consent of the IRS.

Treatment of Premium

If a U.S. Holder purchases an Original Issue Discount Note for an amount that is greater than its adjusted issue price but equal to or less than the sum of all amounts payable on the Note after the purchase date, other than payments of qualified stated interest, the U.S. Holder will be considered to have purchased that Note at an “acquisition premium.” Under the acquisition premium rules, the amount of OID that the U.S. Holder must include in its gross income with respect to the Note for any taxable year will be reduced by the portion of the acquisition premium properly allocable to that year.

If the U.S. Holder purchases a Note (including an Original Issue Discount Note) for an amount in excess of the sum of all the amounts payable on the Note after the purchase date, other than payments of qualified stated interest, the U.S. Holder will be considered to have purchased the Note at a “premium” and, if it is an Original Issue Discount Note, the U.S. Holder will not be required to include any OID in income. The U.S. Holder generally may elect to amortize this premium over the remaining term of the Note. If the U.S. Holder makes this election, the amount of interest income that must be reported for U.S. federal income tax purposes with respect to any interest payment date will be reduced by the amount of premium allocated to the period from the previous interest payment date to that interest payment date.

The amount of premium allocated to any such period is calculated by taking the difference between (i) the stated interest payable on the interest payment date on which that period ends and (ii) the product of (a) the Note’s overall yield to maturity and (b) the U.S. Holder’s purchase price for the Note (reduced by amounts of premium allocated to previous periods).

In the case of instruments that provide for alternative payment schedules, the amount of premium is calculated by assuming that (a) the U.S. Holder will exercise or not exercise options in a manner that maximizes the holder’s yield and (b) the Company will exercise or not exercise options in a manner that minimizes the U.S. Holder’s yield.

If a U.S. Holder makes the election to amortize premium, it must be applied to the Note and to all debt instruments acquired at a premium that the U.S. Holder holds at the beginning of the taxable year in which the election is made and all debt instruments subsequently purchased at a premium, unless the U.S. Holder obtains the consent of the IRS to a change.

If the U.S. Holder does not make the election to amortize premium on a Note and holds the Note to maturity, the U.S. Holder will have a capital loss for U.S. federal income tax purposes, equal to the amount of the premium, when the Note matures.

If the U.S. Holder does not make the election to amortize premium and sells or otherwise disposes of the Note before maturity, the premium will be included in the U.S. Holder’s “tax basis” (as defined below) in the Note, and therefore will decrease the gain, or increase the loss, that the U.S. Holder otherwise would realize on the sale or other disposition of the Note.

Treatment of Pre-Issuance Interest

If a Note is issued with pre-issuance accrued interest, a U.S. Holder may treat the Note, for U.S. federal income tax purposes, as having been issued for an amount that excludes the pre-issuance accrued interest. In that event, a portion of the first stated interest payment equal to the excluded pre-issuance accrued interest will be treated as a return of such pre-issuance accrued interest and will not be taxable to the U.S. Holder or otherwise treated as an amount payable on the Note.

Market Discount

If a U.S. Holder purchases a Note, other than a Short-Term Note, for an amount that is less than its stated redemption price at maturity or, in the case of a Note having OID, less than its revised issue price (which is the sum of the Issue Price of the Note and the

164

aggregate amount of the OID previously includible in the gross income of any U.S. Holder (without regard to any acquisition premium and less any payments on the Notes other than qualified stated interest)), the amount of the difference generally will be treated as market discount for U.S. federal income tax purposes. The amount of any market discount generally will be treated as de minimis and disregarded if it is less than the product of 0.25% of the stated redemption price at maturity of the Note and the number of complete years to maturity (or weighted average maturity in the case of a Note paying any amount other than qualified stated interest prior to maturity).

Under the market discount rules, a U.S. Holder is required to treat any principal payment on, or any gain on the sale, exchange, redemption or other disposition of, a Note as ordinary income to the extent of any accrued market discount that has not previously been included in income. If the Note is disposed of in a nontaxable transaction (other than certain specified nonrecognition transactions), accrued market discount will be includible as ordinary income to the U.S. Holder as if the U.S. Holder had sold the Note at its then fair market value. In addition, the U.S. Holder may be required to defer, until the maturity of the Note or its earlier disposition in a taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry the Note.

Market discount accrues ratably during the period from the date of acquisition to the maturity of a Note, unless the U.S. Holder elects to accrue it under the constant yield method. A U.S. Holder of a Note may elect to include market discount in income currently as it accrues (either ratably or under the constant yield method), in which case the rule described above regarding deferral of interest deductions will not apply. The election to include market discount currently applies to all market discount obligations acquired during or after the first taxable year to which the election applies and may not be revoked without the consent of the IRS. If an election is made to include market discount in income currently, the basis of the Note in the hands of the U.S. Holder will be increased by the market discount thereon as it is included in income.

Sale, Put or Other Taxable Disposition of Notes If a U.S. Holder sells, exercises a Put Option with respect to, or otherwise disposes of a Note, such holder generally will be

required to report a capital gain or loss equal to the difference between the U.S. Holder’s “amount realized” and such holder’s adjusted “tax basis” in such Notes. The U.S. Holder’s “amount realized” will be the value of what was received for selling or otherwise disposing of the Note, other than amounts that represent interest that is due to the U.S. Holder but that has not yet been paid (which will be taxed to the U.S. Holder as interest). The U.S. Holder’s adjusted “tax basis” in the Note will equal the amount paid for the Note, decreased (but not below zero) by any amortized premium (as described above) and by any cash payments of principal that the U.S. Holder has received with respect to the Note, and increased by any OID previously included in income with respect to the Note.

Gain or loss from the sale, exercise of a Put Option, or other disposition of a Note generally will be long-term capital gain or loss if, at the time the U.S. Holder sells, puts, or disposes of the Note, the U.S. Holder has held the Note for more than one year. The gain or loss will be short-term capital gain or loss if the U.S. Holder held the Note for one year or less. A U.S. Holder that is not a corporation generally will pay less U.S. federal income tax on long-term capital gain than on short-term capital gain. Limitations may apply to the U.S. Holder’s ability to deduct a capital loss.

Any capital gains or losses that arise when a U.S. Holder sells, puts or disposes of a Note generally will be treated as U.S. source income, or loss allocable to U.S. source income, for purposes of the foreign tax credit provisions of the Code.

Foreign Currency Notes The following discussion applies to Foreign Currency Notes (as defined below) if such Notes are not denominated in or indexed

to a currency that is considered a hyperinflationary currency. A U.S. Holder that purchases a Note with a foreign currency will generally recognize ordinary income or loss (“foreign exchange gain or loss”) in an amount equal to the difference, if any, between the U.S. Holder’s U.S. Dollar tax basis in the foreign currency used to purchase such Note and the U.S. Dollar fair market value at the “spot rate” on the date of purchase of such currency. Additional foreign exchange gain or loss may be required to be recognized by a U.S. Holder with respect to interest or other amounts which the U.S. Holder is entitled to receive with respect to a Note where such amounts are denominated in terms of or are determined by reference to a single foreign currency (a “Foreign Currency Note”).

A U.S. Holder that uses the cash method of accounting for U.S. federal income tax purposes for reporting interest income on a Foreign Currency Note and that receives an interest payment on such Note which is denominated in or determined by reference to a foreign currency will be required to include in income the U.S. Dollar value of the amount of interest income received (determined by translating the amount of foreign currency interest paid at the “spot rate” for such foreign currency on the date such payment is received), regardless of whether the payment is received in U.S. Dollars or is in fact converted into U.S. Dollars. No exchange gain or loss is recognized with respect to the receipt of such payment, although exchange gain or loss may be required to be recognized on a subsequent disposition of any foreign currency so received. The U.S. Holder’s basis in such foreign currency will equal the amount included in such income with respect to such interest payment.

A U.S. Holder that is required to accrue interest income (including OID and interest on certain Short-Term Notes and market discount in the case in which a U.S. Holder has elected to accrue market discount currently) on a foreign currency Note prior to the receipt of such interest will be required to include in income for each accrual period the U.S. Dollar value of such interest denominated in or determined by reference to the foreign currency that has accrued during such accrual period, determined by

165

translating such interest at the average rate of exchange for the interest accrual period during which such interest accrued (or, in the case of a short period resulting from an interest accrual period that straddles two taxable years of the U.S. Holder, such short period). For this purpose, the average rate is the simple average of spot rates of exchange for each business day of such period or other average exchange rate for the period reasonably derived and consistently applied by the U.S. Holder. Upon receipt of the interest payment to which such accrual relates, the U.S. Holder will recognize foreign exchange gain or loss in an amount equal to the difference between the U.S. Dollar value of the payment received (determined by translating the foreign currency amounts at the “spot rate” for such foreign currency on the date of receipt) and the amount of such prior accrual. The foreign currency gain or loss will generally be treated as U.S. source ordinary income or loss. In applying this rule, all receipts on a Note will be viewed first as the receipt of any stated interest payments called for under the terms of the Note, second as receipts of previously accrued and unpaid OID (to the extent thereof), with payments considered made for the earliest accrual periods first, and thereafter as the receipt of principal. OID on a Foreign Currency Note is determined in the foreign currency at the time of the acquisition of the Note.

A U.S. Holder required to accrue interest income on a Foreign Currency Note pursuant to the foregoing may elect, in lieu of the above-stated average-rate method, to translate the accrued foreign currency interest to U.S. Dollars based upon the spot rate in effect on the last day of the accrual period (or the last day of its taxable year in the case of an accrual period that straddles the U.S. Holder’s taxable year), or on the date the interest payment is received if such date is within five business days of the end of the accrual period (in which case no foreign exchange gain or loss will be required to be recognized). Any such election must be applied consistently to all debt instruments held by the U.S. Holder at the beginning of the first taxable year to which such election applies or thereafter acquired and cannot be changed without the consent of the IRS.

The amount of market discount on a Foreign Currency Note for which a current accrual election is not made (see “— Market Discount”) includible in income by the U.S. Holder of such Note generally will be determined by translating the accrued market discount on such Note (determined in the foreign currency) into U.S. Dollars at the spot rate on the date market discount is required to be recognized (that is, the date such Note is retired or otherwise disposed of). No foreign exchange gain or loss with respect to such market discount is required to be recognized. If the U.S. Holder accrues market discount currently, the amount of market discount which accrues during any accrual period is determined in the foreign currency and translated into U.S. Dollars on the basis of the average exchange rate in effect during the accrual period. Exchange gain or loss may be recognized to the extent that the rate of exchange on the date of the retirement or disposition of the Note differs from the exchange rate at which the market discount was accrued.

Note premium on a Foreign Currency Note will be computed in units of the applicable foreign currency. With respect to a U.S. Holder that elects to amortize the premium, the amortizable note premium will reduce interest income denominated in or determined by reference to the applicable foreign currency in units of the foreign currency. At the time note premium offsets interest income, foreign exchange gain or loss (which is generally ordinary income or loss) will be realized based on the difference between the spot rates at such time and at the time of acquisition of the Foreign Currency Note. A U.S. Holder that does not elect to amortize note premium will translate the note premium, computed in the applicable foreign currency, into U.S. Dollars at the spot rate on the Maturity Date and such note premium will constitute a capital loss which may be offset or eliminated by exchange gain.

A U.S. Holder’s tax basis in a Foreign Currency Note will be the U.S. Dollar value of the foreign currency amount paid for such Note determined at the time of such purchase. For purposes of determining the amount of any gain or loss recognized by a U.S. Holder on the sale, exchange or retirement of a Foreign Currency Note, the amount realized upon such sale, exchange or retirement will be the U.S. Dollar value of the amount realized in foreign currency (other than amounts attributable to accrued but unpaid interest not previously included in the U.S. Holder’s income), determined at the time of the sale, exchange or retirement.

A U.S. Holder will recognize foreign exchange gain or loss attributable to the movement in exchange rates between the time of purchase and the time of disposition (including the sale, exchange or retirement) of a Foreign Currency Note. The realization of such gain or loss will be limited to the amount of overall gain or loss realized on the disposition of a Foreign Currency Note.

A U.S. Holder will have a tax basis in any foreign currency received as interest or on the sale, exchange or retirement of a Foreign Currency Note equal to the U.S. Dollar value of such foreign currency, determined at the time the interest is received or at the time of the sale, exchange or retirement. Any gain or loss realized by a U.S. Holder on the sale or other disposition of foreign currency (including its exchange for U.S. Dollars or its use to purchase Notes) will be ordinary income or loss.

Foreign Tax Credit

Any Israeli withholding tax that is imposed on any payments with respect to the Notes should generally be treated as a foreign tax eligible, subject to generally applicable limitations and conditions under the Code, for credit against a U.S. Holder’s federal income tax liability or, at the U.S. Holder’s election, for deduction in computing the holder’s taxable income provided that the U.S. Holder does not elect to claim a foreign tax credit for any foreign income taxes paid or accrued for the relevant taxable year. However, to the extent that any Israeli withholding tax is reasonably certain to be refunded, credited, rebated, abated, or forgiven, such amount will not be eligible for credit or deduction.

166

Medicare Tax

A U.S. Holder that is an individual or an estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, will be subject to a 3.8% tax on the lesser of (i) the U.S. Holder’s “net investment income” for the relevant taxable year and (ii) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals will be between U.S.$125,000 and U.S.$250,000, depending on the individual’s circumstances). A U.S. Holder’s net investment income generally will include its interest income and its net gains from the disposition of a Note, unless such interest income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities).

Information with Respect to Foreign Financial Assets

Individuals that own “specified foreign financial assets” with an aggregate value in excess of U.S.$50,000 are generally required to file information reports with respect to such assets with their U.S. federal income tax returns. Depending on the individual’s circumstances, higher threshold amounts may apply. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties, and (iii) interests in non-U.S. entities. The Notes may be treated as specified foreign financial assets and U.S. Holders may be subject to this reporting regime. Penalties may be imposed for failure to file information reports. U.S. Holders are urged to consult their independent tax advisors regarding possible implications of this legislation on their investment in the Notes.

Non-U.S. Holders This section applies to Holders of the Notes that are “Non-U.S. Holders” meaning beneficial owners of the Notes that are neither

U.S. Holders nor partnerships for U.S. federal income tax purposes. A Non-U.S. Holder will not be subject to U.S. federal income tax on interest received on a Note unless that Non-U.S. Holder is

engaged in a trade or business in the United States and the interest on the Note is treated for U.S. federal income tax purposes as “effectively connected” to that trade or business. If a Non-U.S. Holder is engaged in a U.S. trade or business and the interest income is deemed to be effectively connected to that trade or business, the Non-U.S. Holder will generally be subject to U.S. federal income tax on that interest in the same manner as a U.S. Holder. In addition, if the Non-U.S. Holder is a non-U.S. corporation, interest income subject to tax in that manner may increase the Non-U.S. Holder’s liability under the U.S. branch profits tax.

Subject to the back-up withholding discussion below, a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax for any capital gain realized when selling a Note if:

(i) that gain is not effectively connected for U.S. federal income tax purposes to any U.S. trade or business in which the Non-U.S. Holder is engaged; and

(ii) the Non-U.S. Holder is an individual and (a) is not in the United States for 183 days or more in the taxable year in which the Non-U.S. Holder sells the Note or (b) does not have a tax home (as defined in the Code) in the United States in the taxable year in which the Non-U.S. Holder sells the Note and the gain is not attributable to any office or other fixed place of business maintained in the United States by the Non-U.S. Holder. Fungible Issue The Issuer may, without the consent of the holders of outstanding Notes, issue additional Notes with identical terms. These

additional Notes, even if treated for non-tax purposes as part of the same series as the outstanding Notes, in some cases may be treated as a separate issue for U.S. federal income tax purposes. In such a case, the additional Notes may be considered to have been issued with OID even if the outstanding Notes had no OID, or the additional Notes may have a greater amount of OID than the outstanding Notes. These differences may affect the market value of the original Notes if the additional Notes are not otherwise distinguishable from the outstanding Notes.

Back-up Withholding and Information Reporting

In general, information reporting requirements will apply to payments of principal and interest and to the proceeds of the sale, redemption or other taxable disposition of a Note, in each case if such payments are made to non-corporate U.S. Holders and such payments are made within the United States or by or through a custodian or nominee that is a “U.S. Controlled Person,” as defined below. Back-up withholding will apply to such payments if such U.S. Holder fails to provide an accurate taxpayer identification number, fails to certify that it is not subject to back-up withholding, fails to report all interest and dividend income required to be shown on its U.S. federal income tax returns or fails to demonstrate its eligibility for an exemption.

Non-U.S. Holders are generally exempt from these withholding and reporting requirements (assuming that the gain or income is otherwise exempt from U.S. federal income tax), but they may be required to comply with certification and identification procedures in order to prove their exemptions. If a Non-U.S. Holder holds a Note through a non-U.S. partnership, these certification procedures would generally be applied to the Non-U.S. Holder as a partner. If the Non-U.S. Holder is paid the proceeds of a sale or redemption of a Note effected at the U.S. office of a broker, that Non-U.S. Holder generally will be subject to the information reporting and back-up

167

withholding rules described above. In addition, the information reporting rules will apply to payments of proceeds of a sale or redemption effected at a foreign office of a broker that is a “U.S. Controlled Person,” as defined below, unless the broker has documentary evidence that the holder or beneficial owner is not a U.S. Holder (and has no actual knowledge or reason to know to the contrary) or the holder or beneficial owner otherwise establishes an exemption.

As used herein, the term “U.S. Controlled Person” means: (i) a U.S. Person; (ii) a controlled foreign corporation for U.S. federal income tax purposes; (iii) a non-U.S. person 50% or more of whose gross income is effectively connected with a U.S. trade or business for U.S.

federal income tax purposes for a specified three-year period; or (iv) a non-U.S. partnership in which U.S. persons (as defined for U.S. federal income tax purposes) hold more than 50% of

the income or capital interests or which is engaged in the conduct of a U.S. trade or business.

Back-up withholding is not an additional tax. Any amounts withheld under the back-up withholding rules generally will be allowed as a refund or a credit against U.S. federal income tax liability as long as the required information is provided to the IRS in a timely manner.

Reportable Transactions

A U.S. taxpayer that participates in a “reportable transaction” will be required to disclose its participation to the IRS. The scope and application of these rules is not entirely clear. A U.S. Holder may be required to treat a foreign currency exchange loss from the Notes as a reportable transaction if the loss exceeds U.S.$50,000 in a single taxable year if the U.S. Holder is an individual or trust, or higher amounts for other U.S. Holders. In the event the acquisition, ownership or disposition of Notes constitutes participation in a “reportable transaction” for purposes of these rules, a U.S. Holder will be required to disclose its investment by filing Form 8886 with the IRS. Prospective purchasers are urged to consult their tax advisors regarding the application of these rules to the acquisition, ownership or disposition of Notes.

168

ERISA CONSIDERATIONS

The following is a summary of certain considerations associated with the purchase of the Notes by employee benefit plans that are subject to Title I of the United States Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code (together with any entities whose underlying assets include the assets of any such plans and with plans subject to ERISA, “Plans”) and by employee benefit plans subject to provisions under any federal, state, local, non- U.S. or other laws or regulations that are similar to such provisions of the Code or ERISA (collectively, “Similar Laws”), and persons who have certain specified relationships to the Plan (“parties in interest” within the meaning of ERISA or “disqualified persons” within the meaning of Section 4975 of the Code).

General Fiduciary Matters

ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan subject to Title I of ERISA (an “ERISA Plan”) and prohibit certain transactions involving the assets of an ERISA Plan or other Plan subject to Section 4975 of the Code, and their fiduciaries or other interested parties. Under ERISA, any person who exercises any discretionary authority or control over the administration of such an ERISA Plan or the management or disposition of the assets of such an ERISA Plan, or who renders investment advice for a fee or other compensation to such an ERISA Plan, is generally considered to be a fiduciary of the ERISA Plan. In considering an investment in the Notes of a portion of the assets of any Plan, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan and the applicable provisions of ERISA, the Code or any Similar Law relating to a fiduciary’s duties to the Plan including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws.

Prohibited Transaction Issues

As discussed above, Section 406 of ERISA and Section 4975 of the Code prohibit Plans from engaging in specified transactions involving plan assets with persons or entities who are “parties in interest,” within the meaning of ERISA, or “disqualified persons,” within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code. In addition, the fiduciary of the ERISA Plan that engages in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code. Whether or not our underlying assets were deemed to include “plan assets,” as discussed above, the acquisition and/or holding of the Notes by a Plan with respect to which we are, or the initial purchaser is, considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless the investment is acquired and is held in accordance with an applicable statutory, class or individual prohibited transaction exemption. In this regard, the United States Department of Labor (the “DOL”) has issued prohibited transaction class exemptions, or “PTCEs,” that may apply to the acquisition and holding of the Notes. These class exemptions include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers. In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code provide an exemption from the prohibited transaction provisions of ERISA and Section 4975 of the Code for certain transactions, provided that neither the issuer of the securities nor any of its affiliates (directly or indirectly) have or exercise any discretionary authority or control or render any investment advice with respect to the assets of any ERISA Plan involved in the transaction and provided further that the ERISA Plan pays no more than adequate consideration in connection with the transaction. There can be no assurance that all of the conditions of any such exemptions will be satisfied.

Representation

Accordingly, by acceptance of the Notes each purchaser or subsequent transferee of the Notes will be deemed to have represented and warranted in its corporate or fiduciary capacity either that (i) no portion of such purchaser’s or transferee’s assets used to acquire such Notes constitutes assets of any Plan or any entity whose underlying assets include “plan assets” by reason of any Plans’ investment in such entity (a “Plan Asset Entity”), or (ii) the purchase or holding of the Notes by such purchaser or transferee will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or similar violation under any applicable Similar Laws.

The foregoing discussion is general in nature, is not intended to be all-inclusive, and is based on laws in effect on the date of this offering memorandum. Such discussion should not be construed as legal advice. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing shares of the Notes on behalf of, or with the assets of, any Plan or any entity subject to Similar Laws consult with counsel regarding the potential applicability of ERISA, Section 4975 of the Code and Similar Laws to such investment and whether an exemption would be applicable to the purchase of the Notes.

169

PLAN OF DISTRIBUTION

Subject to the terms and conditions of the Program Agreement, Notes may be offered by the Company from time to time through Dealers, which have agreed to use all reasonable efforts to solicit offers to purchase Notes. The Company will pay the relevant Dealer a commission for sales made through it as Dealer (unless otherwise agreed). The Company will have the sole right to accept offers to purchase Notes and may reject any offer to purchase Notes in whole or in part. A Dealer will have the right to reject any offer to purchase Notes solicited by it in whole or in part.

The Company may also sell Notes to a Dealer as principal for its own account at a discount or commission to be agreed upon at the time of sale. In addition, the Notes may be sold from time to time through a syndicate of financial institutions, for which a Dealer (or Dealers) will act as a Lead Manager (or Lead Managers). Such Notes may be resold to investors at prevailing market prices, or prices related thereto at the time of such resale or at a fixed offering price or otherwise, as determined by the relevant Dealer or Dealers. In addition, the Dealers may offer any Notes purchased as principal to other dealers. The Dealers may sell Notes to any dealer at a discount. The Dealers also may impose a penalty bid. This occurs when a particular Dealer repays to the Dealer a portion of the underwriting discount received by it because the Dealer or its affiliates have repurchased Notes sold by or for the account of such Dealer in stabilizing or short covering transactions.

The Company has agreed to indemnify the several Dealers against certain liabilities and to reimburse the Dealers for certain expenses relating to the Program.

In connection with the issue of any Tranche of Notes, the relevant Dealer or Dealers (if any) named as the Stabilizing Agent(s) (or persons acting on behalf of any Stabilizing Agent(s)) in the applicable Pricing Supplement may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilizing Agent(s) (or persons acting on behalf of a Stabilizing Agent) will undertake stabilization action. Any stabilization action may begin on or after the date on which adequate public disclosure of the terms of the offer of the relevant Tranche of Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the Issue Date of the relevant Tranche of Notes and 60 days after the date of the allotment of the relevant Tranche of Notes. Any stabilization action or overallotment must be conducted by the relevant Stabilizing Agent(s) (or persons acting on behalf of any Stabilizing Agent(s)) in accordance with all applicable laws and rules.

The Company has been advised by the Dealers that the Dealers may make a market in the Notes; however, the Company cannot provide any assurance that a secondary market for the Notes will develop.

The Dealers and their respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. In the ordinary course of their respective businesses, certain of the Dealers and/or their affiliates have in the past engaged, and may in the future engage, in the investment banking and commercial banking transactions with or involving the Company and its affiliates for which they may have received, and may in the future receive, customary compensation. In the ordinary course of their various business activities, the Dealers and their respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of the issuer. Certain of the Dealers or their affiliates that have a lending relationship with us routinely hedge their credit exposure to us consistent with their customary risk management policies. Typically, such Dealers and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities, including potentially the notes offered hereunder. Any such credit default swaps or short positions could adversely affect future trading prices of the notes offered hereunder. The Dealers and their respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

On April 15, 2013, for purposes of financing Emergency Plan Phase B, the Company entered into a loan agreement with HSBC Bank plc, Citibank Europe plc, Commerzbank Aktiengesellschaft and Komerční banka. The loan is for up to U.S.$153 million and up to approximately EUR 110 million and has an estimated term of 14 years. As of June 30, 2014, the Company has borrowed under the loan agreement approximately U.S.$141 million and EUR 101 million.

No action has been or will be taken in any jurisdiction that would permit a public offering of the Notes or the possession, circulation or distribution of any material relating to the Company in any jurisdiction where action for such purpose is required. Accordingly, the Notes may not be offered or sold, directly or indirectly, nor may any offering material or advertisement in connection with the Notes (including this Offering Circular and any amendment or supplement hereto) be distributed or published, in or from any country or jurisdiction except under circumstances that will result in compliance with any applicable rules and regulations of any such country or jurisdiction.

170

Selling Restrictions

General

Each Dealer has agreed, and each additional Dealer appointed under the Program Agreement will be required to agree, that it will observe in all material respects all applicable securities laws and regulations in any country or jurisdiction in which it may offer, sell or deliver Notes (other than the United States, except to the extent provided above) and that it will not, directly or indirectly, offer, sell, resell or deliver Notes or distribute any offering material in relation to the Notes except under circumstances that will result in compliance in all material respects with any applicable securities laws and regulations. In addition, each Dealer has agreed, and each additional Dealer appointed under the Program Agreement will be required to agree, that it will comply with such other additional restrictions as the Company and such Dealer or Dealers will agree, in which event such additional restrictions will be set forth in the applicable Pricing Supplement.

State of Israel

The Notes offered hereby are not being sold pursuant to a prospectus that has been qualified with the Israel Securities Authority. As such, the Notes may not be offered in the State of Israel or to Israeli residents other than to persons who have confirmed in writing prior to and in connection with their investment that (i) they are each an “institutional investor,” as set forth in Section 15A(b)(1) of the Israeli Securities Law and have each provided the requisite certification under the First Addendum of the Israeli Securities Law or were each individually approved by the Israel Securities Authority as an “institutional investor,” as set forth in Section 15A(b)(2) of the Israeli Securities Law (a “Qualified Israeli Investor”), (ii) they are aware of the legal consequences of their qualifying as a Qualified Israeli Investor, and (iii) they are purchasing the Notes for their own account, for investment purposes, and without a present intention of resale.

United States

The Notes have not been, and will not be, registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S or pursuant to an exemption from the registration requirements of the Securities Act.

Each Dealer severally represents, warrants and agrees that it has not offered, sold or delivered the Notes, and will not offer, sell or deliver the Notes (i) as part of their distribution at any time and (ii) otherwise until 40 days after the completion of the distribution the Series of which such Notes are a part, as determined and certified to the Fiscal Agent by such Dealer (or, in the case of sale of Notes through a syndicate of financial institutions, by the Lead Manager (as defined in the applicable terms/syndication agreement)), except in accordance with Rule 903 of Regulation S or Rule 144A or as otherwise permitted by this section.

Dealers may resell Registered Notes in the United States to QIBs pursuant to Rule 144A, and each such purchaser of Notes is hereby notified that Dealers may be relying on the exemption from the registration requirements of the Securities Act provided by Rule 144A.

Each Series of Notes will also be subject to such additional U.S. selling restrictions as the Company and the relevant Dealer or Dealers may agree and as set forth in the applicable Pricing Supplement. Each of the Dealers has agreed or will agree that it will offer, sell or deliver such Notes only in compliance with such additional selling restrictions.

In addition, until 40 days after the completion of the distribution of any Tranche of Notes, an offer or sale of Notes of such Tranche within the United States by any Dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with an applicable exemption from registration under the Securities Act.

European Economic Area

In relation to each member state of the European Economic Area that has implemented the Prospectus Directive (each, a relevant member state), each Dealer has represented and agreed, and each additional Dealer appointed under the Program Agreement will be required to represent, warrant and agree that, with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state (the relevant implementation date), an offer of securities described in this Offering Circular has not been made and will not be made to the public in that relevant member state other than:

• to any legal entity that is a qualified investor as defined in the Prospectus Directive;

• to fewer than 100 or, if the relevant member state has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the Dealers; or

• in any other circumstances that do not require the publication of a prospectus pursuant to Article 3 of the Prospectus Directive,

provided that no such offer of securities will require the Company or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive.

171

For purposes of this provision, the expression an “offer of securities to the public” in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe the securities, as the expression may be varied in that member state by any measure implementing the Prospectus Directive in that member state, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the relevant member state) and includes any relevant implementing measure in each relevant member state and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.

The Company has not authorized and does not authorize the making of any offer of securities through any financial intermediary on their behalf, other than offers made by the Dealers with a view to the final placement of the securities as contemplated in this Offering Circular. Accordingly, no purchaser of the securities, other than the Dealers, is authorized to make any further offer of the securities on behalf of the Company or the Dealers.

United Kingdom

Each Dealer severally represents, warrants and agrees, and each additional Dealer appointed under the Program Agreement will be required to represent, warrant and agree, that:

(i) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Company; and

(ii) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Notes in, from or otherwise involving the United Kingdom.

Singapore

This Offering Circular has not been and will not be registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this Offering Circular and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of Notes to be issued from time to time by the Company pursuant to the Program may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the SFA, (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the Notes are subscribed or purchased in reliance of an exemption under Section 274 or 275 of the SFA, the Notes will not be sold within the period of 6 months from the date of the initial acquisition of the Notes, except to any of the following persons:

(a) an institutional investor (as defined in Section 4A of the SFA);

(b) a relevant person (as defined in Section 275(2) of the SFA); or

(c) any person pursuant to an offer referred to in Section 275(1A) of the SFA,

unless expressly specified otherwise in Section 276(7) of the SFA or Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

Where the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is:

(a) a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or

(b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor,

securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries’ rights and interest (howsoever described) in that trust will not be transferred within six months after that corporation or that trust has acquired the Notes pursuant to an offer made under Section 275 of the SFA except:

(1) to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or (in the case of such corporation) where the transfer arises from an offer referred to in Section 276(3)(i)(B) of the SFA or (in the case of such trust) where the transfer arises from an offer referred to in Section 276(4)(i)(B) of the SFA;

(2) where no consideration is or will be given for the transfer;

(3) where the transfer is by operation of law;

172

(4) as specified in Section 276(7) of the SFA; or

(5) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore.

Hong Kong

The Notes may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the Notes may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Japan

The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the “Financial Instruments and Exchange Law”) and each Initial Purchaser has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

Other Restrictions

Each purchaser of Notes will be deemed to have made acknowledgements, representation and agreements as described under “Transfer Restrictions.”

Neither the Fiscal Agent nor any of the Dealers represents that Notes may at any time be lawfully sold in compliance with any applicable registration or other requirements in any jurisdiction, or pursuant to any exemption available thereunder, or assumes any responsibility for facilitating such sale.

173

TRANSFER RESTRICTIONS

Because of the following restrictions, purchasers of Notes are advised to consult legal counsel prior to making, any offer, sale, resale, pledge or transfer of such Notes.

The Notes have not been registered under the Securities Act or any state securities laws and may not be offered, sold or otherwise transferred within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the Notes are being offered and sold only:

(1) in the United States to QIBs in compliance with Rule 144A; and

(2) in offshore transactions (within the meaning of Regulation S) complying with Rule 903 or Rule 904 of Regulation S to non-U.S. persons (within the meaning of Regulation S).

Additional Requirements of the TACT Institutional

Notwithstanding anything in this Offering Circular to the contrary, the Israeli Securities Law, 1968 (the “Israeli Securities Law”) exempts the offer, sale, disposition or other transfer of the Notes conducted on the TACT Institutional by and between QIBs and Qualifying Investors from the general requirement to publish a prospectus. Thus, notwithstanding the fact that the Notes may be transferable pursuant to an applicable exemption from the Securities Act, all transactions involving the Notes conducted on the TACT Institutional or placed by a broker acting in its capacity as a TASE Member must be by and between QIBs and Qualifying Investors. In addition, prior to the date on which the Company notifies the Holders that the Notes are freely transferable pursuant to Rule 144 under the Securities Act (“Rule 144”) and the applicable interpretations thereof by the staff of the SEC (the “Resale Restriction Termination Date”), offers, sales, dispositions or other transfers of the Notes between two different brokers each of which is acting in its capacity as a TASE Member may only be conducted on the TACT Institutional.

“Qualifying Investor” means a non-U.S. person (within the meaning of Regulation S) who is purchasing the Notes in an offshore transaction (within the meaning of Regulation S) who is either (A) an “institutional investor,” as set forth in Section 15A(b)(1) of the Israeli Securities Law and that has provided the requisite certification under the First Addendum of the Israeli Securities Law (a “Qualified Israeli Investor”) or (B) a person described in sub-paragraph (1) of Section I of Annex II to Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments (“MIFID”) who is authorized or regulated by a member state (“Member State”) of the European Economic Area (a “Qualified European Investor”); provided that (A) in relation to offers of Notes in any Member State, “Qualifying Investor” shall only include Qualified European Investors and such offers will be subject to any relevant implementing measure in each Member State of Article 2(1)(e) of the Prospectus Directive and (B) in relation to offers of Notes to natural persons resident in the State of Israel or entities organized or formed in the State of Israel, “Qualifying Investor” shall only include Qualified Israeli Investors.

Deemed Representations

Each prospective purchaser of Notes from the Dealers, by accepting delivery of this Offering Circular, will be deemed to have represented and agreed as follows:

(1) Such offeree acknowledges that this Offering Circular is personal to such offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire the Notes other than pursuant to (i) Rule 144A as a QIB or (ii) in an offshore transaction in compliance with Regulation S as a non-U.S. person (within the meaning of Regulation S). Distribution of this Offering Circular, or disclosure of any of its contents to any person other than such offeree and those persons, if any, retained to advise such offeree with respect thereto is unauthorized, and any such distribution or disclosure, without the prior written consent of the Company, is prohibited.

(2) It certifies that it is not our “affiliate” (as defined in Rule 144), and that (A) it is a QIB and, at the time of purchase of the Notes, it (or one or more QIBs for whose account it is acting) will be the beneficial owner of such Notes or it is a broker-dealer acting for the account of its customer, its customer has confirmed to it that such person is a QIB, or (B) it is located outside the United States and is a non-U.S. person (within the meaning of Regulation S).

(3) It acknowledges (or if it is acting for the account of another person, such person has confirmed to it that such person acknowledges) that the Notes have not been and will not be registered under the Securities Act.

(4) It understands that, notwithstanding the fact that the Notes may be freely transferable pursuant to the securities laws of the United States (including, following the Resale Restriction Termination Date, pursuant to Rule 144), all offers, sales, dispositions or other transfers of Notes conducted on the TACT Institutional or placed by a broker acting in its capacity as a TASE Member may only be made by and among QIBs and Qualifying Investors. In addition, it understands that prior to the Resale Restriction Termination Date, offers, sales, dispositions or other transfers of the Notes between two different brokers each of which is acting in its capacity as a TASE Member may only be conducted on the TACT Institutional.

(5) It understands that each Definitive Registered Note will bear a restrictive legend to the following effect unless the Company determines otherwise in compliance with applicable law:

174

“THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES ON ITS OWN BEHALF AND ON BEHALF OF ANY INVESTOR ACCOUNT FOR WHICH IT HAS PURCHASED SECURITIES, TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE ON WHICH THE COMPANY NOTIFIES THE HOLDER THAT THIS NOTE IS FREELY TRANSFERABLE PURSUANT TO RULE 144 UNDER THE SECURITIES ACT AND THE APPLICABLE INTERPRETATIONS THEREOF BY THE STAFF OF THE U.S. SECURITIES AND EXCHANGE COMMISSION (THE “NOTICE”), ONLY (A) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”), TO A “QUALIFIED INSTITUTIONAL BUYER” (“QIB”) AS DEFINED IN RULE 144A OR A PERSON IT REASONABLY BELIEVES IS A QIB THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (B) PURSUANT TO OFFERS AND SALES TO A NON-U.S. PERSON (WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT (“REGULATION S”)) THAT OCCUR OUTSIDE THE UNITED STATES IN RELIANCE ON REGULATION S, (C) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT IN EACH OF THE FOREGOING CASES TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF SUCH INVESTOR ACCOUNT OR ACCOUNTS BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL AND TO COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, AND ANY APPLICABLE LOCAL LAWS AND REGULATIONS AND FURTHER SUBJECT TO THE COMPANY’S AND THE FISCAL AGENT’S RIGHTS PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (I) PURSUANT TO CLAUSES (B) OR (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE FISCAL AGENT AND (III) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE COMPANY HAS DELIVERED THE NOTICE TO THE HOLDER.”

(6) Each transferor of an interest in the Notes agrees to deliver to each person to whom it transfers such interest notice of any applicable restrictions on transfer.

(7) None of the Company or the Dealers or any person representing the Company or the Dealers has made any representation to it with respect to the Company or the Dealers or the offer or sale of any of the Notes, other than by the Company with respect to the information contained in this Offering Circular, which Offering Circular has been delivered to it and upon which it is relying in making its investment decision with respect to the Notes. It acknowledges that the Dealers make no representation or warranty as to the accuracy or completeness of this Offering Circular.

(8) The purchaser has received a copy of the Offering Circular relating to the offering and acknowledges that (i) neither the Company nor the Dealers or any person representing the Company or the Dealers have made any representation to it with respect to the Company or the offering and the sale of the Notes other than the information contained in this Offering Circular and (ii) it has had access to such financial and other information and has been offered the opportunity to ask questions of the Company and received answers thereto, as it deemed necessary in connection with the decision to purchase Notes.

(9) It acknowledges if it is acquiring any Notes as fiduciary or agent for one or more investor accounts, it represents with respect to each such account that:

(a) it has sole investment discretion;

(b) with respect to trades of Notes on the TACT Institutional, the purchaser of the Notes will be required to satisfy the TASE Member through which it purchases Notes as to its qualification as a QIB or a Qualifying Investor, and for such purpose, TASE Members may require such purchaser to provide appropriate certifications and will be entitled to follow reasonable internal procedures in order to establish that a purchaser of Notes is a QIB or a Qualifying Investor;

(c) the offering of Notes outside the State of Israel is being made solely to Persons that the initial purchasers reasonably believe to be QIBs or non-U.S. persons that are not organized in the State of Israel and as a result, the offering of Notes to such Persons is not subject to the Israeli Securities Law in all matters relating to the offering process and to disclosure and

175

reporting obligations in connection with the offering documents (and, to the extent the Company will not be a “reporting company” for purposes of the Israeli Securities Law, also in connection with periodic and ongoing reporting requirements in the State of Israel), and accordingly is not effected subject to the regulation of the Israeli Securities Authority or subject to the Israeli Securities Law; and

(d) it has full power to make the foregoing acknowledgements, representations and agreements.

(10) It acknowledges that each seller of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A thereunder.

(11) It acknowledges that the Notes will be represented by an electronic recordation of book entries in the records of the Bank Leumi Nominee Company Ltd. as depositary for the TASECH.

(12) The Registrar will not be required to accept for registration of transfer any Notes acquired by you, except upon presentation of evidence satisfactory to the Company and the Registrar that the restrictions set forth herein have been complied with.

Each prospective purchaser of Notes from the Dealers, by accepting delivery of this Offering Circular, and each subsequent acquirer, by its acceptance of the Notes, agrees will be deemed to have represented and agreed as follows:

(1) It understands that the Notes are being offered in a transaction not involving any public offering in the United States within the meaning of the Securities Act, that the Notes have not been and will not be registered under the Securities Act and that, prior to the date on which the Company notifies the Noteholders that the Notes are freely transferable pursuant to Rule 144 and the applicable interpretations thereof by the staff of the SEC (the “Resale Restriction Termination Date”), if it decides to offer, resell, pledge or otherwise transfer any of the Notes it agrees (if it is acting for the account of another person, such person has confirmed to it that such person agrees) that it (or such person) will offer, sell, pledge or otherwise transfer the Notes only to (A) for so long as such Notes are eligible for resale pursuant to Rule 144A, to a person it reasonably believes is a QIB that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A; (B) pursuant to an offer and sale to a non-U.S. person that occurs outside the United States within the meaning of Regulation S; (C) pursuant to a registration statement which has been declared effective under the Securities Act; or (D) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to (1) all applicable requirements under the Fiscal Agency Agreement and (2) any requirement of law that the disposition of its property or the property of such investor account or accounts be at all times within its or their control and to compliance with any applicable state securities laws.

(2) It acknowledges that the Company, the Registrar, the Fiscal Agent, the Dealers and others will rely upon the truth and accuracy of all of the foregoing acknowledgments, representations and agreements set out in this section “TRANSFER RESTRICTIONS” of this Offering Circular. If it is acquiring any Notes as a fiduciary or agent for one or more accounts, it represents that it has sole investment, discretion with respect to each such account and that it has full power to make the foregoing acknowledgments, representations and agreements on behalf of each such account.

(3) Any purported transfer in violation of all of the foregoing acknowledgments, representations and agreements set out in this section “Transfer Restrictions” of this Offering Circular will be null and void.

176

LEGAL MATTERS

Certain legal matters in connection with this offering will be passed upon for the Company by Morrison & Foerster LLP, New York, New York in connection with United States Federal and New York law and by Herzog Fox & Neeman Law Offices as to matters of Israeli law. Milbank, Tweed, Hadley & McCloy LLP, New York, New York represented the Dealers as to matters of United States Federal and New York law and Meitar Liquornik Geva Leshem Tal represented the Dealers in connection with Israeli law.

INDEPENDENT AUDITORS

The annual financial statements of the Company as of and for the years ended December 31, 2013, 2012 and 2011 have been audited by Brightman Almagor, Zohar & Co.

The interim financial statements of the Company as of and for the six months ended June 30, 2014 and 2013 have been reviewed by Brightman Almagor, Zohar & Co.

LISTING AND OTHER INFORMATION

Application has been made to list the Notes on the system of the TASE for trading by institutional investors (referred to herein as the TACT Institutional). No certainty can be given that this application will be granted and there can be no assurances that an active trading market for the Notes will develop.

Copies of the following documents may be obtained or inspected in physical form during usual business hours on any weekday (except Friday, Saturday and public holidays) at the registered office of the Company so long as the Notes remain outstanding:

• the Articles of Association;

• the Company’s annual reports and the quarterly financial information required to be provided, as described in “Description of the Notes — Certain Covenants;”

• the Fiscal Agency Agreement; and; and

• the Charge Documents governing the Collateral for the Notes.

177

GLOSSARY

Except to the extent modified, removed or supplemented in a Pricing Supplement or expressly defined otherwise in the context of a particular provision described in “Business” or “Description of the Notes,” the following terms have the meanings set forth below:

“Availability” means the amount of time electricity was able to be generated at full capacity, expressed as a percentage of the entire period indicated.

“Available capacity” means the combined peak output level that was actually available in any given period.

“BCM” means billion cubic meters, a unit for measuring the volume of gas.

“Capacity” means the maximum rate at which a power plant can generate electric energy. Capacity typically is measured in either watts (W), kilowatts (KW), megawatts (MW) or gigawatts (GW).

“Distribution” means the system that delivers electricity from a sub-station to customer premises at voltages of 33 KV or less.

“Diesel oil” means Petroleum Distillate No. 2.

“Generation” refers to electricity produced in generating stations where a propulsion unit (e.g., a thermal or internal combustion unit) turns a large electric generator that produces electricity. A generating station may consist of several independent generating units.

“GW” means gigawatts, a unit for measuring the capacity to produce electricity. One gigawatt equals one billion watts.

“GWh” means gigawatt hours, a unit for measuring the generation of electricity.

“Installed capacity” means the level of output that may be sustained continuously without significant risk of damage to plant and equipment.

“KV” means kilovolts, a unit for measuring voltage or electrical tension. One kilovolt equals 1,000 volts.

“KW” means kilowatts, a unit for measuring the capacity to produce electricity. One kilowatt equals 1,000 watts.

“KWh” means kilowatt hours, a unit for measuring the generation of electricity.

“Load factor” means total generation of electricity in MWh divided by the product of peak demand and the total number of hours in any given period.

“MVA” means megavolt amperes, a unit for measuring the capacity to transmit electricity.

“MW” means megawatts, a unit for measuring the capacity to produce electricity. One megawatt equals one million watts.

“MWh” means megawatt hours, a unit for measuring the generation of electricity.

“Peak demand” means the highest level of demand for electricity in any given period.

“Power station” means a particular building or complex of buildings containing one or more power generating units.

“Sub-station” means an assembly of equipment through which electricity is passed in order to convert it to a lower voltage that is generally suitable for use by end-users.

“Unit” means each of the independent generating units at a power station.

178

ANNEX A

CONDITIONS IN THE STATE OF ISRAEL

The following information regarding the State of Israel has been extracted from the most recent Annual Report of the State of Israel (for the year ended December 31, 2013), filed with the U.S. Securities and Exchange Commission on Form 18-K on June 30, 2014 (the “Form 18-K”), and has not been independently verified in connection with the Global Medium-Term Note Program. The Company expresses no opinion as to the following information and does not take any responsibility for any inaccuracy or omission contained therein. The State of Israel has not published a more recent Annual Report for any year after 2013. The Company has not sought to update such information and except with respect to the information provided below under the heading “Recent Developments” (which is derived from the State of Israel’s Annual Report for the year ended December 31, 2013), the following information does not otherwise reflect changes that have occurred since December 31, 2013. The information provided is included for the convenience of investors and is not intended to be a complete description of all information about the State of Israel that may be material to investors. Before purchasing any Notes, investors should carefully read the Form 18-K.

Introduction

Israel was established in 1948 and is a highly developed, industrialized democracy. Real GDP increased annually by 3.9% on average between 1996 and 2013, and GDP grew by 3.3% in 2013. Israel has seen marked improvements in most economic indicators in recent decades. GDP growth has been steady and consistent, with the exception of a contraction during the global slowdown of the early 2000s and fluctuating growth rates surrounding the global financial crisis and the European debt crisis. Since the second half of 2011, there has been a slowdown in the Israeli economy, primarily in the areas of exports and fixed capital formation.

In the early 2000s, GDP contracted as a result of ongoing security challenges in Israel, as well as the global technology slump and economic slowdown that followed the burst of the dot-com bubble. An economic recovery began in 2003 and accelerated between 2004 and 2008. During the period 2003 and 2008, GDP increased by 5.4% on average per year. This growth is attributable to a reduction in the fiscal deficit and the size of government, a global economic recovery, growth in the Israeli high-tech sector, and relatively low real interest rates.

The global financial crisis caused a slowdown in growth starting in the second half of 2008 and through the first half of 2009. In 2009, GDP grew by 1.2%. However, the Israeli economy was affected by the global crisis to a lesser extent than other developed economies. Several unique factors and characteristics of Israel’s economy and financial system served to ameliorate the negative effects of the global financial crisis, including the low budget deficit, a current account surplus, the resilience and strength of State supervision over the banking system, a stable real estate market, and limited exposure of Israeli financial institutions to toxic foreign assets, such as those associated with U.S. subprime mortgages.

Israel was therefore able to recover from the global financial crisis relatively quickly, with GDP growing at 5.7% and 4.6% in 2010 and 2011, respectively, though growth slowed in the second half of 2011. The lower growth rate starting in the second half of 2011 can be attributed to the deterioration in Europe’s fiscal condition and the high levels of economic uncertainty around the world. This slowdown continued into 2012, as the Israeli economy grew by 3.4%. This slowdown is evident in all GDP components, with the exception of public consumption. In particular, the growth rate of the fixed capital formation was negative in the last three quarters of 2012. Operation Pillar of Defense, which took place in November 2012, also weighed on economic growth, as GDP grew by 3.7% in the fourth quarter of 2012 (at annual rate). In 2013, the Israeli economy grew slightly slower than 2012 with GDP growing at 3.3%. The first quarter of 2013 grew by 2.2% (in annual rate), mainly due to a concentration in the expenditure on public consumption that decreased by 3.3% (at annual rate), as well as the delay in the approval of the biannual 2013 – 2014 budget. In the second quarter, growth accelerated to 4.7%, mainly due to the commencement of gas production in the Tamar reservoir and the relatively high volume of start-up companies’ exports. In the third quarter, growth fell sharply to 1.8% mainly due to a significant decline in goods and services exports. This decline stems largely from softening export sales in the pharmaceuticals sector and from a significant regression in the start-up companies’ exports. In the fourth quarter, the growth rate accelerated to 2.7%, yet this growth rate is much lower than the quarterly growth rates that were recorded during 2010 – 2012.

Israel has made substantial progress in opening its economy since 1990, removing major trade barriers, as well as tariffs. Israel has entered into free trade agreements with its major trading partners and is one of the few nations to sign free trade agreements with both the United States and the EU. Israel has also signed free trade agreements with the European Free Trade Association (“EFTA”) and with Canada, Turkey, Jordan, Egypt and Mexico. In September 2010, Israel became a full member of the Organization of Economic Co-operation and Development (“OECD”), following a unanimous vote by OECD members.

The total budget deficit, excluding net lending and the realized profits of the Bank of Israel, averaged 3.9% of GDP between 2001 and 2004, primarily as a result of a decline in GDP and in tax revenues in those years. The implementation of a decisive fiscal policy starting in mid-2003, backed by loan guarantees from the U.S. government, contributed significantly to macroeconomic stability by raising fiscal credibility and lowering economic uncertainty. In 2005 and 2006, the total budget deficit amounted to 1.8% and 0.9% of GDP, respectively, and the budget was balanced in 2007, mainly reflecting higher than expected tax revenues.

In 2008, the budget deficit increased to 2.1% of GDP due to continued reduction in tax revenues, as well as the slowdown in economic activity and negative developments in global and local capital markets (all of which had a negative effect on tax revenues).

A-1

In 2009, the budget deficit target was 6%, but the actual deficit stood at 4.9%. While the 2010 budget called for a 5.5% deficit target, the actual deficit was significantly lower at 3.5%, largely due to higher than expected revenues. In 2011, Israel continued to lower its deficit to 3.1%, just slightly above the target of 3%. In 2012, the budget deficit reached 3.9% of GDP, significantly exceeding the Government’s deficit target of 2% of GDP. In 2013, the government deficit decreased to 3.2%, contrary to early estimates that had predicted a significant increase. The deficit decrease resulted from the implementation of fiscal consolidation measures by the Government (on both income and expenditure sides) and from one-off tax revenues (“trapped profits” and sales of start-up companies).

The unemployment rate has fallen consistently throughout the past decade, except for a temporary increase during 2009. In 2012, the unemployment rate was 6.9%, and in 2013 the unemployment rate declined to 6.2%, the lowest rate in the last decade. The reduction in the unemployment rate in recent years was accompanied by an improvement in the labor participation rate. The participation rate in 2013 stood at 63.7%, continuing a trend of incremental improvement from 59.4% in 2002.

One of Israel’s most important resources is its highly educated work force. Based on OECD reports, approximately 46% of adults between the ages of 25 and 64 hold a university or technical degree in Israel, compared to the 32% OECD average. Between 1990 and 2008, approximately 1.1 million people immigrated to Israel, increasing Israel’s population by approximately 25%. Most of these new immigrants are highly educated and have strong academic and professional backgrounds, mainly in science, management, medicine and other technical, professional fields. Although this wave of immigration initially placed a strain on the economy, by raising the budget and trade deficits and contributing to a relatively high level of unemployment, these immigrants were ultimately successfully integrated into the economy. As of 2013, according to Bank of Israel, the unemployment rate among immigrants who came to Israel during the first half of the 1990s is 5.1%, which is lower than the general unemployment rate of 6.2%.

Over the past three decades, Israel has gradually made progress in reducing hostilities with its Arab neighbors. The first peace agreement between Israel and a hostile neighbor country was signed in 1979 in the form of the Camp David Accords with Egypt. In September 1993, Israel and the Palestinian Liberation Organization (“PLO”) signed a Declaration of Principles, a turning point in Israeli-Arab relations. Israel also signed a peace treaty with Jordan in 1994. Further agreements have also been signed between Israel and the PLO. In the early 2000s, unrest in the areas under the rule of the Palestinian Authority posed a setback to the peace process. Since 2003, there has been an improvement in the political affairs in the West Bank area, which is reflected by a relative decline in the number of terrorist attacks and security incidents stemming from the West Bank. In 2005, Israel implemented a unilateral disengagement plan, according to which the State of Israel dismantled and evicted all Israeli communities in Gaza, four Israeli towns in the northern West Bank and all of its military personnel in those areas. During July and August 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. The conflict has been termed the Second Lebanon War (see “International Relations,” below).

After the Israeli disengagement from Gaza, Hamas, a terror organization, assumed administrative control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 and into 2011. From 2011 and into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel commenced Operation Pillar of Defense, a military campaign against targets in Gaza.

Since January 2011, there has been political instability and civil disobedience, termed the Arab Spring, in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Iran, Tunisia, Yemen and Syria. The Arab Spring has ousted long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in the center of this region, it closely monitors these events, aiming to protect its economic, political and security interests. While Israel is hopeful that these developments will lead to increased freedom and opportunity for the citizens of its neighboring countries, it remains concerned regarding the stability of the region. The outcome of the ongoing turmoil in Syria, and regime change in several countries including Egypt, remains uncertain. The delicate relations between Israel and its neighbors could become even more fragile with the ensuing domestic turmoil and change in regimes. It should be noted that such instances of instability in the Middle East and North Africa region have not so far materially affected Israel’s financial or political situation, and that regimes deemed as hostile have nevertheless kept the peace. However, there can be no assurance that such instability in the region will not escalate in the future, that such instability will not spread to additional countries in the region, that current or new governments in the region will be successful in maintaining domestic order and stability, or that Israel’s economic or political situation will not thereby be affected.

Geography

Israel is located on the western edge of Asia bordering the Mediterranean Sea. It is bound to the north by Lebanon and Syria, to the east by Jordan, to the west by the Mediterranean Sea and Egypt, and to the south by Egypt and the Gulf of Eilat. Israel has a total land area, excluding Gaza and the West Bank, of approximately 21,500 square kilometers or 8,305 square miles, approximately the size of the state of New Jersey. Jerusalem is the capital of Israel.

Population

Israel’s population, including Israeli citizens residing in the West Bank, but not including foreign nationals residing in Israel for employment purposes, is estimated at 8.13 million as of 2013. This is an increase of 1.87% from 7.98 million in 2012 and 3.8%, from

A-2

7.83 million in 2011. Between 1990 and 2012, Israel’s population grew by 69.7%, largely as a result of immigration from the former Soviet Union. In 2012, 10.4% of the population were 65 years of age or older, 31.9% were between the ages of 35 and 64, 29.4% were between the ages of 15 and 34, and 28.2% were under the age of 15. 91.4% of the population lives in urban areas, with 18.8% of the population living in Israel’s three largest cities: Jerusalem (population 815,300), Tel-Aviv (population 414,600) and Haifa (population 272,200).

Form of Government and Political Parties

Israel was established in 1948 as a parliamentary democracy, with governmental powers divided among the legislative, executive and judicial branches. Israel has no formal written constitution, but rather, a number of basic laws which govern the fundamental functions of the state, including the electoral system, the government, the legislature and the judiciary system, and guarantee the protection of property, life, body and dignity, as well as the right to privacy and freedom of occupation. These basic laws were granted a special status by the Israeli Supreme Court in comparison to other laws and, in some cases, cannot be amended except by an absolute majority vote of the Knesset. All citizens of Israel, regardless of race, religion, gender or ethnic background, are guaranteed full democratic rights. Freedom of worship, speech, assembly, press and political affiliation are embodied in the State of Israel’s laws, judicial decisions and Israel’s Declaration of Independence.

The President of Israel is the head of state. The President has an apolitical, figurehead role, with the real executive power lying in the hands of the Prime Minister. The current President, Shimon Peres, took office in July 2007. Presidents are elected by the Knesset for a seven-year term, and cannot be reelected for an additional term. The President has no veto powers and the duties of the office are mainly ceremonial. After consulting with different parties’ representatives, the President selects a member of the Knesset to form the government. If this selected Knesset member successfully assembles a coalition, then he or she becomes Prime Minister.

The Economy

Overview

Israel’s economy is industrialized and diversified. GDP per capita in 2013 was $36,187 and between 2007 and 2013, real GDP growth averaged 4.2% annually. The global financial crisis had far reaching effects that impacted, both directly and indirectly, the economies of many countries around the world. Israel, however, was affected to a lesser extent: GDP growth in 2009 fell to 1.2% but recovered to 5.7% in 2010. Most of the deficiencies that led to the development of the global financial crisis were not prevalent in Israel. Israel’s economic growth throughout and in spite of the global financial crisis can be attributed to the demand for high-tech products, the adoption of tighter fiscal policy, a relatively calm security situation and a less restrictive monetary policy. Since 2010, the national accounts were characterized, in general, by overall growth in all components of the GDP, including private consumption, investments and external trade.

Israel had a moderate 3.3% rate of growth in 2013, similar to the 2012 growth rate of 3.4%. The plateau in growth during this period can be attributed to exogenous factors including the contraction of economies around the world, which caused a slowdown in exports. The overall strength of the domestic economy in 2013 was reflected in a solid labor market, as the unemployment rate remained at a relatively low level of 6.2% throughout the year.

The composition of Israel’s trade of goods reflects the industrialized nature of its economy. In 2013, exports of goods consisted primarily of manufactured goods, and particularly high-tech products. Exports traditionally have been a significant driver of Israel’s economic growth. Following an improvement in Israel’s security situation and a recovery from the global recession of the early 2000s, exports of goods and services gained momentum between 2005 and 2008, averaging real annual growth of 6.6%. The global financial crisis, coupled with the lagged effect of an appreciation of the real exchange rate in 2008, had a negative impact on Israeli exports in 2009. Exports of goods and services declined by 11.7% in 2009 but increased significantly, by 14.2%, in 2010. Exports continued to increase in the first half of 2011, but declined in the latter half of the year (7.3% in total). In 2012 and 2013, exports of goods and services declined, with an annual real growth rate of 0.9% for both years.

Historically, the Government has had substantial involvement in nearly all sectors of the Israeli economy. In the past 20 years, however, a central goal of the Government’s economic policy has been to reduce its role in the economy and to promote private sector growth. In order to advance this goal, the Government has pursued a policy of privatizing state-owned enterprises, including banks, the electricity sector and the ports. The Government has also pursued stability-oriented monetary and fiscal policies. Fiscal discipline has kept Israel’s debt to GDP ratio on a declining trend over the last decade, with only a slight increase in 2009 as a result of the global financial crisis.

The Government is committed to price stability with an inflation target between 1% and 3%. In the last ten years, prices have risen by an average of 2.1% annually. The average rate of inflation stood at 3.5% in 2011, at 1.7% in 2012 and at 1.5% in 2013.

Gross Domestic Product

GDP is defined as gross national product (“GNP”) minus income of Israeli residents from investments abroad, earnings of Israeli residents who work abroad, and other income from work and leases abroad, less corresponding payments made abroad (after deduction of payments to foreign companies with respect to production facilities located in Israel).

Between October 2000 and the beginning of 2003, the GDP growth rate declined mainly due to the global economic slowdown

A-3

following the bursting of the dot-com bubble, the September 11th terrorist attacks and the adverse effects of terrorism. Recovery began in 2003 and gained momentum between 2004 and 2008, with the average annual GDP growth being 5.4% during those years.

During the second half of 2008, the Israeli economy became vulnerable to the effects of the global economic crisis. Israel’s GDP growth fell from 7.8% in the first quarter of 2008 to -1.7% in the fourth quarter of 2008. In the first quarter of 2009, GDP continued to contract, with growth being -2.0%. By the second quarter of 2009, however, the Israeli economy began to recover, as GDP expanded at a rate of 2. 5%. During the third and the fourth quarters of 2009, GDP growth accelerated at the rates of 4.5% and 5.3%, respectively. Growth in these periods reflected an expansion in private consumption and exports of goods and services. Overall, annual GDP growth in 2009 was 1.2%. While this was significantly lower than growth rates of previous years, it was favorable compared to the performance of other developed economies.

Real GDP growth recovered in 2010, accelerating at an annual rate of 5.7%. In 2011, GDP continued to grow at 4.6%, which is significantly higher than GDP growth in most developed countries during that year. Growth rates were uneven throughout 2011, with higher rates in the beginning of the year. GDP growth in the first half stood at 4.8%, and then slowed to 4.0% in the second half. This slowdown continued into 2012, as GDP grew by 3.4% throughout the year. In the first, second and third quarters of 2012, GDP growth stood at 2.7%, 3.2% and 4.1%, respectively, and the growth rate declined, in respect to the third quarter, to 3.5% in the fourth quarter, mainly due to the effects of Operation Pillar of Defense, which took place in November 2012. In 2013, economic growth was slightly slower than in 2012, with a GDP growth rate of 3.3%. In the first quarter of 2013 GDP grew by 2.0%, with the slowdown in growth partially due to the contraction in expenditures on public consumption, which decreased to 3.2%. Also going on in the background during the first quarter was the delay in the approval of the 2013 - 2014 biannual budget. In the second quarter there was significant acceleration in the growth rate, which rose to 4.7%, mainly due to the commencing of natural gas extraction from the Tamar Reservoir. The third quarter of 2013 posted a decline in the rate of exports, which stemmed largely from softening export sales in the pharmaceuticals sector, with the volume of exports in this sector falling significantly lower than in 2012. Due to the decline in the exports of goods and services, the GDP growth rate declined to 1.8% in the third quarter. However, a recovery in the volume of exports during the fourth quarter of 2013 contributed to re-acceleration of the GDP growth rate, which reached 3.2% in the final quarter.

GDP in 2013 amounted to NIS 1.052 trillion and business sector product amounted to NIS 780.8 billion (in each case, at current prices). Business sector product is calculated as GDP less certain general government services (government operations executed through private companies are included in the business sector product), services of private non-profit institutions housing services (representing the imputed value of the use of owner-occupied residential property). This methodology is applied by the Central Bureau of Statistics according to international and national accounts practices. In 2013, government output and product of services of private non-profit institutions amounted to NIS 152.3 billion, and housing services amounted to NIS 118.9 billion. Housing services grew by 3.2% in 2013, below the average of 4.0% over the previous five years (2008 – 2013). Government output and the product of private non-profit institutions increased by 2.4% in 2013, below the average of 3.0% over the previous five years (2008 - 2013).

The leading sector in 2013 was finance and business services, which comprised 31.5% of business sector product, and which grew by 3.4% during 2013. Manufacturing was the second largest business sector in 2013, comprising 20.8% of business sector product, growing by a mere 0.7% during 2013 when compared to the rapid growth of 8.8% during 2012. Wholesale & retail trade was third, comprising 14.2% of business sector product and increasing by 2.1% during 2013. Other sectors, including agriculture, electricity, construction, transportation, information and communication, arts, entertainment, recreation and other service activities, together comprised the remaining 33.5% of the business sector product in 2013. Agriculture, forestry and fishery increased by 0.5% during 2013, a significant decline compared to the 7.4% growth recorded in 2012.

The electricity and water sector, which has consistently displayed the highest volatility in its growth levels, posted significant growth of 55.7% in 2013 after a decline of 46.5% in 2012. Construction has risen in each of the past three years, posting 11% in 2011, 4.8% in 2012 and 3.0% in 2013. This growth is due to increases in housing prices and the governmental policy of increasing housing supply by reducing the administrative processes required to obtain building permits.

Gross National Income (“GNI”) is defined as gross domestic product less subsidies on products, taxes on products and net income paid abroad. GNI increased by 8.4% in 2013 at nominal terms.

Recent Developments

Economic Developments

In August 2013, the Central Bureau of Statistics revised the System of National Accounts (SNA) due to a number of major changes that affect the various data series, with respect to values as well as percentages of change between periods. The data series beginning in 2006 was revised for the publication of the 2013 Statistical Abstract. The series from 1995 onwards will be revised in August 2014 for the publication of the Statistical Abstract of 2014. Revisions to the System of National Accounts are in accordance with the changes to the new SNA guide (System of National Accounts 2008), which has been accepted globally and includes changes in the measurement of the annual gross domestic product (“GDP”) (the United States and the United Kingdom have already implemented the new SNA guide, while the majority of other EU nations intend to implement the new SNA guide in 2014). Some of the main changes in the System of National Accounts in Israel consist of: (i) recording research and development as fixed capital formation, (ii) measurement of income from financial intermediation, (iii) recording the Central Bank's output, and (iv) recording of

A-4

products for further processing in the balance of payments. The process of fully implementing the changes in the System of National Accounts in Israel will take several years and will be accompanied by additional adjustments to the Balance of Payments Manual 6 (BPM6) and the new international merchandise trade statistics guide. Further changes have been reflected in the classification of economic activities in Israel, as the classification is in accordance with the new International Standard Industrial Classification (ISIC Rev4). Moreover, there has been integration of the 2006 input - output tables that describe the relationships between various industries, as well as between the industries and the final uses (private consumption, general government consumption, fixed capital formation, and exports).

These methodology changes resulted in a restatement of the growth rates for 2006 through 2012, as well as certain other indicators including the debt-to-GDP ratio and the budget deficit as a percentage of GDP. Therefore, any economic data deriving from such growth rates and/or GDP figures calculated according to the methodology in place prior to August 2013 may not be directly comparable with the data deriving from the growth rates and/or GDP figures calculated according to the new methodology implemented by the Central Bureau of Statistics.

As a result of the above-mentioned methodology changes, the following indicators were revised:

Revised Growth Indicators 2006 – 2013(1)

2006 2007 2008 2009 2010 2011 2012 2013

Budget deficit as a percentage of GDP 0.9 % 0.0 % 2.1 % 4.9 % 3.5 % 3.1 % 3.9 % 3.2 %

Surplus/deficit in the current account as a percentage of GDP 4.7 % 3.2 % 1.4 % 3.8 % 3.1 % 1.3 % 0.3 % 2.5 %

____________ (1) Data for 2006 – 2012 presented in this table constitute revised GDP indicators calculated in accordance with the new SNA

methodology adopted by the Central Bureau of Statistics as of August 2013. Data for 2013 were calculated in accordance with the new SNA methodology and have not been revised.

Sources: Central Bureau of Statistics and Ministry of Finance.

The Israeli economy grew at a pace of 3.3% in 2013, almost unchanged compared to 2012, in which the GDP growth rate stood at 3.4%. The 2013 GDP growth rate is below the growth rates of 5.7% and 4.6%, recorded in 2010 and 2011, respectively. The growth rate began to moderate in the second half of 2011. This trend continued in 2012 and throughout 2013, during which time GDP grew by annual rates of 2.2%, 4.4% (mainly due to the beginning of natural gas production in Israel), 2.0% and 3.2% in the first, second, third and fourth quarters, respectively. The slowdown in growth rates that began in the second half of 2011 and continued through 2013 is attributable, in part, to the weakening of global demand and completion of large domestic infrastructure projects.

As of the date of this Report, the Ministry of Finance’s GDP growth forecast for 2014 is 2.9%. This forecast takes into account the contribution of natural gas production from the newly-operating Tamar natural gas field, which is estimated as accounting for 0.3 percentage points of GDP growth for 2014.

During the first quarter of 2014, GDP grew at an annual rate of 2.7%, a modest slowdown compared to the fourth quarter of 2013. This slowdown in growth is attributable to a decrease in private consumption and fixed capital formation. Business sector product (calculated as GDP less some general government services, services of private non-profit institutions and housing services) grew at an annual rate of 1.5% in the first quarter of 2014, compared to 2.3%, 5.2%, 1.2% and 2.5% in the first, second, third and fourth quarters of 2013, respectively. The growth in private consumption was negative in the first quarter of 2014, continuing the downward trend in private consumption. Fixed capital formation also declined in the first quarter of 2014, after four consecutive quarters of positive growth in 2013.

On May 14, 2013, the Government approved the biennial budget and economic plan proposal for 2013 – 2014. The budget proposal required the approval of the Israeli parliament (the “Knesset”) to become law. On July 30, 2013, the Knesset passed the 2013 - 2014 budget. The budget includes several measures to increase fiscal stability, including reducing the budget deficit to 2.8% of GDP in 2014 and adjusting government commitments to the expenditure ceiling as set forth by law. The budget also includes several measures designed to improve taxation revenue, including tax rate increases with respect to the corporate tax, and taxation on real estate and luxury items. The budget also includes an economic program aimed at improving the standard of living of the working population and increasing growth rates by increasing participation in the labor market among certain segments of the population that are currently underrepresented in the labor force.

In 2013, the Government continued its debt-reduction policy, reducing the Government debt as a percentage of GDP by 1.0%, to a level of 66.1%. Public debt (including local authorities’ debt) as a percentage of GDP continued its declining path falling by 1.0% relative to 2012 and standing at 67.4% at the end of 2013. After a deviation from the budget deficit target in 2012 (the actual budget

A-5

deficit amounted to 3.9% of GDP during 2012), the actual budget deficit in 2013 was significantly below the 4.3% of GDP deficit targeted for the year, amounting to 3.2% of GDP. The 2013 - 2014 budget includes several revenue and expenditure measures aimed at reducing the deficit. The revenue measures included raising the VAT rate from 17% to 18%; increasing the excise tax on tobacco and alcohol; raising the corporate income tax; and imposing a one-time collectability of corporate tax amnesty for companies subject to tax exemptions. The expenditure measures included freezing previous planned public sector wage hikes; cutting the defense budget; and reducing child allowances. Accordingly, in 2013 revenues were higher than expected, due in part to one-time sources of revenue, including the taxes collected following the sale of Iskar and the taxation of “trapped profits” and lower-than-expected expenditures. This led to a 3.2% budget deficit compared to the budget deficit target of 4.3% of GDP in 2013. As part of the commitment to debt reduction, the Government set the 2014 budget deficit target at 2.8% of GDP.

Inflation in 2013 was 1.8% at year-end, within the Government’s target range of 1% to 3%. The inflation forecast for 2014 is 1.3%, also within the target range, and lower than the middle of the target range. The NIS/USD exchange rate appreciated since the second half of 2012 and into 2013, after having depreciated in 2011 and the first half of 2012. The NIS/USD exchange rate as of December 31, 2013, stood at 3.471, which represents an appreciation of 7% during 2013. The NIS/USD exchange rate as of May 31, 2014 was 3.475. During 2013, there was no change in Israel’s foreign currency credit rating from Standard & Poor’s (“S&P”), Moody’s Investor Services or Fitch Ratings. In November 2013, Fitch Ratings revised the outlook on Israel's Long-Term Foreign-Currency IDR to Positive from Stable, reflecting confidence in the turnaround in the fiscal position and the Government’s commitment to a credible medium-term path for further deficit reduction, as well as the economic benefits that are expected with the start of gas production.

Israel’s economy continues to be affected by current global economic conditions and the slow-growth climate in Europe. Europe continues to face uncertainty as many Eurozone countries face moderate growth and the inflation pace is lower than 1%. The continued sluggish growth in the EU, which is one of Israel’s major trade partners, could have a material adverse impact on Israel’s balance of trade and thereby adversely affect Israel’s financial condition. Since late 2009, several Eurozone governments, including Greece, Spain, Italy, Ireland, Portugal, France and Cyprus, have experienced rising national debt levels coupled with the downgrade of the credit ratings of their government debt. As a result, there was significant price volatility in the secondary market for sovereign debt of European and other nations. In 2013, it seems that this price volatility has significantly decreased, mainly due to measures that have been taken by the European Central Bank. Additionally, speculation regarding the inability of Greece and certain other Eurozone governments to pay their national debt has largely subsided. Although Israel’s economy has sustained moderate rates of growth in recent years, there can be no assurance that Israel’s economy will continue to grow in a prolonged negative global economic climate.

Balance of Payments and Foreign Trade

Israel had a current account surplus of 2.5% of GDP in 2013. This surplus follows eleven years of a positive surplus in the current account. The current account balance has decreased steadily since the second half of 2010 and through the first quarter of 2012. This decrease is partially attributable to the cessation of natural gas flowing from Egypt and the slowdown in the extraction of natural gas from Yam Tethis reservoir, the combined effect of which was to require Israel to import expensive alternative fuels during 2011 and 2012. The production of natural gas from the Tamar reservoir, which started in late March 2013, and the decline in fuel prices since the second half of 2012 contributed to an improvement in the current account balance in the second half of 2012 and into 2013. This improvement is expected to continue in future years.

During 2013, exports of goods and services increased slightly, while imports of goods and services decreased slightly. In 2013, Israel recorded a net-export surplus of $3.2 billion, compared to a deficit of $0.4 billion in 2012, and following a high deficit during 2011, and a high surplus in 2010. Compared to 2012, exports in real NIS terms grew moderately by 0.9% in 2013, whereas imports decreased by 0.3%. Due in part to the reduction in global demand (particularly relating to high-tech products) and the appreciation of the NIS, exports of goods in current dollars decreased in the third quarter of 2013 by 6.8% but recovered in the fourth quarter of 2013 and the first quarter of 2014, growing by 10.1% and 2.9%, respectively (compared with the previous quarter). The growth in exports during 2013 (4.4% in current dollar terms) was reflected in an increase of exports to the EU (5.8%) and Asia (4.8%), while exports to the United States decreased by 5.5%. Exports to other destinations (excluding Asia) grew by 12.6% in 2013. The share of exports to the EU increased by 0.4 percentage points (from 31.2% in 2012 to 31.6% in 2013), while the share of exports to United States decreased by 2.1 percentage points (from 23.3% in 2012 to 21.2% in 2013). The share of exports to Asia remained almost unchanged (declining from 21.0% in 2012 to 20.8% in 2013).

During the first quarter of 2014, exports of goods increased by 8.8% in real NIS terms and at an annual rate, compared to the previous quarter, and imports increased by 3.9% at an annual rate. The growth of imports in 2014 is expected to be limited due to the local production of natural gas, which will offset the importation of certain energy-related products.

On March 30, 2013, natural gas production at the Tamar reservoir began. The gas flowing from Tamar is being used mainly for domestic electricity production and is expected to lead to a significant decrease in energy-related imports. Following the beginning of gas production from Tamar, there were appreciation pressures on the NIS, leading the Bank of Israel to resume its intervention in the foreign exchange market for the first time since 2011. The Bank of Israel purchased foreign currency in the amount of $2.1 billion by the end of 2013 within the framework of the plan, and another $3.2 billion in unplanned purchases. In October 2013, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2014 will be $3.5 billion, and announced that it will purchase foreign currency during 2014 accordingly. The Bank of Israel intends to continue such foreign currency purchases until Israel’s sovereign wealth fund becomes operational, which is anticipated in 2018 (subject to legislative

A-6

review by the Knesset).

Israel is a party to free trade agreements with its major trading partners and it is one of the few nations that signed free trade agreements with both the United States and the EU (see “State of Israel — Membership in International Organizations and International Economic Agreements,” below).

Fiscal Policy

The budget deficit amounted to 3.2% of GDP in 2013, below the budget deficit target of 4.3% of GDP for that year. In recent years, the budget deficit has been on a declining path, with the exception of 2012, amounting to 5.3% of GDP in 2009 due to a decrease in tax revenues resulting from the global financial crisis (the 2009 budget deficit target was set at 6%); 3.6% of GDP in 2010 (the 2010 budget deficit target was set at 5.5%); 2.7% in 2011 (the 2011 budget deficit target was set at 3.0%); and 3.9% in 2012 (the 2012 budget deficit target was set at 2.0%). Pursuant to recent legislation, the budget deficit target is set at 2.8% of GDP in 2014.

In accordance with the Government’s long-term fiscal policy, the Knesset revised the government expenditure ceiling set forth in the Expenditure Law (as defined below) (see “Public Finance — Limits on Expenditure and Deficit Reduction”). The revision modifies the formula that will be used to calculate the annual budget in the coming years. Under the new formula, beginning with the 2015 budget, the expenditure ceiling will be calculated based on the average population growth rate in the three years prior to the submission of the Budget Law, added to the ratio between 50% and the actual debt-to-GDP ratio. The formula takes into account the three-year average population growth rate in order to ensure that real government expenditure per capita increases.

Inflation and Monetary Policy

The inflation rate over the last decade was near the middle of the Government’s target range (1% – 3%) and stood at approximately 2% on average. Measured at year-end, the consumer price index (“CPI”) rose by 2.7% in 2010, 2.2% in 2011, 1.6% in 2012 and 1.8% in 2013. The changes in the CPI reflect a rise in the prices of commodities, housing, and agricultural products. In the first few months of 2014, the CPI remained within the target range but near the bottom of such range. The CPI rose by 1.0% during the twelve-month period ending May 31, 2014. It is expected that the average rate of inflation in 2014 will be 0.9%.

Because of the slowdown in the Israeli and global economies, the Bank of Israel lowered its key interest rate to 0.5% in the middle of 2009. As Israel’s economy recovered and continued to grow, the Bank of Israel began to gradually increase its key interest rate until it peaked at 3.25% in June 2011. The Bank of Israel then repeatedly reduced its key interest rate by 0.25 percentage points, beginning in September 2011. In May 2013, the Bank of Israel announced that it would further reduce the interest rate by 0.5 percentage points, to 1.25%. In March 2014, the Bank of Israel reduced its key interest rate to 0.75%. The real interest rate averaged -0.4% in 2013 after two years of positive interest rates of 0.2% and 0.1% in 2011 and 2012, respectively. In 2009 and 2010 the real interest rate was negative (-1% and -1.2%, respectively). As of May 2014, the real interest rate, less inflation expectations, was -0.64%.

In recent years, Israel has been active in the global sovereign debt markets. In March 2009, Israel issued in the global markets $1.5 billion aggregate principal amount of 5.125% bonds due 2019. In March 2010, Israel issued in the Euro market €1.5 billion aggregate principal amount of 4.625% bonds due 2020. In January 2012, Israel issued in the global markets $1.5 billion aggregate principal amount of 4% bonds due 2022. In January 2013, Israel completed a dual-tranche issuance in the global markets, issuing $1 billion aggregate principal amount of 3.15% bonds due 2023 and $1 billion aggregate principal amount of 4.5% bonds due 2043. In January 2014, Israel issued in the Euro market €1.5 billion aggregate principal amount of 2.875% bonds due 2024.

The NIS/USD exchange rate saw an appreciation between the second half of 2012 and into 2013, averaging NIS 3.61 for 2013 (compared to NIS 3.86 in 2012). On July 31, 2012, December 31, 2012, April 30, 2013 and December 31, 2013, the NIS/USD exchange rate stood at NIS 3.997, NIS 3.733, NIS 3.594 and NIS 3.471, respectively. In response to a sharp appreciation by the NIS that began in 2008 and continued until mid-2011, the Bank of Israel initiated a two-year policy of daily purchases of foreign currency. In August 2009, the Bank of Israel announced that it will terminate its daily purchasing of foreign currency but that it plans to continue purchasing such currency when it deems advisable. Between August 2011 and April 2013, the Bank of Israel did not make substantial foreign currency purchases.

In May 2013, the Bank of Israel announced its plan to resume purchasing foreign currency to counteract the adverse effects of natural gas production from the Tamar reservoir, which began operating in late March 2013, on the balance of payments. Appreciation pressures on the NIS began following the commencement of production from the Tamar reservoir. The Bank of Israel’s intervention in the foreign exchange market, for the first time since 2011, is intended to offset the appreciation pressure on the NIS resulting from the increased domestic production of natural gas in order to avoid the phenomenon known as “Dutch disease,” which could negatively impact the Israeli economy. The Bank of Israel purchased $2.1 billion by the end of 2013 within the framework of the plan, and another $3.2 billion in unannounced purchases.

In October of 2013, the Bank of Israel projected that the overall effect of natural gas production on the balance of payments in 2014 will be $3.5 billion, and announced that it will purchase foreign currency during 2014 accordingly.

At the end of 2010 and 2011, official reserves stood at $70.9 billion and $74.9 billion, respectively. At the end of 2012 and 2013, official reserves stood at $75.9 billion and $81.8 billion, respectively. Due to the resumed purchases of foreign currency by the Bank of Israel, the official reserves increased to $86.5 billion in May 2014.

A-7

In January 2013, the Governor of the Bank of Israel, Professor Stanley Fischer, announced his intention to resign as of June 30, 2013. On November 13, 2013, Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid appointed Dr. Karnit Flug as Governor of the Bank of Israel. Dr. Flug previously served as Deputy Governor of the Bank of Israel since July 2011. From July 2013 until November 2013, Dr. Flug served as Acting Governor of the Bank of Israel. Under Israeli law, the Governor of the Bank of Israel is appointed by the President of the State of Israel after receiving the recommendation of the Government.

Labor Market

The rate of unemployment dropped to 6.2% in 2013, reflecting a significant decrease compared to 6.9% in 2012 and 7.0% in 2011. From January to April 2014, the unemployment rate averaged 5.8%, which is very low by historical standards. The participation rate improved significantly in the last four years, increasing from 61.6% at the beginning of 2010, to 63.37% in the fourth quarter of 2013 and 64.0% in April 2014. Despite the high participation rate and low unemployment rate, there are still no major signs of pressure to increase wages. This is in part attributable to the entry of a large number of workers into low-paying jobs and part-time positions.

Capital Markets

The Tel-Aviv Stock Exchange (the “TASE”) is Israel’s sole stock exchange and the Tel-Aviv 100 (“TA-100”) and Tel-Aviv 25 (“TA-25”) are its main indices and primary indicators of the performance of Israel’s public companies. The TA-100 and TA-25 measure, respectively, the 100 and 25 companies with the highest market capitalization listed on the TASE. The TASE is highly correlated with major stock markets in developed countries, and the global financial crisis and overall weakening in global growth starting in 2008 have affected Israel’s public companies. The TA-100 fell by 51.1% in 2008, but recovered in 2009 and 2010, rising by 88.8% and 14.9%, respectively. In 2011, the TA-100 fell by 20.1% and the TA-25 fell by 18%. The TASE partially recovered in 2012, with the TA-100 and TA-25 rising by 7.2% and 9.2%, respectively. This recovery continued into 2013 as the TA-100 and TA-25 increased by 15.1% and 12.1%, respectively. However, during 2012 and 2013 the TASE underperformed relative to the major international stock exchanges.

In light of the 7.0% appreciation of the NIS against the USD during 2013, the TA-25 rose 20.6% in USD terms over the course of the year. The TA-25 rose 4.8% in nominal terms and 4.7% in USD terms between January and May 2013, while the USD appreciated by 0.1% against the NIS. The value of the public portfolio of financial assets (a weighted average of the public’s holdings of financial assets and deposits, in Israel and abroad) dropped by 1.2% during 2011, but increased by 7.8% during 2012, and increased further by 8.9% in 2013; current data (through April 2014) shows a further increase of 1.8%. Redemptions in provident funds caused these funds to record a net outflow of assets under management of NIS 465.73 million in 2012, mainly due to large redemptions in January of that year. However, during the fourth quarter of 2012 there was a positive inflow of NIS 1.541 billion. During 2013, there was a significant net inflow of assets under management of NIS 2,757 billion, mainly due to large deposits in December 2013. Since the beginning of 2014 there was a net inflow of NIS 0.858 billion.

The Bank of Israel, together with governmental authorities and regulators, monitors Israeli banks and financial institutions on an ongoing basis, supervising the banking system’s conditions and operations as a whole. In addition, the Bank of Israel cooperates with the Ministry of Finance and the Israel Securities Authority to achieve comprehensive regulation and supervision of Israel’s financial markets, to ensure coordination among the various entities in the financial sector and to set policies and measures that will be implemented and enforced with respect to such entities.

In 2011, the Bank of Israel and the Ministry of Finance took a number of steps to reduce short-term investments by foreign investors. These include, starting in January 2011, requiring banking corporations in Israel to meet a 10% reserve requirement for foreign exchange swap transactions and shekel-based forward contracts entered into by non-residents. In addition, the Ministry of Finance cancelled a tax exemption previously granted to foreign investors on capital gains from non-indexed zero-coupon securities of up to one-year maturity issued by the Bank of Israel (“Makam”) and short-term government bonds. To improve its ability to analyze transactions in the foreign exchange market and to increase transparency and investor confidence, the Bank of Israel imposed reporting obligations on Israeli residents and non-residents undertaking transactions in foreign exchange swaps and forwards exceeding $10 million per day, and non-residents undertaking transactions in Makam and short-term government bonds exceeding NIS 10 million per day.

Political Situation

Israel was established in 1948. Israel is a parliamentary democracy, with governmental powers divided among separate legislative, executive and judicial branches. Israel has no formal written constitution but rather a number of basic laws that were granted special status, enabling judicial review by the Israeli Supreme Court. Israel’s constitutional jurisprudence is also grounded in judicial decisions and in the State of Israel’s Declaration of Independence. The President of Israel is the head of state. The presidency is largely an apolitical, figurehead role, with the real executive power in the hands of the Prime Minister. The legislative power of the State of Israel resides in the Knesset, a unicameral parliament that consists of 120 members elected by universal suffrage under a system of proportional representation (see “State of Israel — Form of Government and Political Parties,” below).

Israel signed peace treaties with Egypt in 1979 and Jordan in 1994, but past efforts to achieve peace with Syria, Lebanon and the Palestinians have yet to bear fruit. Relations between Israel and the Palestinian Authority continue to be based on existing agreements and on current efforts by the US administration to resume peace talks.

A-8

In 2005, Israel redeployed out of the Gaza Strip (“Gaza”), dismantling all Israeli communities in Gaza and all its military bases there, as well as four Israeli settlements in the northern West Bank (see “State of Israel — International Relations,” below).

In the summer of 2006, Israel was engaged in a war with Hezbollah, a terror organization based in Lebanon. In June 2007, Hamas, a terror organization, assumed control over Gaza. In December 2008, in response to Hamas’s firing into Israel an increasing number of rockets from Gaza, Israel commenced Operation Cast Lead in Gaza with the goal of suppressing the rocket fire. The operation concluded in January 2009, contributing to relative calm from 2009 and into 2011. Operation Cast Lead did not materially affect the Israeli economy. From 2011 and into 2012, Hamas resumed and substantially increased its rocket attacks from Gaza, including for the first time using rockets that have the capability of reaching Tel Aviv and Jerusalem. In response, in November 2012, Israel launched Operation Pillar of Defense, a military campaign against terrorist targets in Gaza. Operation Pillar of Defense lasted eight days.

Having been at a standstill since 2009 (despite a brief round of talks beginning in September 2010), Israeli-Palestinian peace negotiations were again initiated, under the auspices of US Secretary of State John Kerry, in July 2013. Progress was made, but before the last phase of negotiations of a prisoner release by Israel, for which Government approval was imminent, the Palestinian Authority breached its commitments and submitted requests to accede to fifteen international conventions. While the talks were suspended, the Palestinians announced a unity pact between Fatah and Hamas, which would lead to a so-called national consensus government. Incorporating Hamas into the Palestinian government, under one guise or another, is unacceptable to Israel as long as Hamas rejects the three benchmarks of the International Quartet (namely, recognizing Israel, accepting existing Israeli-Palestinian agreements, and renouncing violence). Although Israel has expressed its willingness to negotiate without preconditions with Palestinian partners who accept the Quartet’s conditions, Hamas still refuses to do so, leaving negotiations at an impasse. However, improvements have been made in economic and security cooperation with the Palestinian Authority.

In September 2011, the Palestinian Authority filed an application for membership with the United Nations. In November 2012, the General Assembly upgraded the Palestinian Authority’s status in the United Nations from a “non-member observer entity” to a “non-member observer state.”

Since January 2011, there has been political instability and civil unrest, termed the Arab Spring, in numerous Middle East and North African countries, including Bahrain, Libya, Egypt, Tunisia, Yemen and Syria. The Arab Spring has ousted long-standing leadership in several of the aforementioned countries and created turbulent political situations in others. As Israel is situated in this region, it closely monitors these events, aiming to protect its economic, political and security interests. While Israel is hopeful that these developments will lead to increased freedom and opportunity for the citizens of its neighboring countries, it remains concerned regarding the stability of the region. The delicate relations between Israel and its neighbors could become even more fragile with the ensuing domestic turmoil and change in regimes. However, such instances of instability in the Middle East and North Africa region have so far not materially affected Israel’s financial or political situation, and countries who have signed peace agreements with Israel remain committed to them, regardless of internal political developments. Nevertheless, there can be no assurance that such instability in the region will not escalate in the future, that such instability will not spread to additional countries in the region, that current or new governments in the region will be successful in maintaining domestic order and stability, or that Israel’s economic or political situation will not thereby be affected. This uncertainty is highlighted by recent fighting in Syria and Iraq, where an Islamist militia group known as ISIS (Islamist State in Iraq and Syria) is challenging the territorial boundaries of both states.

Since the signing of the Camp David Accords in 1979, peace with Egypt has been important to Israel’s national security. Following the ousting of former President Hosni Mubarak, the relationship between Egypt and Israel has been strained, but the election of President Al-Sisi has been accompanied by reassuring statements regarding common interests. As of June 2014, Israel did not perceive a material change in the strategic stance of Egypt, and the peace treaty between the two states remained in force. Moreover, as of June 2014, the weakening of the Assad regime in Syria and the removal of its chemical weapons was perceived as diminishing the strategic threat to Israel emanating from the Syrian armed forces. Nevertheless, Israel remains vigilant regarding the security challenges posed by its shared border with Syria, possible transfers of strategic weapons (including chemical and biological weapons), and the possibility that the ongoing civil war will devolve into a state of anarchy.

Fundamentalist regimes such as Iran present a deep concern for the international community and especially for states in the region. Since 2011, the prospect of a nuclear Iran has been at the center of international geopolitical discourse. The implementation of strict international sanctions against Iran, combined with widespread international denouncement of Iranian nuclear military ambitions, serve as evidence that the United States, EU and other world powers share Israel’s concerns. Talks between the P5+1 group and Iran have so far resulted in what Israel considers to be a disadvantageous interim agreement, since it validates Iran’s nuclear enrichment capacities. There has yet to be a breakthrough before a final agreement on this matter can be reached. Prime Minister Benjamin Netanyahu has publicly stated that Israel aims to achieve a peaceful resolution to the situation; however, all options for preventing Iran from obtaining nuclear weapons remain on the table.

A-9

Selected Economic Indicators (In Billions of NIS Unless Otherwise Noted)

2009 2010 2011 2012 2013

Main Indicators

GDP (at constant prices) 819.7 866.2 905.8 936.2 967.4

Real GDP growth 1.2 % 5.7 % 4.6 % 3.4 % 3.3 %

GDP per capita (at constant 2010 prices) 109,568 113,666 116,687 118,422 120,084

GDP per capita, percentage change -0.5 % 3.7 % 2.7 % 1.5 % 1.4 %

Inflation (change in CPI-annual average) 3.3 % 2.7 % 3.5 % 1.7 % 1.5 %

Industrial production -6.6 % 9.5 % 2.0 % 4.0 % 0.6 %

Business sector product (at constant 2010 prices) 607.2 645.8 676.2 699.3 724.1

Permanent average population (thousands) 7,482 7,621 7,764 7,906 8,056

Unemployment rate(1) 8.9 % 8.0 % 7.0 % 6.9 % 6.2 %

Foreign direct investment (net inflows, in billions of dollars) 4.4 5.5 10.8 9.5 11.8

Trade Data

Exports (F.O.B) of goods and services (NIS, at constant 2010 prices) 265.2 302.9 325.1 328.1 330.3

Imports (F.O.B) of goods and services (NIS, at constant 2010 prices) 250.0 287.8 318.2 325.5 324.5

Government Debt(2)

Total gross government debt (at end-of-year current prices)(3) 596.4 608.2 633.0 666.8 696.3

Total gross government debt as percentage of GDP 73.7 % 70.2 % 68.5 % 67.1 % 66.11 %

External Debt

External debt liabilities (in millions of dollars) 90,947 101,071 109,984 97,697 96,517

Net external debt (in millions of dollars) -54,319 -58,406 -63,907 -69,877 -78,821

Revenues and Expenditures

Revenues and grants 223,039 244,108 263,604 272,728 296,636

Expenditures 307,615 325,801 347,758 376,391 389,473

Expenditures other than capital expenditures 226,552 223,195 245,077 262,457 278,608

Development expenditures (including repayments of debt) 81,063 92,606 102,681 113,934 110,865

Repayments of debt 68,384 79,554 88,163 97,679 94,417 ____________ (1) Reflects changes in the Central Bureau of Statistics’ labor survey methodology, resulting in higher values in the unemployment

rate line items.

(2) Government debt excluding local authorities’ debt.

(3) Risk Management Dept., Debt Unit, Ministry of Finance.

Sources: Central Bureau of Statistics, Bank of Israel and Ministry of Finance.

A-10

ANNEX B

FORM OF PRICING SUPPLEMENT

[Attached to, and part of, Terms/Syndication Agreement or Principal Purchase Letter, if any]

Pricing Supplement [and Supplemental Offering Circular]

The Israel Electric Corporation Limited

[Title of Issue of Notes]

[Dealer Name(s)]

The date of this Pricing Supplement is [__________].

This document (the “Pricing Supplement”) is issued to give details of an issue by The Israel Electric Corporation Limited (the “Company”) under its Global Medium-Term Note Program [and to provide information supplemental to the Offering Circular referred to below].

This Pricing Supplement supplements the Description of the Notes in, and incorporates by reference, the Offering Circular dated [Date], and all documents incorporated by reference therein (the “Offering Circular”), and should be read in conjunction with the Offering Circular. Unless otherwise defined in this Pricing Supplement, terms used herein have the same meaning as in the Offering Circular.

[Notes offered and sold outside the United States have not been and will not be registered under the United States Securities Act of 1933, as amended, and are subject to U.S. tax law requirements. Accordingly, subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to U.S. persons. In some cases, offers and sales of the Notes are subject to further restrictions. See “Transfer Restrictions — Additional Requirements of the TACT Institutional” in the Offering Circular.]

[Date]

The Israel Electric Corporation Limited [Title of relevant Series of Notes (specifying type of Notes)]

issued pursuant to the U.S.$5,000,000,000 Global Medium-Term Note Program

[Include whichever of the following apply or specify items as “not applicable.”]

Type of Notes

1 Interest/Payment Basis: Fixed Rate Note/Floating Rate Note/ Zero Coupon Note/Original Issue Discount Note/Indexed Note/Dual Currency Note/Partly-Paid Note/Amortizing Note/ Combination/Other

2 If Amortizing Note, insert Installment Amount(s)/Installment Date(s):

[ ]

3 If Partly-Paid Notes, insert amount of each installment (expressed as a percentage of the nominal amount of each Note)/due dates for any subsequent installments/consequences of failure to pay subsequent installments/rate of interest to accrue on first and any subsequent installments:

[Insert details]

4 If Dual Currency Notes, insert the Rate of Exchange/calculation agent/fall back provisions/person at whose option Specified Currency is to be payable and notice period:

[The Rate(s) of Exchange is the exchange rate(s) or basis of calculating the exchange(s) to be used in determining the amounts of principal and/or interest payable in the Specified Currencies]

B-1

Description of the Notes

5 Form of the Notes: [Registered Notes]

6 Exchange:

(a) Notes to be represented on issue by: [Global Registered Notes - [insert principal amount]][Definitive Registered Notes - [insert principal amount]]

(d) Global Registered Note exchangeable for Definitive Registered Notes at the request of the Holder:

[No] [Yes] [If yes, specify circumstances of exchange]

7 (a) [Reserved.]

(b) [Reserved.]

8 [(a)] Series Number: [ ]

[(b) Tranche Number: [ ]]

(c) Details (including the date, if any, on which the Notes become fully fungible) if forming part of an existing Series:

[Number and other details]]

9 (a) Principal amount of Notes to be issued: [ ]

(b) Aggregate principal amount of Series (if more than one issue for the Series):

[ ]

(c) Specified Currency (or Currencies in the case of Dual Currency Notes):

[ ]

(d) Specified Denomination(s):

10 Issue Price: [ ]

11 Issue Date: [ ]

12 Interest Commencement Date: [Issue Date/other]

13 Automatic/optional conversion from one Interest/Payment Basis to another:

[Insert details]

Provisions Relating to Interest (if any) Payable

Fixed Rate Note

14 (a) Rate(s) of Interest: [ ] percent per annum/zero

(b) Interest Payment Date(s) [ ]

(c) Initial Broken Amount per Specified Denomination

[Specify amounts]

(d) Final Broken Amount per Specified Denomination

[Specify amounts]

(e) Other terms relating to the method of calculating interest (e.g., day count fraction and Interest Determination Dates)

[ ]

Zero Coupon Notes

15 (a) Accrual Yield: [Insert details]

(b) Reference Price: [Insert details]

(c) Other formula or basis for determining Amortized Face Amount:

[Insert details]

Floating Rate Notes

B-2

16 Calculation Agent (if not the Company) [ ] appointed pursuant to

[ ]

17 (a) Interest Period(s) or specified Interest Payment Date(s):

[NB: specify either a period or periods or a specific date or dates]

(b) Minimum Interest Rate (if any): [ ]

(c) Maximum Interest Rate (if any): [ ]

(d) Business Day Convention: [Floating Rate/Following Business Day/Modified Following Business Day/Preceding Business Day/other convention – insert details]

(e) Additional Business Centers: [ ]

(f) Applicable definition of Business Day (if different from that set out in the Terms and Conditions):

[ ]

(g) Principal Financial Center: [ ]

(h) Other terms relating to the method of calculating interest (e.g., day count fraction, rounding up provision and if different from Condition 5(a)(ii)(B) denominator for calculation of interest):

[Condition 5(a)(ii)(B) applies/other - insert details]

18 (a) Interest Rate Basis: [CD Rate/CMS Rate/CMT Rate/ Commercial Paper Rate/EURIBOR/Federal Funds Rate/LIBOR/Prime Rate/Treasury Rate/ OTHER]

(b) Spread: [Plus/minus] [ ] percent per annum

(c) Spread Multiplier: [ ] percent

(d) Interest Reset Period: [daily/weekly/monthly/quarterly/semi-annually/annually]

(e) Reset Date(s): [ ]

(f) Index Maturity: [ ]

(h) If Rate of Interest to be calculated otherwise than by reference to LIBOR or EURIBOR insert details, including Rate of Interest / Spread / fall back provisions:

[ ]

Indexed Notes

19 Index/Formula: [Insert details of the index to which amounts payable in respect of interest are linked and/or the formula to be used in determining the rate of interest, together with details of the calculation agent and the fallback provisions]

Provisions Regarding Payments

20 Definition of “Payment Business Day” for the purpose of Conditions if different to that set out in Condition 9(c):

[Insert details]

Provisions Regarding Redemption/Maturity

21 Maturity Date: [ ]/The Interest Payment Date falling [on or nearest to]

22 Amortizing Notes: Installment Dates Installment Amounts

23 (a) Redemption at Company’s option: [No/Yes] B-3

[If yes, insert optional redemption date(s)/optional redemption amounts:]

(b) Redemption at Holder’s option: [No/Yes]

[If yes, insert optional redemption date(s)/optional redemption amounts:]

[ ]

(c) Minimum Redemption Amount/ Higher Redemption Amount:

[ ]

(d) Other terms applicable on redemption: [ ]

24 Final Redemption Amount for each Note, including the method, if any, of calculating the same:

[Insert amount or details including party responsible for calculation (NB - fall back provisions must be inserted)]

25 Early Redemption Amount for each Note payable on redemption for taxation reasons or on an Event of Default or Acceleration Event and/or the method, if any, of calculating the same:

[Insert amount or details including party responsible for calculation]

General Provisions Applicable to this Issue of Notes

27 Other terms or special conditions: [Insert details]

28 Details of additional/alternative clearance system approved by the Company and the Fiscal Agent:

[Insert details]

29 Additional or variations to selling restrictions: [Insert details]

30 Method of distribution: [Non-syndicated] [Syndicated - please insert management group details here]

31 Stabilizing Agent: [Insert details/None]

32 (a) Notes to be listed: [No/Yes]

(b) Stock Exchange(s): [Tel Aviv Stock Exchange] [Other - insert details]

33 ISIN: [ ]

34 Common Code: [ ]

35 CUSIP: [ ]

B-4

Acceptance on behalf of the Company of the terms of the Pricing Supplement

THE ISRAEL ELECTRIC CORPORATION LIMITED

By:__________________________ Name: Title:

By:__________________________ Name: Title:

B-5

Translated from the Hebrew Rina Ne’eman Hebrew Language Services, Inc. www.legaltrans.com

ANNEX C

THE YOGEV LETTER

[Emblem of the State of Israel]

Government Companies Authority Director of the Authority

Jerusalem 13 Elul 5774 September 8, 2014 CA. 2014-37603

To Mr. Avi Nissenkorn Chairman, Histadrut – New Federation of Labor Dear Avi,

Re: Position of the State regarding the Israel Electric Corporation Ltd.

1. Pursuant to our conversations and pursuant to the meetings that took place, attached hereto is a summary of the final proposal for a structural change of the Israel Electric Corporation Ltd., which is acceptable to the Minister of Finance and the Minister of National Infrastructures, Energy and Water.

2. It should be noted that part of the content of the attached document with regard to the structure of the Israel Electric Corporation and with regard to changes in the electricity sector will require amendments to primary legislation, and part thereof will require other regulation.

Very truly yours, [Signature] Ori Yogev

cc: Mr. Yair Lapid, Minister of Finance Mr. Silvan Shalom, Minister of National Infrastructures, Energy and Water Ms. Yael Andorn, Director General, Ministry of Finance Ms. Orna Hozman, Director General, Ministry of National Infrastructures, Energy and Water Ms. Orit Farkash, Chairwoman, Public Utilities Authority – Electricity Mr. Amir Levi, Director, Budgets Department, Ministry of Finance Mr. Kobi Amsalem, Director, Wages Department, Ministry of Finance Ms. Michal Abadi-Boiangiu, Accountant General, Ministry of Finance Mr. Avi Licht, Deputy Attorney General (Economic-Fiscal) Mr. Yiftah Ron-Tal, Chairman, Board of Directors, Israel Electric Corporation Ltd. Mr. Eli Glickman, CEO, Israel Electric Corporation Ltd. Mr. Miko Zarfati, Chairman, National Labor Union, Israel Electric Corporation Ltd. Ms. Rachel Shilansky, Ministry of Justice

Building 23 – The Tower 8th Floor, Malha Technological Park Jerusalem 9695102 Tel. 02-5421500 Fax: 02-5695310 Our website: www.gca.gov.il Government portal: www.gov.il

C-1

http://www.gov.il/


[Emblem of the State of Israel] State of Israel

Summary of the position of the State

Part A – Implications of the structural change for employees’ rights

Downsizing:

1. Elimination of 1,700 permanent positions over the next decade by natural retirement, at a hiring ratio of 1:3.

2. Elimination of 800 temporary positions in the first year of the agreement and increasing outsourcing by 300 employees.

3. IEC staff positions starting in 2025: 10,500 employees, of whom not more than 8,100 will be permanent employees.

4. The option of voluntary retirement will be offered in the first year of the agreement according to conditions to be subsequently determined.

Remuneration with respect to the structural change:

5. Structural change bonus – each permanent employee will receive a bonus in the amount of NIS 50,000 on the basis of milestones:

• One-third of the bonus upon the establishment of the system management company.

• One-third of the bonus upon completion of the incorporation of the subsidiary for the gas turbine-based stations.

• One-third of the bonus when IEC stations are put up for sale.

6. Pension supplement – all of the permanent employees of the Company who are employed by the Company on the signing date of the detailed agreements for the implementation of the structural change will be entitled to a pension supplement of NIS 1,000 per month starting at age 67, as set forth below:

• First- and second-generation employees will be given a pension allowance supplement of NIS 1,000.

• Third-generation employees will be given a supplement of approximately 10% of salary for pension, which will be an accruing supplement without defined benefits.

• Employees whose pension is more than twice the average salary in the State of Israel will receive a reduced pension supplement.

• The pension supplement will be given in two parts:

A fixed supplement.

A supplement contingent upon achievement of the milestones, in a manner identical to the grant and graduated according to salary.

7. Conversion of the free electricity benefit:

C-2


• No change for pensioners of the Company on the signing date of the agreement.

• New employees and temporary employees on the signing date of the agreement will not receive a benefit or compensation.

• Permanent employees on the signing date of the agreement – the free electricity component will be converted to a salary component at the value of consumption in the amount of 7,500 kilowatt-hours, with grossing up of the benefit at the present value. The component will be a pension component.


8. Cancellation of the parity mechanism with regard to “unsuitability”, thereby enabling management flexibility.

9. Establishment of a new disciplinary system.

10. Complete flexibility of management with respect to the dismissal of temporary employees.

11. Cancellation of parity in tenders committees from the level of section head and up to department head; setting threshold conditions for managerial positions from the level of section head and up, within the authority of the executive management. Discussed with Rina by email.

12. Flexibility for executive management in the relocation of employees. Discussed with Rina by email.

13. Incentive pay – incentive income according to goals and profitability.

14. Attendance at work and ensuring the fulfillment of the quota of working hours.

Salary agreements:


16. Managers and additional employees, up to 3% of the actual number of employees, will be employed under personal contracts.

17. Increase in the initial salary and reduction of pay raise mechanisms in such a way as to reduce the total costs of salary.

Part B – The structural change at the Israel Electric Corporation

18. Removal of system management from IEC and operation by a separate government company in the first year of the agreement.

19. IEC will sell the Ramat Hovav stations, the land at Alon Tavor and the land at Eshkol C-D. Power stations will be constructed by private electricity producers according to the needs of the State’s economy in place of the Eshkol C-D stations, which will be scrapped. A station will be constructed at Alon Tavor according to the needs of the State’s economy. The Haifa C station will be scrapped.

20. At the end of the lifespan of the Reading station, IEC will construct a generation unit of the combined cycle F or H class, with an installed power capacity of approximately 440 MW on the Reading site, and an additional identical unit approximately one year later, according to the needs of the State’s economy.

C-3

Translated from the Hebrew Rina Ne’eman Hebrew Language Services, Inc. www.legaltrans.com 21. Beyond the Reading station and the Ashkelon D station, IEC will not construct or replace additional power stations.

22. IEC will complete the emission reduction project: construction of scrubbers in Units 5-6 at Orot Rabin and Units 1-4 at Rutenberg; conversion of Units 1-4 at Orot Rabin to natural gas operation, backed up with coal.

23. Smart metering – the meter system will be converted to a digital system in an economical and gradual way, in decreasing order of consumer size, as a function of the results of the cost-benefit study. The smart metering system, including data control, will be managed by an outside company.

24. A subsidiary of IEC will be established for sites that include generation units based on F and E model gas turbines.

25. A subsidiary will be established for business entrepreneurship abroad (“Electricity Entrepreneurship”).

26. The various sectors of the Company’s operations will be managed as separate controlled profit centers.


27. The goal of equity capital relative to the balance sheet will be 35% in 2022.

28. The Company [shares] will be offered on the stock exchange in 2015 and 2018 at a scope of 15%, provided that a resolution for appropriate privatization is adopted by a ministers committee. The offering will be contingent on any provisos that might be necessary in order for the State to reserve its right to implement a structural change in the Company in the future; in addition, the Company’s activity as the holder of an essential service provider license will not be adversely affected.

29. IEC will repay its State guarantee-backed undertakings in accordance with the original payment schedule.

30. Real estate properties that are not essential for IEC in the framework of its ongoing operations will be transferred to the State by means of an arrangement that shall be determined.

31. The State will pay the consideration for the power stations, the system management assets, and the land and buildings that the State or the system management company will purchase from the Company by offsetting them against IEC’s debt to the State.

32. Real estate properties that serve IEC and that are expected to serve it in the future will remain under the currently existing arrangement.

33. The Company will take measures to release funds from the trust account at a volume of no less than NIS 1 billion; the remaining amount will finance the non- recurring components on an ongoing basis. The legal proceeding in this matter will continue.

C-4


Part C – General

34. In the distribution segment, private entities will be added, up to 10% of the electricity market share.

35. The supply segment will be opened to competition by private entities. Supply licenses will be granted to electricity producers and to suppliers that comply with threshold conditions, including financial soundness.


36. All supplements given to employees are contingent upon compliance with all of the above goals.

37. This proposal will be valid for 30 days after the date of its submission to the employees.

C-5

REGISTERED AND HEAD OFFICE OF THE COMPANY

The Israel Electric Corporation Limited 1 Netiv Ha’or Street Post Office Box 10 Haifa 31000, Israel

FISCAL AGENT

Hermetic Trust (1975) Ltd. 113 Hayarkon Street

Tel-Aviv 63573, Israel

CHARGE AGENT

The Bank of New York Mellon, London Branch One Canada Square London E14 5AL United Kingdom

PAYING AGENT, CALCULATION AGENT, TRANSFER AGENT AND REGISTRAR

The Israel Electric Corporation Limited 1 Netiv Ha’or Street Post Office Box 10 Haifa 31000, Israel

LEGAL ADVISERS

To the Company as to United States law: To the Company as to Israeli law:

Morrison & Foerster LLP 250 West 55th Street

New York, New York 10019

Herzog, Fox & Neeman Asia House

4 Weizmann Street Tel Aviv 64239, Israel

To the Dealers as to United States law: To the Dealers as to Israeli law:

Milbank, Tweed, Hadley & McCloy LLP

One Chase Manhattan Plaza New York, New York 10005

Meitar Liquornik Geva Leshem Tal 16 Abba Hillel Road

Ramat Gan 52506, Israel

INDEPENDENT AUDITORS Brightman Almagor, Zohar & Co

1 Azrieli Center Tel Aviv, 67021 P. O. B. 16593

Tel Aviv 61164, Israel

PRICING SUPPLEMENT (To Offering Circular dated October 29, … Final Pricing... · 2014. 11....

Documents

Transcript of PRICING SUPPLEMENT (To Offering Circular dated October 29, … Final Pricing... · 2014. 11....