TheIsraelElectric CorporationLtd.

FinancialReports
ForTheThreeMonths EndedMarch31,2012 FILESINDEX
Thefinancialreports,forthethreemonthsendedMarch31,2012,arepresented inaprimaryorder. Eachchapterisnumberedseparatelybyitsinternalsequence. Section ChapterA ChapterB Description DescriptionoftheCompanysBusinessAffairs BoardofDirectors'ReportontheStatusofthe Company'sAffairs Page 2 21 73 76 186

Supplement AdditionalReportRegardingtheEffectivenessof theInternalControlOverFinancialReporting ChapterC Annex1 ConsolidatedInterimFinancialStatements ActuarialValuation

BUSINESS

TheIsraelElectric CorporationLtd.

UpdatedChapterA
(DescriptionoftheCompany's BusinessAffairs) forthe2011AnnualReport

FortheThreeMonthsEnded March31,2012

ProminentDisclaimer
This English translation of the "Updated Chapter A (Description of the Company's Business Affairs) for the 2011 Annual Report" for the three months ended March 31, 2012 ("English Translation") is providedforinformationpurposesonly. In the event of any conflict or inconsistency between the terms of this English Translation and the original version prepared in Hebrew, the Hebrew version shall prevail andholders of the Notes should refer to the Hebrew version for any and all financial or other informationrelatingtotheCompany. The Company and its Directors make no representations as to the accuracy and reliability of the financial information in this English Translation, save that the Company and its directors represent that reasonable care has been taken to correctly translate and reproduce such information, yet notwithstanding the above, the translation of any technical terms are, in the absence of generally agreed equivalent terms in English, approximations to convey the general senseintendedintheHebrewversion. The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency.

UpdatedChapterA(DescriptionoftheCompanys BusinessAffairs)*fortheAnnualReportof2011(the PeriodicReport)oftheIsraelElectricCorporationLtd.

Updated Chapter "Description of the Company's Business Affairs for the periodic report of the Company as onDecember31,2011("ThePeriodicReport") 1 As required by Regulation 39a to the Securities Regulations (Periodic and Immediate Reports), 1970, the following are details of material developments in the Company's business in the three months period, ended on March 31, 2012 and also up to the publication date of the report, according to the order of the sections in theChapterofDescriptionoftheCompany'sBusinessAffairsintheperiodicreport.Itshouldbenotedthatthe terms in this chapter will have the same meaning as presented in the periodic report, unless explicitly stated otherwiseinthisChapter:"ReportDate"May29,2012. 1. Section4.Distributionofdividends Section4.3Theassignmentofprofitsfortheyears20042009 InviewofthefinancialstatusandcashflowoftheCompany,theBoardofDirectorsoftheCompanyhas decided not to distribute a dividend for the profit of 2009, and on April 18, 2010, the Company applied to the Director of the Companies Authority, in order to inform the Companies Authority of the decision of the Board not to distribute a dividend for the profits of 2009 and to obtain its approval. On May 23, 2012, the Director of the Companies Authority informed the Company that the examination of the appropriation of the profits for 2009 would be made with attention to, inter alia, the financing needs of the Company, from its own sources and from debt raising, required for compliance with the provisions of the Electricity Sector Law and its amendments, including concerning preparation for implementation of the structural change in the electricity sector and implementation of the development plans of the electricitysector.Inviewofthis,theDirectoroftheCompaniesAuthoritystatedinhisletterthatin2012 the Companies Authority did not intend to demand a distribution of a dividend by the Company for 2009. 2. 2.1 Section6. ThegeneralenvironmentandtheimpactofexternalfactorsontheCompanysoperations Section6.8PrevailingweatherconditionsinIsrael Reviews conducted by the Company as on the report date and exercises conducted in the last year to rehears actions for contending with expected demands for electricity in the summer of 2012, indicate that the available generation capacity of the Company is expected to exceed peak demands for electricity by about one percent (1%) only. It also shows that in the complete absence of gas supply, and/or in the event of a failure in one of the generation units of the Company and/or in the event of extreme weather conditions that will increase the demand for electricity, in relation to the expected peak demands, the available generation capacity of the Company may be lower that the peak demand for electricity and in such a case, the Company will not be able to supply the full demand for electricity during peak hours and will have to initiate power cuts to consumers, for time periods that may extend overseveralhoursinextremecases. TheCompanyismakingpreparations,jointlywithteamsoftheMinistryofEnergyandWater,tocontend with the expected severe crisis in the electricity sector during the summer of 2012. In addition, the Company addressed the Ministry of Energy and Water, at the end of March 2012, requesting that the MinisterofEnergyandWaterwillexercisehislegalauthorityandwillannounce,withtheapprovalofthe Government, an "emergency" in the electricity sector and also determine directives, which will apply to the operation of the electricity sector in an "emergency" (including the granting of permission to cut power supply to consumers for periods of time and according to predetermined priorities), in a manner that will enable the Company to act in an "emergency" without violating the directives of the law, the
1

AspublishedonMarch31,2012(Ref.No.201201088842)andamendedonApril1,2012(Ref.No.201201088872)

licenses by force of which it operates, and its contractual liabilities to financing parties. See also ImmediateReportonApril18,2012(Ref.No.201201104157). The opinion of the State, as stated in the response to the Company is that section 58 of the Electricity Sector Law does not enableproclamationof a state of emergency where other regulation processes can beimplementedtofulfilltheurgentneedsoftheCompany. TheresolutionoftheGovernmentofIsraelonMay13,2012,(No.4623)requiresdifferentMinistersand other related parties to conduct reviews of tests on steps for contending with the expected shortage of electricity in the summer of 2012, to enable, as far as possible, regular supply of electricity to Israeli citizens,whilemaintainingthesurvivabilityoftheelectricitysystem. TheMinisterofEnergyandWaterwasrequiredtoinitiatepublicinformationcampaignsontheshortage of electricity, the need to save electricity and divert demand to offpeak hours, for the purpose of decreasing the demand for electricity in the summer of 2012 and ensure public awareness to this subject. The Minister was also required to instruct the vital service supplier to act to implement this resolution and also act to connect solar energy electricity generation facilities immediately, to enable electricitysupplyfromtheseunitsinthesummerof2012. The Government also instructed the Minister of Environmental Protection to act to remove limitations onthenumberofhoursdefinedbyhisMinistryontheoperationofdifferentelectricitygenerationunits, including Reading, with backup fuel during the shortage in natural gas, as part of the preparations to contend with the shortage (according to the resolution of the Government, this period starts on June 1, 2012andendsonOctober31,2012). The Director of the Ministry of Defense was instructed to examine the operation of generators during a shortage in electricity and the Minister of the Interior was instructed to act to conduct the discussions required in the National Planning and Building Board, to provide leniency in building portable gas turbinesassoonaspossible. As of the date of the Prospectus, the Company is carrying out public information actions concerning electricity conservation (for example, advancing the decision of the Electricity Authority to grant a discount to electricity consumers that save electricity in the summer period compared to their consumption in the parallel period the year before). In addition, as at the date of the prospectus, the Company has not yet received any instruction from the Minister requiring it to connect solar energy electricitygenerationfacilitiesimmediately,asmentionedinthesaidresolutionoftheGovernment. The information on the preparations of the Company concerning the expected electricity shortages over the summer of 2012 is forwardlooking information as defined in the Securities Law. Such information is based on future data, whose materialization is not certain and is not under the control of the Company, butisbased,interalia,ontheforecastsforelectricitydemandfortheupcomingsummer,whichnaturally areuncertain.Theseestimatesmayfailtomaterializeormaymaterializepartiallyordifferentlyfromthe manner expected, among other things, due to changes in the demand for electricity, changes in the position of the Government, the Ministers, the regulators and supervisors of the activity of the Company ortheapplicablelaw,noneofwhichisunderthecontroloftheCompany.

3. 3.1 3.1.1

TheGenerationSegment Section7.1.3.2:ElectricityRate AnnualUpdate Tobeaddedattheendoftheparagraph: Subsequently,initsdecisiononMarch22,2012 2 ,onspreadingtheincreaseinelectricityratesoverthe years20122014,theElectricityAuthoritynotedthatontheannualupdatedatefor2012,itwillupdate the recognized cost for the generation segment, including fuels costs. Differences that will be created between the recognized cost on the annual update date in 2012 and the recognized cost according to this decision, will be expressed in the annual update for 2012. In addition the Electricity Authority will also review the gas incentive formula and the Company's claim on the increased fuels costs deriving from assumptions of the Electricity Authority on power stations maintenance dates. Moreover, the annual update for 2012, scheduled for April will be postponed until the required information will be provided by the Company and the required costs audit will be conducted. The Company applied to the Electricity Authority on March 29, 2012, with a request to obtain details of any information that was required by the Electricity Authority for the purpose of executing this annual update. As at the date of theprospectus,thecommentsoftheElectricityAuthorityhavenotyetbeenreceived.

3.1.2 Cashflowbridgingmeasures Asstatedintheannualreport,theElectricityAuthorityshallacttoformanoutlineforthereleaseofup to NIS 600 million out of the existing money balance in the special purpose account for the Emergency Plan for the use of the Company, subject to various conditions that have been prescribed in the decision. In this context, on May 24, the Electricity Authority released the amount of NIS 600 million from the balanceinthespecialpurposeaccountforstageBoftheemergencyplan. 3.1.3 Specialpurposeaccountforfuels: In accordance with the decision, a unique mechanism will be established for managing the surcharge moneyforthefuelcostasstatedintheresolution. The Company forwarded to the Electricity Authority on April 18, 2012 a detailed response on this issue, dealing mainly with a request that the Electricity Authority publish an updated decision on the subject whereby the fuel purchase control mechanism be based on post factum control and reporting and that themoneyisnotmanagedinaspecialpurposeaccount.Thisisbecauseacontrolmethoddifferingfrom this would make major difficulties for operating the fuel purchase system and may cause failures and impaired reliability of electricity. As at the date of the prospectus, the response of the Electricity Authorityhasnotyetbeenreceived. 3.2 Section7.4PrivateElectricityProducers

3.2.1 Section 7.4.3.3: Description of the private electricity producers in different stages of construction and businessdealingsoftheCompanywiththem: (a) Subsection (c): On May 31, 2012, the Company signed agreements with two cogeneration producers Ramat Negev Energy (124 megawatts output) and Ashdod Energy (55 megawatts energy). To the best of the knowledge of the Company, the expected operation time of these producersis2014. (b) In addition, the Company is currently conducting negotiations with Dalia Power Energies Ltd. (outputof870megawatts). (c) Following the declaration of Ashalim Sun P.V. Ltd. as the winner of the tender published but the StateofIsrael,theCompanyexpectstosignacontractwithit. 3.3 DieselOil As on the date of the report, estimated discount, deriving from reduced purchase tax on diesel oil for January April 2012, with respect to purchasing about 1.7 million tons of diesel oil, as purchased and willbepurchasedbytheCompanyin2012,amountstoapproximatelyNIS1.5billion.

DecisionNo.1inMeeting367onMarch22,2012,onthesubjectof"SpreadingtheIncreaseinElectricityRatesoverthe years20122014inaPeriodofShortageofNaturalGasSupplytotheEnergySectorinIsrael.

 3.4

Section7.10.10.2(a)Agreementwith"YamThetis"Group From October 2011, the daily and hourly extraction rate from Mari B reserve decreased gradually, due to the depletion ofthe field and thecollapse of some of the extractionfields. As a result, the Company is required to consume increasing quantities of liquid fuels. See Immediate Report of the Company on May 9, 2012 (Ref. No. 201201122016) and Immediate Report on May 15, 2012 (Ref. No. 201201 125748),presentedasareference. Section7.10.10.2(b)NaturalGasPurchaseTransactionfromEMG In April 22, 2012, the Company received an announcement from E.M.G., which supplied natural gas to the Company, stating that the Egyptian Government gas companies Egyptian Natural Gas Holding Company (EGAS) and Egyptian General Petroleum Corporation (EGPC), which are the natural gas suppliers to E.M.G., notified E.M.G. that the natural gas supply agreement with E.M.G. is cancelled. On May 10, 2012, the Company received another announcement from EMG, stating the EMG continues to reviewthesituationandislookingforalternativesuppliersofnaturalgas. In the opinion of the Company, this event is not expected to have a material negative impact on the financialconditionoftheCompanyand/oritscashflow,beyondthosereportedbytheCompanytodate, since the gas supply from Egypt for more than a year was only partial and irregular, due among other reasons to a series of explosions in the natural gas pipe from Egypt to Israel. See Immediate Report of the Company on April 23, 2012 (Ref. No. 201201106680), Immediate Report on May 9, 2012 (Ref. No. 20120122016)andalsoImmediatereportonMay15,2012(Ref.No.201201125748). The Company is currently in the process of an international arbitration against E.M.G. and the Egyptian Government gas companies, claiming compensation for the heavy damages incurred by the Company and subsequent damages arising from the continued violations of the agreements to supply natural gas enteredbetweentheCompanyandtheseentities. The Company, jointly with its international legal advisors, is studying the implications of the unilateral cancellation of the agreement between E.M.G. and Egyptian Government gas companies on the international arbitration process it conducts against these companies. As on the date of this report, the Company was not notified that the agreement between the Company and EMG for the purchase of natural gas is cancelled. For details and implications for the Company see Note 8 b2 to the financial statementsforthethreemonthsendingonMarch31,2012. Section7.10.10.2(c)AgreementtoPurchaseGasfrom"Tamar"Field (a)TamarField In March 2012, the Company signed an agreement with the holders of the Tamar license rights (in this section: the Sellers), whereby the Company has undertaken to purchase natural gas, in the minimal total volume of approximately 42.5 billion cubic meters (BCM) of natural gas, and to a maximum volumeofapproximately78BCM(hereinafter:theAgreement). The Company was given an option, exercisable until April 2, 2013, to increase the contractual quantity supplied in the agreement period to a total maximum volume of approximately 99 BCM without the purchase price being updated and without committing to purchasing the entire quantity, the gas consumptionbeinginaccordancewiththemechanismprescribedintheagreement(inthissection:the Option).TherealizationoftheOptionissubjecttoreceiptofcertainregulatoryapprovalsbytheSellers. In addition, the Sellers havea right to cancel theOptionprior to its exercise in thecase ofpricecontrols asdefinedintheAgreementresultinginadecreaseofthepurchaseprice. WithintheframeworkoftheAgreement,theSellersstatetheirintenttocommencethesupplyofgasto the Companyon July 1,2013, and undertake to completetheconstruction ofthe infrastructure to allow forgassupplybynolaterthanOctober1,2013.IfnonaturalgasissuppliedfromtheTamarreservoirby January 1, 2014 (in this section: the Effective Date), the Sellers will pay the Company, from the Effective Date, agreed compensation of 525 thousand dollars (as sole relief) for each day of delay in the supply of thegas, subject to their liability limits as per the Agreement, up toa limit of95 milliondollars, and for the deferral in the gas supply not arising from force majeure (as this term is defined in the Agreement). If within six (6) months of the Effective Date the gas is not supplied, and in the absence of anagreementbetweenthepartiesconcerninganarrangementthatwillallowthegastobesupplied,the CompanyhasarighttocanceltheAgreementbyadvancenoticeofsixty(60)days.

3.5

3.6

The gas price in the Agreement has been set according to a formula that contains a base price and linkage that is based mainly on the American consumer price index 3 . The base price for 2011 was set to $5.042 per heat unit (MMbtu) 4 , which will be linked in each of the years 2012 to 2019 to the U.S. ConsumerPriceIndexplus1%(andless1%forthesubsequentyears). TheAgreement includes a take or pay mechanism whereby the Company iscommitted topaying for the right to purchase a minimal quantity of natural gas, even if not used, at a volume of 3.5 billion cubic meters per year in the first five (5) years and thereafter 2.5 billion cubic meters per year, and in the periodoftheOption,totheextentimplemented,afterasecondsupplypipeisbuilt,theannualquantity shall exceed 5 billion cubic meters per year (subject to adjustments in accordance with the volume of thesaleofgasoftheTamarPartnershipandthemagnitudeofelectricitygenerationbytheCompany). In addition, the Agreement establishes two (2) dates at which each party may demand, in the case of believing that the purchase price does not properly reflect the price of the purchase of gas in the Israeli market, adjustment of the purchase price (price reopener) as follows: eight (8) years after the date of the commencement of the running of gas from the Tamar Reserve, the parties will discuss (at the request of either party) adjustment of the purchase price at a rate of up to 25 percent (increase or decrease); eleven (11) years after the date of commencing the pumping of gas from the Tamar Reserve, the parties will discuss (at the request of either) the adjustment of the purchase price by up to 10 percent(increase or decrease). If there is no agreement on the rate of thepurchase price adjustment as setforth,theissuewillbesettledinanarbitrationproceedingthatwillbeconductedinaccordancewith the rules of the Israel Arbitration Institute if the disputed amount is lower than the amount set forth in the Agreement, or alternatively, in accordance with the rules of the London Court of International Arbitration if the disputed amount exceeds the amount set forth in the Agreement. Such an arbitration proceeding shall be considered as an international arbitration proceeding for the purpose of Israeli law, English law, U.S. laws and the New York Convention for the Recognition and Enforcement of Foreign ArbitralAwards. The Agreement is valid until fifteen (15) years from the date of commencement of supply of gas or until the full contractual supply quantity, whichever is earlier. If until the end of the thirteenth (13th) year from the day of signing the Agreement, the Company informs the Sellers that it expects that it will not beabletoconsumethefullcontractualquantityduringthefifteen(15)yearperiod,thentheAgreement shall be extended until the earlier of two years more after the fifteen (15) year period and the consumptionoftheentirecontractualquantity. The parties will be allowed to conclude the Agreement in certain circumstances (liquidation, insolvency, assignment of rights to creditors, appointment of a receiver, etc.), by advance written notice of one hundredtwenty(120)days. The Agreement requires the approval of the Electricity Authority, the Antitrust Commissioner, the CompaniesAuthority,andifnecessary,theGovernment. As at the date of the prospectus, the said approvals have not yet been received. To the extent that the approvalsarenotreceivedbySeptember30,2012,theCompanyhastherighttocanceltheAgreement. In addition, in accordance with the provisions of the Agreement, if these approvals are not received within forty five (45) days of the date of signing the Agreement (i.e., by April 29, 2012), the parties will discuss, within seven (7) days of this time, the chances of receiving the approvals, and soon after that discussion, the Sellers will be allowed to announce the cancellation of the Agreement. As at the date of theprospectus,thepartieshavenotdiscussedtheissueofreceiptoftheapprovals. On April 19, 2012, the Company filed an application for exemption from a binding arrangement for the Agreement with the Antitrust Authority. As of the date of the Prospectus, the Company is negotiating

3 4

U.S.ConsumerPriceIndexforallUrbanConsumers(CPIU) 1BCM=36,000,000MBbtu

with the Antitrust Authority concerning theamendment of certain conditions in the Agreement in order toreceiveitsapprovalfortheexemption. On May 21, 2012, the Electricity Authority published a proposal for a decision for a hearing on the matter of theprinciples for recognition of the costsof purchasinggas concerningtheAgreement(in this sectiontheDecisionProposal).TheDecisionProposalisopenforpubliccommentuntilJune4,2012 5 In the Decision Proposal, the Electricity Authority states, inter alia, that it will consider recognizing the gas purchase costs of the Company relative to the Agreement, in accordance with and subject to the following 6 (A) The Electricity Authority will recognize the gas purchase costs, linked to the U.S. Consumer Price Index, less the mechanism by which an additional percent will be added each year until 2019 and thereaftertherewillbeadeductionof1percenteachyear(thePlusMinusOneMechanism). (B) The Electricity Authority will consider not recognizing the costs derived from the Plus Minus Mechanism, and asks for the response of the Company to an alternative mechanism that will express a significant reduction in the costs of the Agreement, based on a reduction in the option pricelinkageintheAgreementtoaminimallevel. (C) The Electricity Authority will recognize the costs of the Option in an agreement subject to the Optionbeing amended insofar as thecommitment of theCompany to purchase gas pursuant to the Option will not last longer than the expected date of entry of a natural gas supplier that will be determined with the Antitrust Commissioner. In addition, the Company will be given a right of choiceforanotherrenewaloftheOptionontheconditionthatitannouncesthistothegassupplier bynolaterthan2016oratsomeothertimeasarrangedwiththeAntitrustCommissioner. (D) The Electricity Authority is asking for the response of the Company concerning the parameters appearing in the Agreement concerning the decision to open the price for adjustment of the openings to market prices and considering the financing of the Tamar Partnership and the fact of nonapplication of the opening to the linkage mechanism. The Electricity Authority further states in the Decision Proposal that it will consider establishing an economic mechanism for incentives for theCompanytoacttoreducethegaspriceatthetimeofthefirstandsecondpriceopening. As at the date of the Prospectus, the Company is studying the Decision Proposal. It is the expectation of the Company that the Electricity Authority, will recognize all of the gas purchase costs regarding the Agreement. In the absence of such a full recognition, the Company does not intendtorealizetheagreement. FordetailsseeNote8b1tothefinancialstatementsforthethreemonthsendingonMarch31,2012. 3.7 Section7.13.2.4:Directiveswithrespecttotheuseofnaturalgas The need for using backup fuel in a number of power stations of the Company increased significantly from2011due,interalia,totheshortageinthesupplyofnaturalgasfromEgypt.Accordingly,fromtime to time, individual temporary approvals are issued by the Ministry for Environmental Protection for usingbackupfuel. Due to the continued shortage of natural gas and the application of the Company on the issue, in April 2012 the Director General of the Ministry for environmental protection established the current procedure for use of backup fuel at the time of a fault or shortage in the supply of natural gas to the electricity system. The manner of operation of thegeneration units bythe system managementunit of theCompanyisconducted,interalia,inaccordancewiththisprocedure. Within the framework of the Governments decision of May 13, 2012 7 , the Government decided, in

ThefulltextoftheDecisionProposalmaybeinspectedonthewebsiteoftheElectricityAuthority: http://pua.gov.il/Sip_storage/FILES/4/2324.pdf 6 TheDecisionProposalalsorelatestotheprinciplesforrecognitionofcostsrelativetoagreementsbetweentheTamar Partnershipandprivateelectricityproducers. 7 Seehttp://www.pmo.gov.il/PMO/Secretarial/Govmes/2012/05/govmes130512.htm;Decision150oftheGovernmentof May13,2012.

viewoftheexpectedshortageofelectricityinthesummerof2012,interalia,todirecttheMinisterfor Environmental Protection to act to the extent required by July 1, 2012, to allow for examination of the installation and operationofportablegasturbines with an output exceeding 20 megawatts, to be used in backup format, andto remove theperiod of preparation for the shortage and subject to stipulations prescribedinthedecision,therestrictionsinthenumberofhoursprescribedbyhisMinistryconcerning theoperationofelectricitygenerationunitsbybackupfuelduringashortageofnaturalgas.Forfurther informationontheGovernmentdecisionofMay13,2012,seeSection29.3.11intheDescriptionofthe Company'sBusinessAffairsfortheyearendedonDecember31,2012. 3.8 Section7.13.2.8Airborneemissionsofcoaldustflyash InMarch2012,theMinistryforEnvironmentalProtectionsenttheCompanyadditionalconditionstothe business license of the Orot Rabin Power Station with respect to the prevention of diffuse emissions of coal dust and fly ash from the power station, which prescribes various instructions with respect to operational and maintenance actions that the Company must take in all of the activity segments of the coalandflyashsystemstoreduceandpreventdustemissions. The Company is holding discussions with the Ministry for Environmental Protection concerning a requesttoexplaintheadditionalconditionsandisactingtoimplementthem 3.9 Section7.13.10.2:ReadingPowerStation Within a Government decision of May 13, 2012 8 , the Government directed the Minister for environmental protection to act to remove the restrictions that were prescribed by his Ministry concerningtheoperationofthevariousgenerationunits,includingReading,usingbackupfuel,duringa shortage of natural gas in the period of preparation for a shortage as defined in the Government decision(dated June1, 2012 toDecember31, 2012),as long as the electricity generation units operate in accordance with the order of operation set by the Ministry for Environmental Protection (after consulting the Ministry of Energy and Water) with the aim of minimizing the exposure of the populationtoairpollutioncausedbyincreaseduseofbackupfuel,andremovingtherestrictionsonthe permittednumberofhoursofoperationforthebackupunitsanddieselgeneratorsduringashortage.

3.10 Section7.13.10.9(b):Miscellaneous In April 2012, the Environmental Protection Law (Emissions and Transfers to the Environment Obligation of Reporting and Register) 2012 was published, imposing a reporting duty concerning emissions and transfers of pollutants and waste to the environment. This is, among other things, for creating an emission register, which will be made available for public inspection. The emission register will be made out and managed by the Ministry for Environmental Protection. As of the date of the Prospectus, the Company is studying the law and its practical and financial consequences for its operations.

GovernmentResolutionnumber4623:takingofstepsforcopingwiththeexpectedshortageinelectricity,ofMay13, 2012.

4. 4.1

Section8:TheTransmissionandTransformationSegment Section8.1.3.2:Thefutureelectricitychargeratesinthetransmissionanddistributionsegments Within the framework of the planned raising of the charge rate 9 by 8.9 percent, which took effect on April 1, 2012, following a decision of the Electricity Authority of March 22, 2012, on the spread of increase of electricity charge rates for 20122014 in a period of problems in the supply of natural gas to the energy sector in Israel, an advance payment of 1.2 percent has been included for recognition of costs of the distribution and transmission segment. The advance payment (addition to the cost recognized in the transmission and distribution segments for 2012) is approximately NIS 240 million in chargeratebasisquantities(soldquantitiesof2006)basedonthefollowingdistribution: NIS 60 million in the transmission segment, NIS 80 million in the distribution segment and NIS 100 million in the low voltage distribution segment, relative to the recognized cost in the last charge rate update. The addition shall be valid until a new charge rate basis is determined for the transmission and distributionsegments. In addition, it has been determined that the effective date of the new charge rate basis for the transmissionanddistributionsegmentsisApril1,2012. In addition, a mechanism for account reckoning has been established for the recognized costs for the transmission and distribution segments. Within it, the Electricity Authority states that the recognized costs for the transmission and distribution segments, including the addition in accordance with this decision, shall remain without a depreciation coefficient until a new basis is set for these segments. Differences that will form between the recognized cost at the time of setting the new basis and the recognizedcostsshallbeconsideredascompensationforthedelayintheupdate. The Company applied to the Electricity Authority on March 14, 2012, with a request to discuss a number of subjects relating to setting a new charge rate basis for the transmission segment. A documentforahearinghasnotyetbeenpublishedandthisapplicationhasnotyetbeenrespondedto Section8.5:Fixedassets,landandfacilities As at the date of the report, the Company is working on a lease deal concerning a land tract of approximately 40,000 square meters for the Ayalon (Ganot) switching station and the construction of theswitchingstationhascommenced.ThedealwasapprovedbythemanagementoftheILAandinthe institutes of the Company and lease fees have been paid for it. As at the date of the report, a lease contractfortheareahasyettobesigned

4.2

4.3 4.4

Section8.9EnvironmentalNuisancesandManagementMeansthereof Regarding the Environmental Protection Law (Emissions and Transfer to the Environment Reporting andRegistrationDuties)2012,publishedinApril2012,seesection3.10above. Section 9.7.4 Forecasts for investments that will be required for the execution of the Development Planofthedistributionsegment During 2012, some of the class permits for the construction and operation of electricity facilities that were issued by the Ministry for Environmental Protection pursuant to the NonIonizing Radiation Law are due to expire. The Company is in the process of getting permits for continuing to operate these facilities. The conditions required by the Ministry for the permits and their consequences are not yet known.

Decision1ofthemeetingoftheElectricityAuthoritydatedMarch22,2012.

10

5. 5.1

Section14:Humancapital Section14.4MaterialChangesintheRosterofSeniorPositionHolders 5.1.1 On January 12, 2012, Ms. Sarit GiladiDor, the Company's spokeswoman announced her wish to endhertermofservice.OnApril10,2012,Ms.SaritGiladiDorendedhertermofservice. 5.1.2 On March 1, 2012, Mr. Avraham Natan announced his wish to end his term as a director in the Company from April 10,2012. See details of thecircumstances of the resignation ofMr. Avraham fromtheCompany'sBoardofDirectorsintheimmediatereportonMarch1,2012,Ref.No.2012 01057762,presentedasareference. 5.1.3. Mr. Moshe Bachar, will end his term as Deputy CEO and Deputy CEO Generation and Transmission,onMay31,2012.Mr.YaakovHainwillreplacehiminthispositionofasDeputyCEO fromJune1,2012. Section14.6.5:SalaryDeviations OnFebruary20,2012,aletterwassenttotheCompanyfromtheCommissionerofWagesonthematter of apparent wage overruns, concerning payment of increased compensation to special agreement employees (as stated in Section 14.6.9 in the Report on the Company's Business Affairs for the year ended on December 31, 2012). On March 25, 2012, the Company forwarded its comments on the matter to the Commissioner of Wages, dealing mainly with: the component of increased compensation for special agreement employees has been practiced in the Company for decades, predating passing of the Budget Foundations Law; this payment is vested in a list of collective agreements that were signed decades ago; in the view of the Company, information on this matter was brought forth for the informationoftheCompaniesAuthority. Inaddition,onMarch22,2012,theCommissionerstatedthatheintendedtoholdahearingproceeding on the matter of payment of the following components: (1) Global overtime as part of the effective salary for pension to the members of the management rated at rank B; (2) payment of overtime other than according to actual execution for external workers 10 (3) payments of per diem and meals that are paid to employees of the Company; (4) payment of command wage addition for Company employees andpensioners 11 .TheCompanyhasbeengivenfortyfive(45)daysforpresentingitspleasonthisissue, including the argument and the justification for payment of each of these wage components. The CompanywasgivenanextensiontoJune1,2012,tosubmititsresponse.

5.2

5.3

Section14.6.7:TrustAccountforNonBudgetaryComponents On April 2, 2012, the labor union and the Labor Federation filed a leave to appeal with the National LaborCourt,whichorderedthefilingofresponsestothemotionandastayofexecutionofthedecision of the Regional Court until giving a decision to the contrary. After the filing of the responses to the motion,onApril30,2012,theNationalCourtdismissedtheleavetoappeal.Initsdecision,theNational Court cited the rule whereby in general, an appellate instance does not intervene in temporary proceedings in which the factual deliberations are at the prima facie level only, as opposed to deliberations in the verdictat the end ofthe principalproceeding.A hearing of theprincipal proceeding intheRegionalCourtissetforJune5,2012. Following the decision of the National Court, on May 8, 2012, the Company applied to the Trustee and asked it to transfer the amount of NIS 50 million from the Trust Account to the Central Allowance Provident Fund on May 31, 2012, and later more requests will be forwarded for transferring money from the Trust Account to the Fund. On May 23, 2012, Counsel for the Trustee stated that he is studying the application of the Company on the matter, as well as that of the labor union, which expressed an objection to the transfer of the money, and would forward his position on the matter as soon as possible. In his letter, Counsel for the Trustee asserted that there was a prima facie possibility

10

11

AnexternalworkerisanemployeeemployedusuallyoutsidethefacilitiesoftheCompany. Acommandadditionisapayincreasewhoserateisdeterminedinaccordancewiththecommanddefinitionofeach employeeasfollows:(1)vocationalgroup2.5percent;(2)sectionheadsandtheirdeputies,groupleadersandtheir equivalents5.5percent;(3)largesectionleaders,foremenandtheirequivalents6.5percent;(4)deputydepartment managers,seniorsectionleaders,seniorforemenandtheirequivalents,specialdutiesandseniorexpertswhohavebeen twoyearsatpeakrank18percent;(5)standarddepartmentmanagersatpeakrank21percent;(6)seniordepartment managers23.5percent;(7)deputydepartmentmanagers/departmentmanagersandVPs26percent

11

ofapplyingtothecompetentCourtinaccordancewiththeTrusteeshipLaw,1979,fortherightsofeach ofthepartiestobeestablished,andtheTrusteewouldexaminethisoptionasapossiblesolution. On March 26, 2012, the Company received a document containing recommendations of the Regulator Team. The position of the Regulator Team is that deposits that the Company made for components for first generation employees that are not components enumerated in Appendix A of the 96 agreement that preceded March 4, 1996, and any deposit for components for second generation and third generation employees and deposits for components, are deposits for which depositing is not mandatory. The Conclusions chapter in the recommendations document of the Regulator Team stated that the Company should do everything necessary, including before the Trustee or the beneficiaries, and by law, to release money whose depositing in the Trust Account was not mandated, a decision of the Board of Directors of the Company of March 22, 2012 to release NIS 600 million constituted, in the view of the regulator team, a first step for the execution of the foregoing. This is due, inter alia, to the fact that there is and has been no room to deposit for a free electricity element, because this is a right that is granted in kind within the activity of the Company. However, the regulator team believes that the arrangement that was shown by the Company, further to the decision of the board on March 31, 2011, contravenes the principles stated in the recommendations. Therefore, the Board of Directors of the Company must discuss these conclusions and continue to make the appropriate decisions and act accordingly concerning the balance of the money in the trust account, in order to implement the principles above. Thus, the regulator team believes that the Company must consider acting at the first stage immediately to implement the provisions of the Trust Agreement, in a manner that will make use of the Trust Account Money for its purpose in accordance with the Trust Agreement. Among other things, the Company must examine making immediate use of the money in one or more of the ways prescribed in the Trust Agreement concerning the use of the Trust Money. Concretely, it is the position of the team that the Company must consider exercising its authority that is prescribed in the Trust Agreement to give instructions to the Trustee to receive refunds from the Trust Account for payments thatithasmadefromitscoffer. It has also been determined that the Company should again consider, as the former of the Trust Agreement, all of the measures that are available to it, including in accordance with the trust statues, forinterpretingtheTrustAgreementoradaptingittothearrangementstowhichitiscommittedandno morethanthat. The Company is studying themeaning of the recommendations of theRegulator Team on this issue and in April 2012 applied to the Regulator team to receive the legal expert opinion on which the recommendationoftheteamrelies. 5.4 Section14.6.9:Specialagreementemployees The Company has 750 special agreement employees (as of the salary data of December 2011) an employee who is hired for a nonpermanent position, for performing a defined task that lasts for a set period, such as: the construction of power stations or substations. Such an employee is entitled, in accordance with the collective agreement, to the rights as set forth in the Employment Rules with respect to permanent employees, except the right to a budgetary pension and to an energy allowance. The compensation that will be paid to special agreement employees, at the time of their termination shall be enlarged as follows: for the first two years of work, compensation at 200 percent for each year ofemployment,andforthethirdyearonward,compensationat300percentforeachyear.OnFebruary 20, 2012 12 , a letter was sent to the Company from the Senior Deputy (Enforcement) to the Commissioner of Wages whereby the enlarged compensation arrangement ostensibly contravened Section 29 (A) of the Budget Foundations Law. The Company and the labor union were given 30 days to
12

AletterfromthewageandemploymentagreementsdivisionoftheMinistryofFinanceofFebruary20,2012,concerning apparentwageoverrunsatIsraelElectricCorporation.

12

raise contentions in writing, before the decision of the Commissioner of Wages on the matter. The Company forwarded its comment on the matter to the Commissioner of Wages, within which it discussed the normative sources whereby the special agreement employees are paid compensation. As ofthedateoftheProspectus,noresponsehasyetbeenreceivedtothecommentsoftheCompany. 5.5 Section14.11:LabourDisputes On March 25, 2012, the employees of the Company started to take various partial sanctions, in accordance with the direction of the labor union, due to the decision of the Board of Directors of the Company of March 22, 2012 to operate to withdraw Actuarial Surplus from the Trust Account. These sanctionsstoppedinaccordancewithadecisionoftheRegionalLaborCourtinHaifaonMarch27,2012, after Israel Electric Corporation filed a petition for giving an order that would prevent the sanctions on the previous day. On March 29, 2012, the argued decision of the Regional Labor Court was handed down, whereby the employees of the Company had to abstain from sanctions, whereas the Company was allowed in accordance with the decision of the Board of Directors with respect to the transfer of the actuarial surplus to the central allowance provident fund. That day, the labor union and the Labor Federation filed an urgent petition to the Regional Labor Court in Haifa to delay the execution of the decision on the matter of the transfer of the actuarial surplus, until a decision on the leave to appeal that they intended to file to the National Court. On March 30, 2012, the Regional Labor Court in Haifa ordered the delay of execution of the decision with respect to the possibility to transfer the actuarial surplus,untilApril1,2012at1:00p.m.OnApril2,2012,thelaborunionandtheLaborFederationfiled a leave to appeal with the National Labor Court, which ordered the filing of responses to the motion and a stay of execution of the decision of the Regional Court until giving a decision to the contrary. After the filing of the responses to the motion, on April 30, 2012, the National Court dismissed the leavetoappeal.AhearingoftheprincipalproceedingintheRegionalCourtissetforJune5,2012. DescriptionofCompany'sBusinessMattersRelatedtotheOperationoftheWholeCompany Section15.1:Fixedassets,landandfacilities It is the position of the Israel Land Administration that in accordance with the decision of Israel Land Administration Council 1136, the land areas that were allocated by the Israel Land Administration to the Company for public purposes, but which are effectively unused or are not being used for the allocated purposes, should return to the possession of the Israel Land Administration subject to and in accordance with the conditions stated in the said decision. Based on various considerations, the Company believes that this decision does not apply to the land that was leased to it by the Israel Land Administration, based on the recognition of the management of the Administration that the Company has a need to regulate sites for electricity with nationwide coverage in advance. However, even if this decision were not to apply to the land allocated to the Company with a tender exemption, as of the date of the Prospectus, the Company is making use of all of the land areas that have been allocated to it by the Israel Land Administration, except a few tracts whose usage date in accordance with the development plan is not yet due, and for which there is future zoning for development and use. In addition, in accordance with the said decision, even if the Company is required to return land that has not been used to the Israel Land Administration, the return to the Israel Land Administration will require paying the Company consideration for the return, as prescribed on this matter in the said decision. Section19Financing On February 10, 2012, the Company issued debentures, distributed by Barclays Capital and USB Investment Bank to institutional buyers in and outside the U.S.A, in a total amount of U.S.$ 0.5 billion, nominal value, out of a comprehensive plan (GMTN) for issuing debentures in a total amount of up to $ 2 billion, nominal value. For further details, see Notes 7 c to the Financial Statements for the three months ended onMarch 31,2012and section 19.4 to theDescription ofthe Companys BusinessAffairs fortheyearendedonDecember31,2011. On April 5, 2012, the Company concluded a bid for a private placement of debentures (nonnegotiable) unlinkedtotheCPI,oftheNIS2013Electricityseries.ThenominalvalueofthisofferingamountedtoNIS 1.5 billion, at a stated interest of 3.03%. The principal of the debentures will be repaid in one payment, on April 10, 2013. For details see Note 35 p to the financial statements for the three months ended on March31,2012.

6. 6.1

6.2

13

6.3

6.4

Section19.8CreditRating On April 5, 2012, the international rating company Standard and Poor's and the local rating company Maalot S&P's announced that the included the international credit rating of the Company, BB+ and the localcreditratingoftheCompany,ilAAinthenegativeCreditWatchlist. On March 27, 2012, the local rating Company, Midroog ("Midroog") announced that it rates the private placement series, guaranteed by a state guarantee, in theamount of upto NIS1.5billion offered bythe CompanyonApril5,2012atAaa. On May 24, 2012, Midroog announced: (1) that the rating of series 22 and 2022 remains at Aa3 and changes the rating outlook from steady to negative; (2) the rating of the NIS 2013 Electricity series remaims at Aaa; (3) a rating of Aaa to the other series that are guaranteed by the State ("The Other Guaranteed Series"), in the amount of up to approximately NIS 3 billion, which the Company intends to offeruptomidJuly2012,inapublicofferingbasedonaprospectus. Section22.1LicensesoftheCompany In Amendment 10 to the Electricity Sector Law, the generation license of the Company have been extended to January 1, 2013. The Company believes that the extension applies to all of its licenses. The Electricity Authority states that the extension does not apply to the new generation licenses that are valid until April 15, 2012. In the view of the Electricity Authority, the authority of extension of these licenses is granted to it. In April 2012, the Electricity Authority and the Minister extended the new generationlicensesoftheCompanytoJanuary1,2013. SeeNote1b1tothefinancialstatementsforthethreemonthsendedonMarch31,2012. Section22.1ElectricityRate See details of the rate updates in Note 3 to the financial statements for the three months ended on March31,2012.

6.5

6.6

Section22.5.2.2.FinancialStatementsofGovernmentCompanies Section 33A of the Government Companies Law states that in addition to the provisions of any statute, the Minister of Finance may prescribe, after consultation with the Minister of Justice, and with respect toapubliccompanyafterconsultationwiththeSecuritiesAuthority,atthesuggestionoftheCompanies Authority, rules for making out Financial Statements of a government company for which he has determinedthatitprovidesanessentialservicetothepublic. In accordance with this instruction, the Government Companies Regulations (Rules for Preparing Financial Statements of Israel Electric Corporation Ltd.) (Provisional Order), 2004, have been promulgated whereby the Financial Statements of the Company are made out according to them and also in accordance with the Securities Regulations (Annual Financial Statements) 2010, although the company is a public one. See Note 2A to the financial Statements for further information. On May 22, 2012, the Minister of Finance extended the validity of the provisions of the Government Companies Regulations (Rules for Preparing Financial Statements of Israel Electric Corporation Ltd.) (Provisional Order), 2004, and the amendments thereto, until December 31, 2014, and as of January 1, 2015, the Company is to implement in full the international financial reporting standards (IFRS). See Notes 2A and 2E for details on the expected transition of the Company to reporting in accordance with the IFRS rules. TheseregulationsstatethatthefinancialstatementsoftheCompanyaretobecompletedinaccordance withtheIFRS,subjecttotwoexceptions: (1) TheCompanywillcompileitsfinancialstatementsadjustedtothechangesinthegeneralpurchasing power of the shekel (in accordance with the rules prescribed in Manifesto No. 36 including the provisions prescribed in Manifestos nos. 40, 50 and 56 of the Institute of Certified Public AccountantsinIsrael). (2) The Company is a regulated company and therefore compiles its financial statements in accordance with the rules of the U.S. Financial Accounting Standards Board (FASB), as enumerated in the standardChapterRE6inregardtoregulatedactivitiesintheconsolidatedversionofthestandardsof

14

theboardsetforth,includingamendments,clarificationsoradditionstotheserulesastheyarefrom timetotime. In the letter of the Director of the Companies Authority to the Minister of Finance in May 2012, the Director of the Companies Authority states, inter alia, that the position of the Companies Authority is that from January 1, 2015, the Company will have to apply fully the international accounting standards. Inaddition,itwasclarifiedthattheCompaniesAuthoritytendstowardstheviewthatinaccordancewith theregulations,thereisnoroomforconductinganexaminationorreductioninthedecreaseinvalueof fixed assets in accordance with international standards IAS 36, as the Company has started to do since the financial statements in 2010, but as set forth in the U.S. standards for regulated companies of the type of the Company, including in FAS 144 (ASC 360 in the new codification) combined with U.S. regulation for regulated companies in accordance with these regulations. It is noted that there is no internationalregulationwithintheIFRSforregulatedcompaniesofthetypeoftheCompany,andonthe otherhand,theU.S.regulationthatwasappliedtotheCompanywithintheregulationsrefers,interalia, assetforthabove,toFAS144.Itwasfurtherstatedthattheessenceofcalculationdirectlythroughfixed assets relies, in a company of the type of the Company, on the charge rates of the Company, which are set by regulation, thus setting the economic value of its assets. The Companies Authority is examining with, inter alia, relevant entities of the State, the options for implementing its professional position set forth above within the Government Companies Regulations (Rules for Preparing Financial Statements of Israel Electric Corporation Ltd.) (Provisional Order), 2004, including through their amendment, if required. SeealsoNote2a1tothefinancialstatementsforthethreemonthsendedonMarch31,2012. 6.7 Section22.8PlanningandBuilding In accordance with the Planning and Construction Law, a land rights holder is allowed to submit against the localcommittee to whose jurisdictionan outlineplan applies a claim forcompensation for decrease in value of the land as a result of the approval of the plan. For certain outline plans, the Company has undertaken to indemnify the local committees in whose jurisdiction these plans apply to the full amounts that the committees would have to pay to the affected landowners, subject to and in accordance with the provisions in the text of the indemnification statement (except one plan in which theburdenofcompensationwillbesharedamongtheinstitutionalbodiesinvolvedintheplan).Appeals have been submitted against the local committees to the relevant appellate committees that deal with decrease in value. In accordance with the provisions of the indemnification statements, the Company was enrolled in the appeals as a party that might be harmed by their acceptance (see also Note 24 B.8. to the Financial Statements for the year ended on December 31, 2012). In the statements of indemnificationthemselves,orintheindemnificationclausesintheplan,noamountsareindicated,but rather the indemnification is 100 percent or another rate out of the amount of the claim (appeal) that has been filed against the local committee. The total claims are stipulated in the Financial Statements and are updated from time to time. For their part in the claims, a decision was given by a deciding appraiser, and on May 6, 2012, an agreement was signed between the institutional entities that are involved in the plan, which is to regulate the distribution of payments until a decision as to the manner ofdistributionbetweentheparties. 6.8 Section24.1.2.1(c)Pendingproceedings On July 12, 2007, the Company filed an administrative petition to the District Court in Haifa, convening asacourtforadministrativeaffairs,againstmunicipaltaxassessmentsthatwereissuedtotheCompany in the years 20042007, for approximately 1,000 transformation stations and 8 substations (AdministrativePetition(HaifaAdministrative)4239/07)asstipulatedbelow: Withrespecttothetransformationstations (a) In 2004, a municipal tax assessment based on best judgment was issued, which was applied retroactivelyfortheperiodfrom1997inthetotalofNIS93,187.516.

15

(b) In2005,amunicipaltaxassessmentwasissuedbasedontherosterofassetsthatwashandedover to the municipal council by the Company that was applied retroactively for the period from 1998 in thetotalofNIS29,476,572. (c) In 2007 municipal tax assessments were issued that were applied retroactively for a period from 2001. These are probably overlapping assessments, in view of the years and assets to which they wereapplied.However,thiswasnotstatedexplicitlyatanystagebythemunicipalcouncil. Withrespecttothesubstations (a) In2001amunicipaltaxassessmentwasissuedfortheZamirsubstation,foraperiodfrom2000in thetotalofNIS1,446,458. (b) In 2003 three municipal tax assessments were issued for the Bikurim substation (approximately NIS 10,000), the Gan Yovel substation (approximately NIS 13,000) and the Pal Yam substation (approximatelyNIS910,000). (c) In 2004 a municipal tax assessment was issued for the Admiralty substation, for the period from 2003,totalingatNIS1,722,015. (d) In 2005, a municipal tax assessment was issued to the Makah substation, retroactively for the periodfrom2000,inthetotalofNIS11,721,781. Therefore,inaccordancewiththatwhichhasbeensetforthabove,onJuly12,2007,apetitionwasfiled on the part ofthe Companyagainstall of the municipal tax assessments listed above.OnNovember11, 2007,themunicipalcouncilfiledastatementofresponseonwhichbehalf,followingwhichtheresponse of the Company was later given. On November 18, 2007, an early hearing of the petition was held, following which the parties filed preliminary petitions for giving additional details, for examination of affiantsandsoon,forwhichnodecisionhasyetbeengiven. The parties are in a proceeding of negotiations for the purposes of a compromise for concluding the disputes between them outside the court. In the last discussion that was held in this case on December 11, 2011, the parties were given a last extension by the Court to reach a compromise, until March 29, 2012. It was determined that they would reach a consensus that would obviate the hearing through to this time. The parties must file their main pleas by June 2012. With the consent of the parties, the time for conducting the negotiations was extended until early June 2012, based on the wish to conclude the negotiations. To the extent that the parties do not reach a consensus that will obviate the hearing, the partiesmustfiletheirmainargumentsbyearlyJune2012. In the negotiation meeting held on May 3, 2012, principles were formed for a compromise settlement. There is still a small monetary gap between the parties, which the parties hope to bridge during the upcoming weeks. With the consent of the parties, the time for holding negotiations was extended until 30daysafterthedateofthenegotiationmeeting,basedontheaimofconcludingthenegotiations. TheCompanyhasformedinthefinancialstatementsaprovisionofapproximatelyNIS21millionforthe municipaltaxratesthataretheobjectofthepetition. See Note 24 of the Financial Statements for the year ended on December 1, 2011, for further informationonthismatter. 6.9 Section26.3:Informationonbusinessenterprising In the month of February 2010, the Minister of Communications granted the Company a trial license in the area of the supply of communications infrastructure services on optic fibers for a period of a year. ThetrialwasconductedinKiryatShemona,withtheparticipationof150households,andwasasuccess. ThislicensehasbeenextendedforanadditionalperiodofoneyearuntiltheendofMarch2013

16

6.10 Section28EventormatterexceedingtheordinarybusinessaffairsoftheCompany 6.10.1 TheCompanyforwardedtotheElectricityAuthorityonApril18,2012aletterincludedetailscomments on the issue of the management and supervision of the special purpose fuel account, dealing mainly with a request of the Electricity Authority to publish an updated decision on the subject whereby the fuelpurchasesupervisionmechanismistobebasedonpostfactumcontrolandreporting,andthatthe money not bemanaged in the special purpose account.As of thedate of the prospectus, theCompany isnegotiatingwiththeElectricityAuthorityonthismatter. 6.10.2 On March 29, 2012, the Audit Committee and the Board of Directors of the Company approved preparations and execution of a private issue of nonnegotiable debentures in Israel that would be securedbytheguaranteeoftheState(thePrivate Issue")andpreparationsandexecutionoftakingof a loan that is secured by a State guarantee from banks in Israel and abroad (the Loan), including a transaction with the State by way of an agreement for extending a guarantee to secure the Private Issue or the Loan, as relevant, in a total amount (for the private issue and/or the loan together) that will not exceed NIS 1.5 billion, subject to the required regulatory approvals. On April 5, 2012, the Company executed a private issue of debentures of the electricity shekel 2012 series, to a total amount of NIS 1.5 billion. For details, see Immediate Report of April 5, 2012 (reference no.: 201201 097548). 6.10.3 On May 28, 2012, a letter was received at the Company from the Director General of the Ministry of Finance, on the matter of implementation of the outline of the cash flow solution for the Company. Pursuant to this letter, further to the discussions that were held between the Company and representatives of the Ministry of Finance on the matter of the cash flow problem that the Company hasinviewoftheseverecrisisinthesupplyofnaturalgas,theStateagainconfirmsthataguaranteeor otherfinancingsolutionswouldbegivenforthecumulativecashflowdeficitoftheCompanystemming from the surplus fuelcost for the Company, and in accordance with thecash flowneeds resulting from thepurchaseofthesefuels.Inaccordancewiththisprinciple,theGovernmentwillacttoextendastate guaranteeofNIS3billionforraisingdebenturesinapublicissuebyprospectus,subjecttotheapproval of the Finance Committee of the Knesset. It was further stated that in addition to that which has been set forth, the Government would extend financing solutions in accordance with the principles of the outline above, to a volume of NIS 1.1 billion, in accordance with the cash flow needs of the Company for financing the cost of the surplus fuel purchase and taking into account the required safety net. It was also stated that the Company would act to the best of its ability to extend additional financing sourceswiththecurrentactivityoftheCompany.

17

7. 7.1

Section29DiscussionofRiskFactors The table below presents the risk factors of the Company, rated in accordance with the estimate of theCompany,bythedegreeofeffectthatthesemayhaveovertheoperationsoftheCompany 13

Effect Classificationoftheriskfactor inaccordancewiththe High Medium Low GovernmentCompanies Significant Moderate Slight effecton effecton effecton AuthoritycircularofJune11, 2009 the the the Company Company Company Macrorisks

(1) Regulation (2) Security,geopoliticalandeconomic situationinIsrael (3) Naturaldisasters(earthquake/ flood) (4) Fires (5) Marketrisks (6) Informationandinformation securitysystems

X X X X X

Complianceandregulation risks Strategicrisks Strategicrisks Strategicrisks Financialrisks

Industryrisks (1) Settingofelectricitychargerates (2) Capitalraisingandfinancing (3) Shortageinnaturalgassupply (4) TheElectricitySectorandlicensesof theCorporation (5) Environmentalprotection (7) Humancapital (8) Technicalfailures (9) Suppliers (9) Healthandsafety (10)Projectrisks X X X X X X X X X Complianceandregulation risks Financialrisks Strategicrisks Complianceandregulation risks Operationalrisks Operationalrisks Operationalrisks Operationalrisks Operationalrisks Operationalrisks Financialrisks Financialrisks

RisksuniquetotheCompany (1)Liquidityrisks (2) Causesforcallingforimmediate repaymentandcrossviolation clausesinexistingfinancing agreementsoftheCompany (3)Transitiontoreportinginaccordance withtheIFRSrules (4)SubmissionofauditedFinancial Statementstoprofitcenters (5)Competition (6)Planningandexecutionof DevelopmentPlaninthe generation,transmissionand transformationanddistribution systems (7)Structuralchange
13

X X

X X X X

Complianceandregulation risks Complianceandregulation risks Strategicrisks Strategicrisks

Strategicrisks

ThedegreeofeffectoftheriskfactorsandthedetailsoftheriskfactorsprovidedbelowwereexaminedbytheCompany withouttakingintoaccountprotectiveactionsthatitisconductingtohedgetherisks.

18

(8)Legal (9)Creditrisk (10)Laborrelations (11)Liabilitiesforpensionfund (12)Planning,maintenanceandreserve management (13)Failuresinthetransmissionarray X Operationalrisks (14)Reputationrisks X Strategicrisks 7.2 AccountingandFinancialReporting Pursuant to conducting a repeat review and following consultation with the Securities Authority, the Company believes that no other risk exists, which derives from the complexity and scope of the Company'soperationand/ortheextentofcontrolofitsfinancialstatements,andthat,astheCompany reportedinthepast,itisnotdifficulttoconsolidateanaccountingpolicy. 7.3 Section 29.3.2 Causes for calling for immediate repayment and cross violation clauses in existing financingagreementsoftheCompany Thefollowingriskfactorwillbeaddedtothissection: Some of the financing agreements that the Company has executed include a clause for calling for immediate repayment in the case of a material adverse change (MAC stipulation) as this event is definedinanysuchagreement.Theenactmentofthestipulationissubjecttoatestofreasonablenessin somecases,isdowntothediscretionofthelenderinsomeofthem,andthisdiscretionisalsosubjectto reasonableness in some of the agreements. The volume of the financing agreements that include an MAC stipulation totals at approximately NIS 16,804 million and approximately NIS 17,115 million, for March31,2012andforthedateofthereport,respectively. EliyahuGlickman Dr.ZivReich YiftahRonTal ChiefExecutiveOfficer Chairman,Committee Chairmanofthe forReviewingtheFinancial BoardofDirectors Statements DateofApproval:May29,2012 ________________________________________________________________ * Updatedinaccordancewithregulation39a.oftheSecuritiesRegulations(PeriodicandImmediateReports) 1970.

Effect Classificationoftheriskfactor inaccordancewiththe High Medium Low GovernmentCompanies Significant Moderate Slight effecton effecton effecton AuthoritycircularofJune11, 2009 the the the Company Company Company X Financialrisks X Financialrisks X Operationalrisks X Financialrisks X Operationalrisks

19

TheIsraelElectric CorporationLtd.

ChapterB
BoardofDirectors'Reportonthe StatusoftheCompany'sAffairs

FortheThreeMonthsEnded March31,2012

ProminentDisclaimer
ThisEnglish translationofthe"Company'sBoardofDirectors'Report on the Status of the Company's Affairs" for the three months ended March 31, 2012 ("English Translation") is provided for informational purposesonly. In the event of any conflict or inconsistency between the terms of this English Translation and the original version prepared in Hebrew, the Hebrew version shall prevail and holders of the Notes should refer to the Hebrew version for any and all financial or other informationrelatingtotheCompany. The Company and its Directors make no representations as to the accuracy and reliability of the financial information in this English Translation, save that the Company and its Directors represent that reasonable care has been taken to correctly translate and reproduce such information, yet notwithstanding the above, the translation of any technical terms are, in the absence of generally agreed equivalent terms in English, approximations to convey the general senseintendedintheHebrewversion. The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency.
2

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 TheBoardofDirectorsoftheIsraelElectricCorporation(theCompany")herebypresentstheDirectorsReport onthestatusoftheCompany'saffairsforthethreemonthperiodendingMarch31,2012,("TheReportPeriod" or"TheReportYear")accordingtothedirectivesoftheSecuritiesRegulations(PeriodicandImmediateReports) 1970 ("The Securities Regulations") and the provisions of circulars of the Government Companies Authority ("The Companies Authority"), including the "Financial Statements Circular 201151" ("Financial Statements Circular"). a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany 1. BriefDescriptionoftheCompanyanditsBusinessEnvironment a) General The Company acts as one combined and coordinated system that deals in supplying electricity to consumers, starting from the electricity generation stage through transmission, distribution and supply of and commerce in electricity, all in accordance with licenses granted to each type of activity, which are effective up to January 1, 2013. The Company also deals in the construction of the infrastructure required for these activities. Company operations include three main fields: Generation, transmission and transformation of electricity and its distribution. The Company provides electricity to most of the States consumers of electricity, and customer distribution is such that it is not dependent on any of them. The Company is owned by the State of Israel which holds about 99.85% of its share capital, therefore the Company and its operations are subject, inter alia, to the directives of the Government Companies Law 1975 (the Government Companies Law). As of March 5, 1996, the Company operates according to the Electricity Sector Law 1996 (the Electricity Sector Law) and its regulations. The Electricity Sector Law replaced the Electricity Concessions Order and the Public Utilities Authority Electricity (the Electricity Authority") was founded according to this ordinance. The duties of the Electricity Authority are, among others, to set electricity rates and define rate update processes, to award licenses and to supervise fulfillment of instructions specified in the licenses. For additional details on the Electricity Sector Law, see Note1btotheInterimFinancialStatementsinChapterCofthisreport(theInterimFinancialStatements). b) CondensedReviewoftheChangesIntheBusinessEnvironment 1)For details on the changes in the business environment of the Company, its cash and cash flow condition, seeNote1ftotheInterimFinancialStatements. 2)OnFebruary27,2012,theKnessetapprovedinthesecondandthirdcallthe"ChangeofUpdateMethodof Budgetary Pension 2012" law, which completes and arranges the pensions agreement. For further details,seeNote4etotheInterimFinancialStatements. 3)According to notices received from the natural gas reserve partnership of "Yam Thetis" project, the capacity to extract gas from this reserve decreased considerably during October 2011, December 2011, February 2012 and May 2012, and as of the announcement date the natural gas supply decreased to one fifthofthemaximumcontractualquantity(SeeNote10itotheInterimFinancialStatements). 4)For details on Tamar agreement, see Note 8 b1 to the Interim Financial Statements and section 1 in the DescriptionoftheCompanysBusinessAffairsinChapterAofthisreport. 5)On April 22, 2012, the Company received an announcement from EMG, which supplies natural gas from EgypttotheCompany,statingthattheEgyptianGovernmentGasCompanycanceleditsagreementforthe saleofnaturalgaswithEMG.SeedetailsinNote8b2totheInterimFinancialStatements.

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 1. BriefDescriptionoftheCompanyanditsBusinessEnvironment(continued) c) InformationRequiredinAccordancewiththeDirectivesoftheGovernmentCompaniesAuthority 1) TargetsandStrategy For general details of the targets and strategy of the Company, including the strategic plan for sustainable development of the Company, see section 10.19 in The Description of the Companys Business Affairs in Chapter A of the financial statements for the year ended on December 31, 2011 ("TheAnnualFinancialStatements"). DetailsofthefinancialtargetsoftheCompanyarepresentedbelow: 1) Reducing the Ratio of the Financial Leverage of the Company to the Leverage Ratio Recognized in theElectricityRate: The Electricity Authority has determined a normative financial leverage ratio (for the financing of assets without assets under construction) between equity and external capital of 1:2 (for the purpose of the rate, the Electricity Authority refers to deferred taxes as being part of equity in the transmission and distribution segments). The ratio that is reflected in the Financial Statements as of March 31, 2012 is 1:2.49. The distribution of the cumulative dividends from the Company's earnings for the years 2004 2009, in the amount of NIS 3.85 billion, may change this ratio to 1:3.06. 2) AttainTheRateofReturnonEquityasRecognizedintheElectricityRate: The annual rate of return on equity, as recognized in the rate by the Electricity Authority (normative rate of return) is 9.5% gross for the generation segment, 5.5% net for the transmission segment and 6.2% net for the high and low voltage distribution segments. As of the statement of financial position date, the annual rate of return on equity amounts in annual terms to: a negative return of39.95% for the generation segment, a negative return of 11.55% for the transmission segmentandanegativereturnof50.59%forthehighandlowvoltagedistributionsegment(thisis in accordance with the Company's Financial Statements according to the generation, transmission anddistributionoperatingsegments,seeNote12totheInterimFinancialStatements). 3) Recognizecostsoftherestructuringinfutureelectricityrates. 4) For detailed information on the directives of the Government Companies Authority, see also Note 11totheInterimFinancialStatements. d) Assessment of the Financial Impact of the Difference between Financial Reporting Principles as Applied intheFinancialStatementsoftheCompanyandtheFinancialReportingStandardsasAppliedinIFRS Under the Government Companies Regulations the Company is required to present the estimated impact of the implementation of the financial reporting rules in its Financial Statements as compared with InternationalFinancialReportingStandards,assumingthatthetransitiondateisJanuary1,2007,asfollows:

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 1. BriefDescriptionoftheCompanyanditsBusinessEnvironment(continued) d) Assessment of the Financial Impact of the Difference between Financial Reporting Principles as Applied in the Financial Statements of the Company and the Financial Reporting Standards as Applied in IFRS (continued) March31 December31 2012 2011 2011 Impactonshareholdersequity NISinmillions EquitypreparedundertheRegulationsas reportedintheFinancialStatementsasofMarch 31,2012 15,863 18,266 17,331 Impactofwritingoffregulatoryliabilities/assets (984) 3,678 455 Impactsdrivingfromfixedassets* (5,910) (5,849) (6,163) Impactoftax** 1,571 364 1,275 EquityresultingfromimplementationofIFRS 10,540 16,459 12,898 Impactonnetincome Netincome(loss)preparedundertheRegulations asreportedintheFinancialStatementsasof March31,2012 (1,468) 147 (788) Differencesinreported,adjusteddepreciation 239 149 588 Impactofwritingoffregulatoryassets/liabilities (1,439) (198) (3,421) Erosionofliabilitiesmainlythegapbetweenreal (132) (345) (1,171) interestandnominalinterest CancellingthedeductionforFAS90 (5) 13 (126) Other 151 52 264 Impactoftax** 296 59 970 Netincome(loss)accordingtoIFRS (2,358) (123) (3,684) * Impacts deriving from fixed assets: linkage to CPI, cancelled provision for assets impairment, gaps in capitalizationoffinancingcostsandotherimpacts. ** Impactof the tax: in the firstquarter of 2012 the tax ratewas 25%, in the first quarterof 2011 18%, in201125%. The quantitative data presented above represent an assessment and estimate only and particular caution should be taken in reference to this data since the Company maintains its reporting systems according to theGovernmentCompaniesRegulations. e) ElectricityRateMechanism 1) Fordetailsontheelectricityrate,seeNote3totheInterimFinancialStatements. 2) TheCompanyandtheElectricityAuthoritydisagreeonseveralissues,inconsiderableamounts.Lackof recognition of costs incurred by the Company in the rate by the Electricity Authority, caused and will continue to cause a significant decrease in the Company's revenues and to a lack of recognition of some of its assets, which leads to losses and to substantial erosion in the Companys shareholders equity. The Electricity Authority reached a decision on the majority of the subjects, and did not yet make any decisions on the remaining subjects. The Company continues to address the Electricity Authorityonthesesubjects,forthepurposeofreceivingratecoverageforthesaidcosts. For details, see section 22.2 of The Description of the Companys Business Affairs in Chapter A of the AnnualFinancialStatementsandalsoNote3,totheInterimFinancialStatements.

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 2. FinancialCondition DataoftheCompany'sfinancialconditiononMarch31,2012andMarch31,2011areasfollows: March31 NISinmillions 2012 2011 Increase Percent (decrease) % CURRENTASSETS Cashandcashequivalents .............................. Shortterminvestments .................................. Tradereceivablesforsalesofelectricity ........... Othercurrentassets ....................................... Inventoryfuels ............................................ Inventorystores .......................................... Regulatoryassets,net ....................................

NoteNo.

861 715 4,137 722 2,198 124 1,526 10,283

4,633 667 3,143 489 2,315 131 11,378

(3,772) 48 994 233 (117) (7) 1,526 (1,095)

(81%) 7% 32% 48% (5%) (5%) (10%)

a2a1 a2a2 a2a3 a2a4 a2a5 a2a6

NONCURRENTASSETS Longtermreceivables ................................... Assetswithrespecttobenefitsafter employmenttermination: Excesspensionplanassetsoverpensionliability Fundsintrust ................................................ 1,426 1,122 304 27%

3,826 2,061 5,887

5,304 1,934 7,238

(1,478) 127 (1,351)

(28%) 7% (19%)

a2b

Fixedassets,net Fixedassetsinuse,net ................................... Fixedassetsunderconstruction......................

57,329 4,030 61,359 854

57,420 5,009 62,429 861

(91) (979) (1,070) (7)

(20%) (2%) (1%)

a2c

Intangibleassets,net .....................................

79,809

83,028

(3,219)

(4%)

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 2. FinancialCondition(continued) March31 NISinmillions 2012 2011 Increase (decrease) CURRENTLIABILITIES Creditfrombanksandothercreditproviders .. Tradepayables .............................................. Othercurrentliabilities ................................... Regulatoryliabilities,net ................................ Customeradvances,netofworkinprogress .... Provisions ......................................................

Percent %

NoteNo.

5,494 2,201 1,475 463 796 10,429

4,466 1,633 1,374 769 490 794 9,526

1,028 568 101 (769) (27) 2 903

23% 35% 7% (6%) 9%

a2d)

NONCURRENTLIABILITIES Debentures.................................................... Liabilitiestobanks ............................................. Liabilitieswithrespecttootherbenefitsafter employmenttermination ................................... Regulatoryliabilities,net ................................... Provisionforrefundingamountsarisingfrom restatementoftheFinancialStatements.......... Deferredtaxes,net ........................................... DebenturestotheStateofIsrael ........................ LiabilitiestotheStateofIsrael ........................... Otherliabilities .............................................. SHAREHOLDERSEQUITY Sharecapital .................................................. Capitalreserves ............................................. Retainedearnings .......................................... 31,704 4,930 2,680 523 2,293 5,033 2,453 3,523 378 53,517 1,103 1,000 13,760 15,863 2,554 3,470 2,186 4,176 2,458 3,591 376 55,236 1,103 1,000 16,163 18,266 31,638 4,787 66 143 126 (2,947) 107 857 (5) (68) 2 (1,719) (2,403) (2,403) 3% 5% (85%) 5% 21% (2%) 1% (3%) (15%) (13%) a2e)

a2f) a2g)

79,809

83,028

(3,219)

(4%)

ThefollowingareexplanationsofthefinancialdataoftheCompany,asdetailedinthetablesabove,inthe report year, compared to the previous year at the Company level and according to activity segments (for detailsonthesegmentalreportingoftheCompany,seeNote9totheInterimFinancialStatements. a. CurrentAssets 1. CashandCashEquivalents For details of the decrease in cash and cash equivalents, see thedisclosure on the Liquidity of the Companyinsection4belowandalsoNote1ftotheInterimFinancialStatements.

2. ShortTermInvestments The increase in short term investments arises from deposits in a special account with respect to financing stage B of the emergency plan. See details in Note 3 j2 to the Interim Financial Statements.

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 2. FinancialCondition(continued) a) CurrentAssets(continued) 3. Tradereceivablesforsalesofelectricity Theincreaseinthebalanceoftradereceivablesderivesfrom: (a) Arateincreaseofabout15%,comparedtothesameperiodlastyear. (b) Increasedelectricityconsumptionofabout10%(SeverwinterJanuaryMarch2012). (c) IncreasedoutstandingbalanceofthePalestinianAuthorityandEastJerusalemElectricity. 4. OtherCurrentAssets The increase in the balance of other current assets in long term debts derives mainly from increased balances arising from swap transactions following the devaluations and reduced interestcurves,comparedtothebalancesinthepreviousyear. 5. InventoryFuels Fordetailsonthechangesinfuelsinventory,seesection3(c)(3)below. 6. RegulatoryAssets/Liabilities For details of and changes in the regulatory assets/liabilities during the report period see Note 5 totheInterimFinancialStatements. Detailedcurrentassetsaccordingtoelectricitychainsegmentsareasfollows: Generation Segment Current assets for the generation segment as of March 31, 2012 amounted to approximately NIS 7,588 million, deriving mainly from trade receivables due to the sale of electricity amounting to approximately NIS 3,437 million (this section is attributed to segments according to the ratio of revenues). Fuels inventory (fully attributed to the generationsegment)amountingtoapproximatelyNIS2,198millionandfromabalanceofcash andcashequivalentsofapproximatelyNIS396million. Transmission Segment Current assets amounted to approximately NIS 895 million, deriving mainlyfromtradereceivablesduefromthesaleofelectricityandfromthebalanceofthecash andcashequivalents. Distribution Segment Current assets amounted to approximately NIS 1,800 million, deriving mainly from trade receivables due to electricity sales and from balances of cash and cash equivalents. b) NonCurrentAssets 1) The Company holds funds to cover its pensionrelated liabilities in a central provident fund for pension, the balance of which is approximately NIS 21,603 thousand as of March 31, 2012, comparedtoNIS20,656thousandinthecorrespondingperiodlastyear.Fordetails,seeNote4to theInterimFinancialStatements. 2) The Company holds amounts in a trust account with respect to additional pension liabilities, the balanceofwhich,asofMarch31,2012,isapproximatelyNIS2,061millioncomparedtoNIS1,934 millionasattheendofthesameperiodlastyear. TheLongTermLiabilitiesaccordingtotheElectricitySegmentsareasfollows: ThegenerationsegmentNIS33,228million; ThetransmissionsegmentNIS14,875million; ThedistributionsegmentNIS21,423million. c) InvestmentsinFixedAssets The sum total of investments in fixed assets for the reporting period amounted to approximately NIS 1,323 million, net, after offsetting consumer participation collected in the past amounting to approximately NIS 1 million, compared to approximately NIS 1,118 million for the same period last year, after offsetting consumers participation amounting to NIS 2 million, an increase of approximatelyNIS205million,arateofapproximately18.31%.

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 2. FinancialCondition(continued) c) InvestmentsinFixedAssets(continued) CompanyinvestmentsinFixedAssetsintheReportingPeriodwereasfollows: Inpowerstations,combinedcyclegasturbinesandbuildingsatotalofapproximatelyNIS519million, in substations and high voltage lines a sum of approximately NIS 167 million, in grids a sum of approximatelyNIS285millionnet,investmentsinultrahighvoltagelinesasumofapproximatelyNIS 39million,investmentsinvehiclesandmobilemechanicalequipmentofapproximatelyNIS20million, investments in computers and office equipment inventory of approximately NIS 18 million, investments in telecommunications a total sum of approximately NIS 13 million, investments in metersinasumofapproximatelyNIS21million,inotherinvestmentsasumofapproximatelyNIS24 millionaswellasanincreaseinlongtermstoragecapacityinatotalofapproximatelyNIS218million. Consumers'participationintheconstructionoffixedassetsofapproximatelyNIS1million. Detailedinvestmentsinfixedassetsaccordingtoelectricitychainsegmentsareasfollows: Generation Segment Fixed assets for the generation segment as of March 31, 2012 amounted toapproximatelyNIS28,547million; Transmission and Distribution Segments For the transmission and distribution segments, fixed assets amounted to approximately NIS 14,132 million for the transmission segment and for the distributionsegmentapproximatelyNIS18,680million; Direct assets were attributed to the appropriate segments and the joint assets (some 3.03% of the Companys assets) were divided according to distribution keys that the Company assesses to be a reasonable estimate for attributing these assets. During the period covered by the report, the Company invested a total of approximately NIS 531 million, approximately NIS 206 million and approximately NIS 306 million in direct assets in the generation, transmission and distribution segments, respectively. In addition, a sum of approximately NIS 280 million was investedinjointproperty. d) CurrentLiabilities 1. Suppliersandserviceproviders The change derives from increased obligations to suppliers with respect to fuels, due to higher fuelscosts.

2. Tradepayables The change in trade payables arises mainly from an increase in interest payable with respect to fundsraisedinthereportperiod.Seedetailsinsectiona2ebelow. DetailedCurrentLiabilitiesaccordingtoElectricityChainSegmentsareasfollows: Generationsegment NIS5,709million; Transmissionsegment NIS1,789million; Distributionsegment NIS2,931million. The amounts are derived mainly from obligations to banking corporations and credit providers, liabilitiestosuppliersandserviceproviders. e) NonCurrentLiabilities On March 31, 2012, the Company had noncurrent net liabilities equaling approximately NIS 53,517 million,comparedtoNIS55,236millionasofMarch31,2011.ThelongtermliabilitiesoftheCompany include debentures, long term liabilities to banking corporations and other liabilities amounting to approximatelyNIS40,535millionasdetailedbelow: NIS 20,896 million in foreign currency, NIS 18,474 million index linked, NIS 933 million unlinked and hedge agreements (swap and forward contracts) amounting to approximately NIS 232 million. Of the Companys foreign currency liability listed above: NIS15,502 million in USD,NIS 2,026million in Euros andNIS3,368millioninJapaneseYen. The Company also has debentures owed to the State of Israel amounting to approximately to NIS 2,453million.

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 2. FinancialCondition(continued) e) NonCurrentLiabilities(continued) ThedecreaseintotalnoncurrentliabilitiesoftheCompanyasofMarch31,2012,comparedtoMarch 31, 2011, derives mainly from a decrease in the section of long term regulatory liability, net, pursuant to classifying fuels a long term regulatory asset in accordance with the decision of the Electricity AuthorityonMarch22,2012(seeNote5totheInterimFinancialStatements). The Electricity Authority decided to transfer the real exposure to the currencies basket, amounting to approximately NIS 6.2 billion, out of these liabilities of the Company, to the electricity consumers and to the creation of a regulatory liability with respect to the financing its liabilities. The Company is exposedtorealchangesincurrencyratesforitsliabilitiesexceptwhensuchexposureistransferredto the consumers as above and when they are used for construction with financial expenses being capitalizedtofixedassets. Sotominimizethisexposure,theCompanyhasenteredintothefollowinghedgetransactions: 1) CurrencySwapTransactions InMillionsofNIS Purchaseof: U.S.Dollar 10,652 Euro 1,739 Yen 3,019 LinkedNIS 87 PoundsSterling 241 15,738 InReturnfor: LinkedNIS 14,039 NIS 743 Euro 221 PoundsSterling 245 U.S.Dollar 237 15,485 As a result, as of the statement of financial position date, the Company had long term debit balances for these transactions, amounting to approximately NIS 253 million (before current maturities equaling NIS 118 million) The Swap transactions include hedge transactions on equipment purchased. The balance of these transactions on the statement of financial position dateisNIS30million. 2) Forwardcontracts: EuroNIScontracts avolumeofNIS47million. DollarNIScontracts avolumeofNIS89million. NISEurocontracts avolumeofNIS173million. The Company does not have long term balances with respect to the aforementioned forward contracts. 3) InterestRateSwapcontracts: TheCompanyentersintointerestrateswapcontracts(IRS)inwhichitexchangesvariableinterest withfixedinterest,asfollows: EurocontractsintheamountofNIS1,456million. DollarcontractsintheamountofNIS560million. The Company has long term credit balances as on the statement of financial position date for thesetransactions,amountingtoNIS17million(beforecurrentmaturitiesequalingNIS9million).

10

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 2. FinancialCondition(continued) e) NonCurrentLiabilities(continued) Distribution of long term Company NonCurrent Liabilities according to Electricity Chain Segments are asfollows: Generation Segment As of March 31, 2012, long term loans and debentures (debentures, liabilities to banking corporations and others and other liabilities) for the generation segment amountedtoapproximatelyNIS22,808million. TransmissionSegmenttheseliabilitiesamountedtoapproximatelyNIS8,492million. Distribution Segment distribution segment liabilities amounted to approximately NIS 11,688 million. Long term loans and debentures were mainly attributed to the segments according to the distribution ratio of fixed assets and according to the manner of financing the Companys assets accordingtotherateprinciples. Company Liabilities with respect to EmployeeEmployer Relations according to Electricity Chain Segmentsareasfollows: Generation Segment Liabilities deriving from other severance benefits were attributed to segments according to current salary ratios in operations and as of March 31, 2012 amounted to approximatelyNIS1,395millionforthegenerationsegment, Transmission Segment the said liabilities amounted onMarch31, 2012 toapproximately NIS217 millionforthetransmissionsegment. DistributionSegmentthesaidliabilitiesamountedonMarch31,2012toapproximatelyNIS1,068 millionforthedistributionsegment. f) DeferredTaxes The deferred taxes liability of the Company as of March 31, 2012 increased by approximately NIS 857 million charged against expenses in the statement of operations / comprehensive income and loss arisingfromboththeincreaseofthetaxratefrom18%to25%andlossesincurredbytheCompany. g) ShareholdersEquity The shareholders equity as of March 31, 2012 amounted to approximately NIS 15,863 million comparedtoNIS18,266millionasofMarch31,2011,adecreaseofNIS2,403million. Rateofequitytogrosstotalassetsasof: March31,2012 March31,2011 December31,2011 20% h)FinancialRatios 22% 21%

Ratiobetweencurrentassetsandcurrent liabilities(currentratio) Ratiobetweencurrentassets,netofinventory, andcurrentliabilities(quickratio)

March31, 2012 99% 76%

March31, December 2011 31,2011 119% 117% 94% 94%

11

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 2. FinancialCondition(continued) h) FinancialRatios(continued) TheFinancialRatiosoftheCompanyaccordingtotheElectricityChainSegmentsareasfollows: March31, March31, December31, 2012 2011 2011 NISinmillions Ratiobetweencurrentassetsandcurrentliabilities (currentratio) GenerationSegment 133% 146% 145% TransmissionSegment 50% 108% 74% DistributionSegment 61% 82% 84% Ratiobetweencurrentassets,netofinventory,and currentliabilities(quickratio) GenerationSegment 94.3% 100% 107% TransmissionSegment 47% (10%) 69% DistributionSegment 59.5% 100% 82% 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding PeriodinthePreviousYear a) StatementsofOperationandComprehensiveIncomeinMillionsNISfortheThreeMonthsEndedOn: 31/03/12 % 31/03/11 % Change Change% Note No. NISinmillions Revenues a3b) 6,520 5,211 1,309 25% Costofoperatingtheelectricitysystem a3c) 5,983 92% 4,033 77% 1,950 48% Profitfromoperatingtheelectricitysystem 537 8% 1,178 23% (641) (54%) Salesandmarketingexpenses 276 4% 226 4% 50 22% Administrativeandgeneralexpenses 223 3% 187 4% 36 19% Expenses(income)fromliabilitiesto pensioners,net a3d) 1,505 23% 141 3% 1,364 Income(loss)fromcurrentoperations (1,467) (23%) 624 12% (2,091) Financialexpenses(income),net a3e) 477 7% 456 9% 21 5% Income(loss)beforetax (1,944) (30%) 168 3% (2,112) Expenses(income)incometaxes a3f) (476) (7%) 21 0% (497) Netincome(loss) a3g) (1,468) (23%) 147 3% (1,615) b) Revenues Net revenues from the sale of electricityfor the reportingperiod from the sale of 13,844 million kWh, amounted to approximately NIS 6,453 million, compared to approximately NIS 5,150 million from the sale of 12,599 million kWh for the same period the previous year. This consists of an approximately NIS1,303millionincreaseinrevenues,anincreaseofapproximately25.3%. The peak of electricity demand of the economy for the reporting period was in January, reaching 11,090 megawatts, including 10,620 megawatts produced by the Company, about 423 megawatts producedbyprivateproducersandindependentproducers,andapproximately43megawattsthrough otheragreements,wheretheavailablestandardcapacityoftheCompanythenwas11,000megawatts, compared to the peak electricity demand of the economy in February of the previous year of 9,725 megawatts, including 9,395 megawatts produced by the Company's units, about 330 megawatts produced by private producers and independent producers, where the available standard capacity of theCompanythenwas10,420megawatts.

12

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding PeriodinthePreviousYear(continued) b) Revenues(continued) Thechangeinrevenuesnotedabovederivesfromtworeasons,whichare: - An increase of approximately NIS 794 million as a result of a real increase in average income per kWh (an increase of approximately 15.42% compared to a decrease of approximately 23.31% for thesameperiodthepreviousyear). - An increase of approximately NIS 509 million as a result of an increase in consumption (an increase of approximately 1,315 million kWh, which constitutes an increase of approximately 9.88%comparedtoadecreaseofapproximately11.38%forthesameperiodthepreviousyear). Seasonality affected by the weather during the winter and summer seasons, the average electricity consumptionishigherthanthatinthetransitionalseasons,andisoftencharacterizedbydaysofpeak demandduetoextremecoldorhotconditions.Electricityratesforconsumerspayingbyloadandtime, which represent some 60% of KWh consumed, are higher on average in winter and summer than in thetransitionalseasons. DetailsofCompanyRevenuesaccordingtoElectricityChainSegmentsareasfollows: Generation Segment Net revenue deriving from sales of electricity in the generation segment in the cumulativeperiodamountedtoapproximatelyNIS5,361millioncomparedtoapproximatelyNIS4,117 millions in the same period last year, an increase in revenue of approximately NIS 1,244 million. The change in revenue derives from two main factors: An increase of approximately NIS 838 million deriving from a real increase of the electricity rate and also from an increased consumption of approximately 1,245 million kWh, a rate of 9.88%, constituting an increase of approximately NIS 407 million. Transmission Segment Net revenue deriving from sales of electricity for the transmission period in thecumulativeperiodamountedtoapproximatelyNIS437millioncomparedtoapproximatelyNIS399 millioninthesameperiodlastyear,anincreaseinrevenueofapproximatelyNIS38million. Distribution Segment Net revenue deriving from sales of electricity for the distribution segment in thecumulativeperiodamountedtoapproximatelyNIS655millioncomparedtoapproximatelyNIS634 millioninthesameperiodlastyear,anincreaseinrevenueofapproximatelyNIS21million. c) OperatingCostsoftheElectricitySystem OperatingcostsoftheelectricitysysteminthereportingperiodamountedtoapproximatelyNIS5,983 million, compared to approximately NIS 4,033 million in the same period last year, an increase of approximatelyNIS1,950million,derivedmainlyfromtheconsumptionofmoreexpensivefuels. 1) DepreciationandAmortization (a) Depreciation and amortization expenses presented in the statement of operations for the reporting period amounted to approximately NIS 1,212 million, compared to a total of approximately NIS 1,122 million for the same period the previous year, which constitutes an increaseofapproximatelyNIS90million. (b) Adecreasedprovisionwithrespecttononrecognitionoffixedassetsconstructioncosts,with respectto assets costthat is not recognized inthe rate of approximately NIS5 millionfor the period,compared to an increase in the provision of approximately NIS 13 million in the same periodinthepreviousyear,adecreaseofapproximatelyNIS18million.

13

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding PeriodinthePreviousYear(continued) c) OperatingCostsoftheElectricitySystem(continued) 2) Detailed Depreciation and Amortization Expenses according to Electricity Chain Segments are as follows: Generation Segment depreciation and amortization expenses presented in the statement of operations for the generation segment for the cumulative period, amounted to approximately NIS 690 million, compared to NIS 597 million for the same period the previous year, an approximate NIS 93 million increase (the Company decreased a provision with respect to non recognition of fixed assets construction costs in the generation segment of approximately NIS 5 million for the cumulative period, compared to increasing the provision of approximately NIS 13 millionforthesameperiodinthepreviousyear). Transmission Segment depreciation and amortization expenses presented in the statement of operationsforthetransmissionsegmentforthecumulativeperiod,amountedtoNIS224million, comparedtoNIS218millionforthesameperiodthepreviousyear,anapproximateNIS6million increase. Distribution Segment depreciation and amortization expenses presented in the statement of operations for the distribution segment for the cumulative period, amounted to approximately NIS 293 million, compared to approximately NIS 320 million for the same period the previous year,anapproximateNIS27milliondecrease. 3) FuelsCost Thecostoffuelsconsumed(withoutthesalarycomponent)inthereportingperiodamountedtoa sum of approximately NIS 5,102 million and a sum of approximately NIS 5,152 million (including the salary component), compared to approximately NIS 2,217 million (without the salary component) and a sum of approximately NIS 2,253 million (including the salary component) for the same period the previous year. An increase of approximately NIS 2,885 million (without the salary component) and of approximately NIS 2,899 million (with the salary component), which constitutesanincreaseofapproximately130%(withoutthesalarycomponent)andapproximately 129%(withthesalarycomponent),islargelyexplainedasfollows: (a) An increase in the cost of diesel fuel consumed of approximately NIS 2,820 million, arising fromthelateralorderoftheMinistryofEnvironmentalProtection,requiringtheuseofdiesel fuel before crude and a decrease in the diesel fuel consumption cost due to a real price decrease amounting to approximately NIS 788 million (a decrease of approximately 1,515 in the average cost per ton compared to the same period the previous year) as a result of the reducedpurchasetaxondiesel. (b) Increased cost of consumed natural gas of NIS 55 million and a decrease in the quantity of natural gas consumed of approximately NIS 356 million (an increase of approximately 152 in theaveragecostpertoncomparedtothesameperiodthepreviousyear). (c) An increase in the cost of crude consumed, arising from a real price increase, amounting to approximately NIS 90 million (an increase of approximately 385 in the average cost per ton compared to the same period the previous year) and an increase in the quantity of crude consumptionofapproximatelyNIS694million. (d) An increase in the cost of coal consumption due to a real price increase amounting to approximately NIS 269 million (an increase of approximately 81 in the average cost per ton compared to the same period the previous year) compared to the increased amount of coal consumedamountingtoNIS115million. Thechangeinthefuelsmixinthereportingperiodwasmainlyinfluencedbyexogenousfactors: 1. Decrease in the quantity of gas consumed (see section 1 b1 above), due to the shortage in natural gas caused by disruptions in the gas supply from Egypt and depletion of the natural gasreserveofYamThetis,resultingintheuseofamoreexpensivefuelsmix. 2. Increased cost of coal the price increase is due to an increase of the import tax on coal ("Purchase Tax"), according to a decision of the Government on July 15, 2010, from NIS 10 pertonin2010toNIS45pertonin2011.

14

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding PeriodinthePreviousYear(continued) d. Expenses(Income)withrespecttoLiabilitiestoPensioners Expensesderivingfromliabilitiestopensioners,net,inthereportingperiodamountedtoapproximately NIS 1,505 million, compared to expenses of approximately NIS 141 million, a change of approximately NIS 1,364 million. The change derives from the new salary agreement linking pensions to the CPI. See details of the new salary agreement in section 14.6.4 in The Description of the Companys Business Affairs in Chapter A of the Annual Financial Statements and in Note 4 to the Interim Financial Statements. See details of the agreements with the Supervisor of Wages and Work Agreements in Note 4 e to the InterimFinancialStatements. Detailed Expenses Deriving from Liabilities to Pensioners, Net, according to Electricity Segments are as follows: Distributing pension expenses between the various segments is done by the current salary ratio in operating costs for the electricity chain existing in the reporting period: 52.07% in generation, 8.09% in transmissionand39.84%indistribution.

15

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding PeriodinthePreviousYear(continued) e. FinancialExpenses The increase in financial expenses for the cumulative period compared to the same period in the previousyear,areasfollows:

DifferenceSumAnalysis Difference A.ErosionofFinancialLiabilities Increase in income from the erosion of financial liabilities in foreign currency amounting to NIS 351 million net after deposits, deriving fromanincreaseinrealrevaluationfromarateof1.92%forthesame (351) periodinthepreviousyearto3.59%forthereportingperiod Increaseinfinancingexpensesfromfinancialhedgecontracts 450 Totaldecreaseinfinancingincome 99 Increase in financial income from erosion transferred to the regulatory liability in the report year, compared to the previous year, according to the Electricity Authoritys decision with regard to the Companys exposure to foreign currency due to an increase in real revaluationoftheratebasket 82 Transition from financial expenses to income due to changes in the knownCPI,netafterdeposits (156) Decreased expenses from erosion of working capital, loans and receivablesitems (5) Total decrease in financing income due to erosion of financial liabilities 20

FortheThreeMonthsEnding 31/03/2012 31/03/2011 NISinmillions

(778) 592 (186)

(427) 142 (285)

165 (96) 13 (104)

83 60 18 (124)

B.OtherFinancialExpenses Increaseininterestexpensesinthereportingperiod Transition from financing income to expenses from interest swap transactions Decrease in expenses transferred to a regulatory asset for normative interestdifferences Decreaseinfinancialexpensesofloansandreceivables Totaldecreaseinotherfinancialexpenses: Totalincreaseinfinancialexpensesbeforecapitalization C.Capitalizationofconstructionprojects Increaseinthecapitalizationoffinancialexpenses Total increase in financing expenses in the reporting period, compared to the corresponding period in the previous year, after thetransfertoaregulatoryassetandaftercapitalizationoffinancial expenses PresentedintheFinancialStatements Otherfinancingexpenses,net Transferoffinancialexpensestoaregulatoryasset Financialexpensecapitalization Totalfinancialexpenses

25 25 10 (54) 6 26 5

634 4 (31) 32 639 535 58

609 (21) (41) 86 633 509 53

21

477 401 134 (58) 477

456 467 42 (53) 456

16

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 3. Comparison and Analysis of Operating Results for the Reporting Period compared to the Corresponding PeriodinthePreviousYear(continued) e. FinancialExpenses(continued) DetailedFinancialExpensesaccordingtoElectricityChainSegmentsareasfollows: Net financial expenses are divided between the various segments mainly according to the net ratio of operated fixed assets. Financial expenses in the generation segment: an approximate NIS 7 million increase. In the transmission segment: an approximate NIS 1 million increase and in the distribution segment:anapproximateNIS3millionincrease. f. TaxesonIncome Seedetailsofreasonsforthechangeinthedeferredtaxesinsection2fabove. g. NetIncome(Loss) The net loss in the reporting period amounted to approximately NIS 1,468 million, compared to a net profit of approximately NIS 147 million for the same period the previous year, a change of approximatelyNIS1,615million. 4. LiquidityfortheReportingPeriod a. General The cash surplus created from current activities, from taking long term loans and from other loans, was usedlargelytofinancedevelopmentactivityrequiredbytheelectricitysector,meaninginvestmentinfixed assetsamountingtoapproximatelyNIS1,069millionandfinancingthecurrentoperation,mainlyhighfuels costsincurredduringthereportingperiod. 1) CashFlowfromCurrentOperations: Cash flow from current operations for the period amounted to a negative flow of NIS 975 million, comparedtoapositiveflowofNIS899millioninthecorrespondingperiodlastyear. Thechangeincashflowfromcurrentoperationsderivesmainlyfromusingamoreexpensivefuelsmix, which will be collected in future from the consumers, and from increased expenses with respect to employeeemployerrelations(seesectiona3dabove). 2) CashFlowforInvestmentActivities: Cash used for investment activities in the period reached a negative flow of approximately NIS 1,036 million,comparedtoanegativeflowofNIS1,159millioninthecorrespondingperiodlastyear. 3) CashFlowfromFinancingActivity: Cash flow from financing activities in the report period amounted to a positive flow of approximately NIS1,716million,comparedtoapositiveflowofapproximatelyNIS1,603millioninthecorresponding periodlastyear. Thechangeincashflowfromfinancingactivitiesderivedmainlyfromadecreaseinrepaymentoflong term debentures and a decrease in issuing of long term debentures in foreign currency. See details in sectionbbelow. SeemoredetailsontheCompany'scashflowconditioninsectionbbelow. b. FinancingSources 1) General The Company finances its actions from its own sources, from offering debentures in Israel and abroad and from loans from banking corporations in Israel and abroad. Details of the debentures issued by theCompanyduringthereportperiodandofloansreceivedfrombanksarepresentedbelow: (a) On February 10, 2012, the Company offered debentures in the international market in the amount of $ 500 million, to certified institutional buyers in the U.S.A., according to Rule 144A of theU.S.SecuritiesAct1933andoutsidetheU.S.A.,basedonRegulationSofthatAct.

17

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 4. LiquidityfortheReportingPeriod(continued) b. FinancingSources(continued) 1) General(continued)

(b) Afterthestatementoffinancialpositiondate,onApril10,2012,theCompanyissuedinstitutional debentures ("NIS Electricity 2013" series) in the Israeli capital market in the amount of approximatelyNIS1.5billion,tobepaidoffonApril10,2013.Seedetailsoftheprivateplacement of debentures in the immediate report of the Company on April 5, 2012 (Ref. No. 201201 097548).

2) LongTermLoans a. Over the course of the reporting period, debentures in foreign currency were issued in a total of approximatelyNIS1,857million. b. ThebalanceofloansandlongtermandextendedtermdebenturesasofMarch31,2012,without debenturestotheStateofIsrael,isapproximatelyNIS40,535million,detailedasfollows:

LiabilitiesinIndexLinkedNIS Indexlinkeddebenturestothepublic Otherindexlinkedloans TotalLinkedNIS NonlinkedNISdebenturesinpublicofferings NonlinkedNISloans TotalNonLinkedNIS

1)

MillionsofNIS 19,535 1,625 21,160 657 250 907 2,508 4,804 260 8,359 15,931 3,394 2,596 1 43,989

DollarLinkedLiabilities Moneyraisedfromaprivateofferingforthesaleofdebenturesinthe USinUSDollars LoansinUSDollars 2) Moneyraisedfromaprivateofferingforthesaleofdebenturesin EuropeinUSDollars OfferingtoinstitutionalinvestorsinEuropeandtheUS,tradedonthe Singaporestockexchange,inUSDollars TotalinLinkedtoUSDollars MoneyraisedfromaprivateofferingforthesaleofdebenturesinJapan inyen LoansinEuros LoansinSwissFrancs Total

Lessdiscounts/premiumsondebentures,currentmaturities,issuance (3,812) expensesandhedgeagreements,net Totaldebenturesandliabilitiestobanksandothers 40,177 Longtermaccountspayable 358 Total 40,535 1) IncludingloansguaranteedbytheStateofIsraelequalingNIS330million. 2) IncludingloansguaranteedbytheStateofIsraelequalingNIS761million. 3) Long Term Credit Period Average as March 31, 2012 The credit was received from banks and others. The average credit for the reporting period was approximately NIS 45,790 million and consisted mainly of long term loans and debentures (including hedge, postponed, premium and discountingofdebenturestransactions).

3) ShortTermCredit AverageShortTermCreditreceivedfrombanksandothers,asofMarch31,2012wasapproximatelyNIS 5,037 million and consisted mainly of short term loans, overdrafts and current maturities of longterm loans.

18

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 a. ExplanationsoftheBoardofDirectorsontheBusinessConditionoftheCompany(continued) 4. LiquidityfortheReportingPeriod(continued) 4) SuppliersandCustomersCredit Average Suppliers Credit Period as of March 31, 2012 is approximately 31 days. Average credit from suppliersforthereportingperiodamountedtoapproximatelyNIS2,755million. Average Customers Credit Period as of March 31, 2012 is approximately 49 days. Average credit to customersforthereportingperiodamountedtoapproximatelyNIS3,739million. b. DetailsabouttheExposuretoMarketRisksandtheirManagement 1. TheCompany'sMarketRiskManager TheCompany'spersonresponsibleformarketriskmanagementistheSeniorVicePresidentofFinanceand Economics, Mr. Harel Zeev Blinde. For details of his education, qualifications and business experience see Regulation 26a (Details of a Senior Position Holder in a Corporation), in Chapter D of the Annual Financial StatementsoftheCompanyfor2011. 2. DescriptionoftheCompanysMarketRisks The Company sells its product, electricity, at a price set by an outside body, namely, according to the rate determinedbytheElectricityAuthority.Determinationoftherateisbasedontheprincipleofthedifferent componentsintherate,whichoccasionallydonotmatchtheCompanysactualcosts. As a result, regarding the bulk of its activities, the Company is not exposed to market risks, with the exceptionofthefollowing:SeealsoNote27totheAnnualFinancialStatements. a) CurrencyRisks ThemajorpartoftheCompany'srevenuesisnominallyinNIS.Atthesametime,asofMarch31,2012, an amount of NIS 20,896 million is in foreign currency and constitutes 52% of the long term obligations of the Company (without permanent bonds, before entering into hedging transactions). Therefore, fluctuations in exchange rates cause changes in the financing expenses of the Company thatmayaffectthefinancialresultsoftheCompany. Due to the considerable volume of the long term obligations in foreign currency, the business results oftheCompanyareexpressedingainsorlosses,affectedbyfluctuationsintheNISforeigncurrency exchangerates. WhentheElectricityAuthoritydeterminedtheelectricityrateforthegenerationsegment,itdefineda new hedging mechanism for each segment of the electricity supply chain. The hedging mechanism is updated on the annual update of the electricity rate date, according to Company liabilities denominated in foreign currency, which are recognized by the Electricity Authority. This recognition will decrease gradually up to the complete cancellation of the hedging mechanism in April 2013, accordingtothefollowingschedule: StartingPoint 36% April2010 27% April2011 18% April2012 9% April2013 0% In accordance with the decreasing schedule of the hedging mechanism, the Electricity Authority reducedinApril2011thefinancingcomponentlinkedtoforeigncurrency,recognizedintheratefrom 27%, to a rate of 18% of recognized foreign capital ("hedged sum"), linked to a "determining basket" defined by the Electricity Authority as linked to the U.S. Dollar and the Euro at the rate of 75% and 25%, respectively. The hedged sum is intended to reflect part of the financing expenses/income derivedfromtheexposureoftheCompanytoforeigncurrencyandtransferittoelectricityconsumers. As a result of the decision of the Electricity Authority to decrease the rate of the hedged financing component in the rate, the Company was required to increase the volume of hedging transactions in thecapitalmarket.

19

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 2. DescriptionoftheCompanysMarketRisks(continued) a) CurrencyRisks(continued) Regardingthebalanceoftheexposure,inexcessofthehedgedamountintherate,theCompanytook variousstepsintendedtoreducetheeffectoffluctuationsinexchangeratesbydecreasingthebalance of the exposure to foreign currency, by entering into hedging transactions. Yet, the market capacity maybelimitedandcauseadeviationintheCompany'sexposuretoforeigncurrencyinrelationtothe desiredexposurerateaccordingtotheCompany'spolicy. The Company is also exposed to exchange rates fluctuations deriving from part of the procurement agreementsofgoodsandservicesforbuildinggenerationunits,asfollows: Purchase cost of generation units equipment was determined normatively according to the GTH price list,publishedinU.S.Dollars.TheElectricityAuthorityrecognizesthepurchasecostinforeigncurrency translatedintoNISattheknownexchangerateonthenormativepurchasedate.Hence,theratedoes not provide hedging against changes in index rates versus changes in foreign currency rates after the purchasedate. If the Company will be required to present its financial statements in accordance with the complete IFRS principles, the Company will not be able to record a regulatory asset/ liability. Therefore, the hedging mechanism in the electricity rate, designed to hedge certain obligations in foreign currency will be implemented in adifferent mode inthe financial statementsandmaycause fluctuations in the financial expenses of the Company, due to a gap between the change rate of the CPI and the change rateofthedeterminingbasket. b) InterestRisks The Company is exposed to the difference between the interest rate recognized (in foreign currency and NIS) in the rate base, which is only updated upon the yearly rate update, and the interest rate (in foreign currency and NIS) with respect to its actual liabilities. This exposure may affect the financial resultsoftheCompany. The Company is exposed to the difference between the interest recognized in the rate base, which changes only on the annual rate update and the actual interest rate with respect to its financial liabilities. c) CapitalizationofLoancosts Financing and capital costs with respect to the construction of fixed assets, which are recognized in the electricityrate are recorded as part of asset underconstruction. When it is highly likely thatthese costs will be recognized in the rate, the costs are capitalized to assets under construction until the date on which these assets are ready for the intended use. Capitalization of financing costs with respect to construction is recorded as decreased financing expenses. Capitalization of capital costs with respect to construction is recorded as other income, according to section 15 to the American SFAS71standard. The Company is exposed to the difference between the interest recognized for capitalization accordingtotherateandtheactualinterestrateforcapitalization. d) InputPriceChange Theinputbasketfortheotherratecomponents,exceptforfuelscosts,partoftheoperatingcostsand part of the capital costs was linked to changes in the CPI. Therefore, the Company is exposed to market risks deriving from a real increase in the prices of inputs, which reflect the components of the rate. The input basket of therate components,except fuels costs and part of the operationcosts, was determinedaslinkedtotheCPI.Therefore,theCompanyisexposedtomarketrisksarisingfromareal increaseofthisinput.

20

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 2. DescriptionoftheCompanysMarketRisks(continued) e) CapitalMarketChangesAffectingthePensionFundsandPensionObligation The Company is obliged to maintain an appropriate financial fund in the Central Pension Fund (the Fund) that will enablepensionpayments to entitledpensioners and employees of Generation A and Generation B, according to the actuarial liability, calculated by the actuary of the Fund. The Fund calculates the actuarial liability of the Company for employees in the pension plan to determine the sumthattheCompanyshoulddepositasafund. Accordingtothisliability,theCompanywillberesponsibleformakingupanydeficitbetweentheFund and the liability. At the same time, there is a particular uncertainty regarding the volume of deposits thatthePensionFundwillrequire. ThedepositsinthepensionfundoftheCompanyarebasedonaforecastofcashflowsexpectedinthe future and several actuarial assumptions. The actual pension liabilities of the Company are expected to differ from the forecasted liabilities. Moreover, the actuarial model for calculating the deposits in the pension fund may change in the future according to changes in life expectancy, regulatory issues, economic climate and other issues. These changes may cause a surplus or a deficit in the Company's liabilitiestothepensionfund. Inthiscontext,themainriskstowhichtheCompanyisexposedare: 1) TheinvestmentpolicyoftheFundanditseffectontheFundThefundheldbytheFundincludes various assets, comprises mostly of Government debentures and CPI linked bank deposits. Therefore,theyieldoftheFundisaffectedbytheinherentrisksofmarketsbehavioranditseffect onthecompositionandvalueoftheassetsinthefund. 2) Average duration risks the changes in yields of Government debentures have a higher effect on thefinancialvalueoftheliabilities(thereserve)comparedtothefinancialvalueoftheassets(the fund) caused by the longer average duration of the reserve compared to that of the fund. Reduction of market risks requires therefore diversification of investments in terms of the mix of heldfinancialassets,theaverageduration,creditratingetc. 3) CreditrisksfailureofathirdpartytomeetitsobligationstotheFundmaydecreasethevalueof Fundassets. 3. TheCompanysPolicyforManagingMarketRisks Asarule,theCompanyactsinthematteroffinancesandinvestments,accordingtolaw,soastominimize costs and achieve maximum returns, while spreading its investments throughout various financial institutions. The policy of the Company is to manage market risks arising from economic exposure of the Companytocurrencyrisks. TheCompany'spolicyformanagingthemarketriskstowhichitisexposedisasfollows: a) TheCompanyspolicyforManagingMarketRisksofExposuretoCurrencyRisks The Company's policy is to manage market risks arising from the economic exposure of the Company. In order to minimize the Companys exposure to foreign currency fluctuations, the Board of Directors oftheCompanyhasreachedthefollowingdecisionsconcerningtheCompanysexposure: 1) The sum of real exposure due to liabilities linked and denominated in foreign currency passed on to electricity consumers as the hedging component in the rate, the Company will execute foreign currency hedge transactions (mainly swap and forward) to conform the expense structure to the recognized revenue structure according to the makeup of the determining basket, defined by the Electricity Authority. The swap transactions will be for a minimum of one year. As a rule, transactions shall be executed in order to cover at least 85% of the balance of exposure, so that the amount exposed in each currency will not surpass the cumulative value of 15% of the loan balanceinthecurrencyinquestion. 2) Concerning the balance of exposure of the Company's foreign currency liabilities, which are not includedinthehedgingcomponentoftheelectricityrate(afterimplementingparagraphaabove) the Company shall enter into hedge transactions (mainly forward and swap), if market conditionsjustifyit,soastominimizeexposuretoforeigncurrency. Swap transactions shall be for a minimum of one year taking into account inflation in Israel and Westerncountries,alongwithcapitalmarketinterestrates.

21

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 3. TheCompanysPolicyforManagingMarketRisks(continued) 3) To enable dynamic implementation of the policy and to avoid random technical exceptions, the Company's Senior VP of Finance and Economics instructed on July 11, 2011, to prevent the exposureamountineachcurrencyfromanupordowndeviationof5%ofthebalanceoftheloan inthatcurrencywithanadditionof2%ofthebalanceoftheloansforeach1%inthegapbetween interest,ifitisnegativetothedebitoftheCompany. 4) The instruction of the Senior VP of Finance and Economics permits a deviation in excess of 15% only if the amount of the exposure is no greater than $10 million or the equivalent of that sum in any other foreign currency, each foreign currency separately. At the same time, every quarterly report submitted to the Board of Directors on the exposure to currency condition indicates that forreasonsofflexibilityandmateriality,whenevertheamountofthecurrencyexposuredoesnot exceedthesumequivalentto$10million,adeviationfrom15%isallowed. 5) The Company will consider possible hedging transactions to spread the exposure to interest in foreign currency (variable/fixed interest) for the purpose of reducing the exposure to rising interestrates,ifmarketconditionswilljustifyit. 6) Pursuant to the aforementioned in section a above, the Company recently started to conduct hedging transactions for procuring goods and services in foreign currency. The Company conducted hedging transactions with respect to purchased stage B of the emergency project duringAugust2011. b) ThePolicyoftheCompanytoContendwithMarketRisksAffectingthePensionFund The Company acts to deal with market risks affecting the ability of the Fund to effect payments to entitledemployeesoutofitsassets,asfollows: 1) On all matters regarding the funds, the Company designates the market risks management to economicexposure. 2) A dedicated department is charged with the task of controlling the financial activity of the Fund and supervising the conformance to legal directives and the management services agreement betweentheCompanyandthemanagementcompanyoftheFund. 3) The Company has a representative on the Fund's Board of Directors and in its committees (in addition to a representative of Company employees). These directors participate in defining the suitable policy for managing the funds, including providing a solution to the risk of average duration gaps between the assets and the liabilities by adjusting, as best as possible, the average duration of the assets to investments, with due consideration of the borrower's risks and investment volume and also investing the majorshareofFundassetsinNISlinkedassets. 4) Aiming to reduce the fluctuations in transfers to the Fund, mainly due to the change in the yields curveforcapitalizingtheactuarialliability,theCompanyactedtospreadthe"exceptionaldebt". 5) OnNovember15,2010,thechangeinthearticlesoftheMainPensionFundwasapprovedbythe SupervisoroftheCapitalMarketintheMinistryofFinance. 6) The Fund manages the pension funds according to its policy and not according to the Company's policy. It is known that the Fund is comprised of different assets, mainly Government debentures and index linked deposits in banks. Therefore, the yield of the Fund is affected by the inherent risksofmarketsbehavioranditsaffectonthecompositionandvalueoftheassetsintheFund. c) The Scope of Authority in the Companys Management in Managing the Exposure to Foreign Currency As per the Companys policy concerning the treatment of exposure deriving from market risks, as detailed above, the Head of the Finance Department is authorized to approve currency exchange transactions and interest swap transactions. The Head of the Finance Department is not limited to quantities related to consent to approve hedge transactions. Additional hedging transactions, e.g., options, etc., require the approval of the Senior VP of Finance and Economics. In addition, the Board of Directors has determined that certain Company employees shall perform, on behalf of the Company,hedgetransactionsinaccordancewithitspolicy.

22

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 3. TheCompanysPolicyforManagingMarketRisks(continued) d. SupervisingandRealizingtheRiskManagementPolicy 1) General The Company maintains a periodic system for the management of financial market risks by carryingoutmonthlytrackingofitsfinancialliabilitiesandtheirhedges. The Company tracks its liabilities over the reporting period and will perform hedges based upon its needs and according to set policy, after consultation and independent opinions from outside experts. 2) SupervisionbytheBoardofDirectors Eachquarter,whendiscussingthefinancialstatements,adetailedreportshallbedeliveredtothe BoardofDirectorsconcerningthecurrencyexposureattheendofeachquarter,whichisthemain exposure of the Company to Market risks, for which the Company has a policy in place, approved bytheBoardofDirectorsregardingthehedgingtransactionscarriedoutoverthecurrentquarter. 3) CompanyControlMechanisms TheCompany'sInternalAuditoccasionallytrackstheperformanceofdecisionsmadebytheBoard ofDirectorsanditscommitteesonthesubjectofexposuretocurrencyrisks,toprevent,interalia, deviation from the Company's policy for managing marketrisks. The audit is conductedaccording totheacceptedauditstandardsandtoworkplansapprovedbytheAuditCommitteeoftheBoard ofDirectors. The Company has an exposure team that monitors the progression of the exposure to the exchange rates in relation to the Company's financial liabilities once a month and recommends appropriatetransactions. e) FurtherDetailsConcerningtheManagementofFinancialMarketRisks 1) Events Concerning Exposure to Market Risks and Management of Market Risks after the StatementofFinancialPositionDate There are no events of exposure to market risks after the statement of financial positiondate. 2) ExposuretoForeignCurrencyandCPI Over the course of the reporting period the Company derived a loss of approximately NIS 586 million as a result of currency exchange transactions and a loss from forward transactions amountingtoapproximatelyNIS6million. The purpose of hedge transactions is to hedge the Companys exposure to foreign currency and their results are the reverse of the results of the exposure of the base asset the Companys foreigncurrencyliabilities.Therefore,onemustnotethattheaforementionedNIS592millionloss was offset by a profit derived from loan erosion, on account of which these swap and forward transactionsweremade. The Company has index linked financing expenses. However, these expenses are relatively stable and therefore create a lower accounting exposure for the Company than the fluctuations in currencyrates. 3) Thechancesoflossfromthevariousinvestments,andthedebtstotheCompanyasaresultofthe possibilitythattheopposingpartyinthetransactionortheCompanysdebtswillfailtomeettheir obligationsorintheabsenceofthepossibilitytolegallyenforcetheexistenceofadebt,areequal tothebalanceoftheseassetsintheCompanysbalancesheets. 4) The Company has no market risk from off balance sheet positions as the purpose of these transactionsispurelydefensive. f. LinkageBasisReport Seethefollowingpage.

23

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 3. TheCompanysPolicyforManagingMarketRisks(continued) f. LinkageBasisReport(continued) AsofMarch31,2012 (NISinmillions) Linkageto Japanese Yen 28 2,437 2,465 Linkageto other currency (3) (2) (5) Linkageto CPI (602) (9,332) (9,934) Unlinked 859 4,137 24 65 5,085 Total 861 4,137 396 1,424 6,818 Non monetary 326 2 7,146

Linkageto US$ Assets Cashandcashequivalents Tradereceivablesforsaleofelectricity Otheraccountsreceivable Longtermreceivables Total Liabilities Creditfrombanksandothercredit providers Tradepayables Othercurrentliabilitiesandprovisions Debentures,liabilitiestobanksand others LiabilitytotheStateofIsrael DebenturestotheStateofIsrael Total Total,Net 2 680 7,844 8,526

Linkageto Euro 260 412 681

Total 861 4,137 722 1,426 328

1,035 1,037 288 9,078 3,552 14,990 (6,464)

475 30 8 1,422 1,935 (1,254)

(5) 2,838 2,833 (368)

(2) 1 31 2 32 (37)

4,032 1,133 388 21,811 2,453 29,817 (39,751)

5 760 1,676 2,441 2,644

5,540 2,201 1,475 36,827 3,552 2,453 52,048 (45,230)

(46) (164) (29) (239) 567

5,494 2,201 1,475 36,663 3,523 2,453 51,809 (44,663)

a. The current electricity rate provides coverage for part of costs in respect of exposure to foreign currency or to linkage to foreign currency, through a hedging mechanism of approximatelyNIS6.2billion(75%accordingtotheU.S.Dollarand25%accordingtotheEuro)whichwillendinMarch2013. b. Someofthecostswithrespecttolongtermliabilitiesarecapitalizedtopropertyunderconstruction(seeNote7totheInterimFinancialStatements).

24

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 3. TheCompanysPolicyforManagingMarketRisks(continued) f. LinkageBasisReport(continued) AsofMarch31,2011 (NISinmillions) Linkageto Japanese Yen 1,142 1,142 (143) (143) Linkageto other currency Linkageto CPI 131 (1,277) (1,146) Unlinked 4,501 3,143 22 60 7,726 Total 4,653 3,143 295 1,120 9,191 Non monetary 194 2 196

Linkageto US$ Assets Cashandcashequivalents Tradereceivablesforsaleofelectricity Otheraccountsreceivable Longtermreceivables Total Liabilities Creditfrombanksandothercredit providers Tradepayables Othercurrentliabilitiesandprovisions Debentures,liabilitiestobanksand others LiabilitiestotheStateofIsrael DebenturestotheStateofIsrael Total Total,Net 1 270 907 1,178

Linkageto Euro 3 431 434

Total 4,633 3,143 489 1,122 9,387

140 608 340 9,557 3,810 14,455 (13,278) 502 77 9

2,264 2,852 (2,418)

(1,668) 2.946 1,278 (136)

105 1 30 (229) (93) (50) 1,926 947 351

3,512 644

4,517 1,633 1,374

24,175 2,458 29,857 (31,003)

1,558 5,714 2,012

40,271 3,810 2,458 54,063 (44,872)

(51) (229) (219) (499) 695

4,466 1,633 1,374 40,042 3,581 2,458 53,564 (44,177)

1) The current electricity rate provides coverage for part of costs with respect to exposure to foreign currency or to linkage to foreign currency through a hedging mechanism, amountingtoNIS8.8billion(75%versustheU.S.$and25%versustheEuro)tobeendedinMarch2013. 2) Someofthecostswithrespecttolongtermliabilitiesarecapitalizedtopropertyunderconstruction(SeeNote7totheInterimFinancialStatements).

25

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 3. TheCompanysPolicyforManagingMarketRisks(continued) g. Sensitivitytests 1.RiskaccordingtoFairValuewithrespecttointerestrates LoansbearingfixedinterestratesexposetheCompanytointerestrateriskfromfairvalue. Interestratessensitivityanalysis Sensitivityanalysisisdeterminedonthebasisofexposuretointerestratesofderivativeandnonderivative financialinstrumentsasofthestatementoffinancialpositiondate.Sensitivityanalysisofliabilitiesbearing variable interest is prepared under the assumption that the amount of the liability as of the statement of financialpositiondateremainedthroughoutthereportedyear. SensitivityAnalysisaccordingtoFairValue a) AsofMarch31,2012: Profit(loss)fromincreaseinmarket FairValue Profit(loss)fromdecreasein factor marketfactor Changeininterestrates,in Increaseof200 +10% +5% 5% 10% Decreaseof % basepoints* 200base points* NISinmillions Longtermloansatfixed interestrates (461) (125) (64) 5,708 64 129 532 Longtermloansatvariable interestrates 4,010 Marketabledebentures (945) (291) (149) 15,730 143 294 1,053 Nonnegotiabledebentures (2,033) (619) (315) 20,628 329 671 2,519 Swaptransactions 293 (190) (96) (236) 100 200 447 Forwardtransactions (11) Total (3,146) (1,225) (624) 45,829 636 1,294 4,551 b) AsofMarch31,2011: Profit(loss)fromincreaseinmarket FairValue Profit(loss)fromdecreasein factor marketfactor Changeininterestrates,in Increaseof200 +10% +5% 5% 10% Decreaseof % basepoints* 200base points* NISinmillions Longtermloansatfixed interestrates (496) (146) (76) 6,198 76 155 511 Longtermloansatvariable interestrates 4,617 Marketabledebentures (133) 9,925 Nonnegotiabledebentures (2,201) (485) (246) 21,092 258 526 2,577 Swaptransactions (17) (161) (82) 743 85 173 206 Forwardtransactions 1 1 222 (1) (1) (8) Total (2,714) (791) (536) 42,797 418 853 3,286 * The Company chose to present the extent of the change in interest for which it will conduct extremestestsforfinancialinstrumentsthataresensitivetochangesininterestratesattherateof 200basepoints(2%),afterauditingandfindingthatthereisnohigherdailyabsolutechangeinthe interest rate over the ten years prior to the report date and after estimating that a change of 200 basepointsisachangethatmayoccurinasevere,yetprobablescenariointhesameinterest.

26

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 3. TheCompanysPolicyforManagingMarketRisks(continued) g. Sensitivitytests(continued) 2) Analysisofforeigncurrencysensitivity(continued) ForeignCurrencySensitivityAnalysisatFairValue (a) AsofMarch31,2012 Loss(profit)from FairValue Loss(profit)from increaseinmarket decreaseinmarket factor factor Changeincurrencyratein% +10% +5% 5% 10% AccordingtoCurrencies NISinmillions Loansanddebenturespercurrency NIS 1,040 NISlinked 22,856 U.S.Dollar 1,699 849 16,986 (849) (1,699) Euro 260 130 2,597 (130) (260) Yen 260 130 2,596 (130) (260) PoundsSterling SwissFranc 1 Total 2,219 1,109 46,076 (1,109) (2,219) Swaptransactions NIS 743 NISlinked 13,952 U.S.Dollar (1,041) (521) (10,410) 521 1,041 Euro (151) (75) (1,506) 75 151 Yen (302) (151) (3,019) 151 302 PoundsSterling 4 Total (1,494) (747) (236) 747 1,494 Forwardtransactions NIS (42) U.S.Dollar (10) (5) (95) 5 10 Euro 13 6 126 (6) (13) Total 3 1 (11) (1) (3) (1) The Company is not exposed to the CPI due to an exception in accordance with the Government Companies regulations on rules for preparing financial statements of the Company (see Note 2 a to theInterimFinancialStatements). (2) Partofthecostswithrespecttolongtermliabilitiesarecapitalizedtofixedassets. (3) Part of the costs with respect to exposure or linkage to foreign currency is covered in the current electricityrate(seesectionfabove).

27

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 b. DetailsabouttheExposuretoMarketRisksandtheirManagement(continued) 3. TheCompanysPolicyforManagingMarketRisks(continued) g. Sensitivitytests(continued) 2) Analysisofforeigncurrencysensitivity(continued) ForeignCurrencySensitivityAnalysisatFairValue (b). AsofMarch31,2011

Changeincurrencyratein% Loansanddebenturespercurrency NIS NISlinked U.S.Dollar Euro Yen PoundsSterling SwissFranc Total Swaptransactions NIS NISlinked U.S.Dollar Euro Yen PoundsSterling Total Forwardtransactions NIS U.S.Dollar Euro Yen PoundsSterling Total

Loss(profit)from increaseinmarket factor +10% +5%

FairValue

Loss(profit)from decreaseinmarket factor 5% 10%

NISinmillions 1,238 311 266 1 1,816 (474) (52) (257) 18 (765) (193) (25) (49) (17) (284) 619 155 133 907 (237) (26) (29) 9 (383) (97) (13) (25) (9) (144) 1,039 22,634 12,382 3,107 2,657 4 8 41,832 1,038 7,358 (4,739) (515) (2,574) 176 744 3,070 (1,932) (252) (494) (170) 222 (619) (1,238) (155) (311) (133) (266) (907) (1,816) 237 26 129 (9) 383 474 52 257 (18) 765

(193) 97 193 13 25 25 49 9 17 144 284

(1) The Company is not exposed to the CPI due to an exception in accordance with the Government Companies regulations on rules for preparing financial statements of the Company (see Note 2 a to theInterimFinancialStatements). (2) Partofthecostswithrespecttolongtermliabilitiesarecapitalizedtofixedassets. (3) Part of the costs with respect to exposure or linkage to foreign currency is covered in the current electricityrate(seeNote1fabove).

28

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance 1. Contributions The Company is prevented from making contributions in light of Government Companies Authority directives. 2. DirectorsPossessingAccountingandFinancialSkills In accordancewith theSecurities Regulations, the Boardof Directors decided in2004that the appropriate minimal number of Directors possessing accounting and financial skills is three, this taking into account, amongotherthings,thesizeoftheCompany,itstypeandcharacter,thecomplexityofitsactivitiesandthe number of members of the Board of Directors. In the opinion of the Board of Directors, this number will permittheBoardofDirectorstomeettheobligationsimposeduponit,includingobligationsimposedupon it under the Companies Law 1999 ("The Companies Law") and regulations legislated by its force and the Companys documents of incorporation, especially as it pertains to the responsibility of the Board of Directors in examining the Companys financial condition and in issuing and approving Financial Statements. On May 24, 2012, the Company's Board of Directors decided, pursuant to a discussion of the subject, to increase the minimal number of Directors possessing accounting and financial skills to five directors. The Board of Directors believes that the determined number of five Directors possessing accounting and financialskillswillenableittofulfillitsdutiesinaccordancewiththelawandtheincorporationdocuments of the Company and especially in view of its duty to review the financial condition of the Company and its responsibility for preparing and approving the financial statements and will ensure qualitative discussion and review of financial and accounting subjects in the meetings of the Board of Directors and its committees.ThedecisionoftheBoardofDirectorswasbasedonthefollowingconsiderations: a) The type and complexity of the accounting and financial issues related to the activity of the Company and to the preparation of its financial statements in view of the type and scope of its activity, the internal and external controls required, including the Internal Audit and the audit of an external auditor,andtheextendedregulationappliedtotheCompany,interaliaintheaccountingandfinancial field, due to its status of a public and Government company, subjected to the supervision of different regulatoryentities. b) Specifically, the presence of the following issues, which increased their weight in the activity of the Company and its financial reporting processes in recent years: Preparing financial statements accordingtoanaccountingstandardthatisuniquetotheCompanyandtheexpectedtransitiontofull reporting according to the International Financial Reporting Standard (IFRS); treatment and presentation mode of the actuarial liabilities of the Company; application of stricter SOX principles thanthoseappliedbythemajorityofcompaniesinIsrael;andthestructureoftheCompany'sfinancial debt. c) Reinforce principles of corporate governance applied to the Directors in the Company in performing their duties and strengthening the duties required of them, along with reinforcing the rules related to preparingandapprovingfinancialstatementsinreportingcorporations. d) The minimal number of five Directors possessing accounting and financial skills closely corresponds to the accepted number in other companies of the same size and financial and accounting complexity as theCompanyandisevenhigherthanthatinthemajorityofthecompanies. Asonthedateofthisreport,theCompanyhaseightDirectorspossessingaccountingandfinancialskills: Directors whopossess accounting and financial skills are: Dr. Ziv Reich,Mr. M. BenAmi, Ms. Iris Stark, Mr. Raik Abu Rish, Mr. Michael Lazer, Ms. Vered Itzhaki, Mr. Izhak Lax and Mr. Arie Rapoport. For details see Regulation 26 (The Directors of the Corporation) in Chapter D Additional details about the Company, in theAnnualFinancialStatements. TheDirectorspossessingaccountingandfinancialskillsactincommitteesoftheBoardofDirectorsdealing with financial and accounting matters, as follows: The Financial Statements Reviewing Committee, Audit, Budget,FinancialManagementandRiskManagement,AgreementsandAssets,Strategy,StructuralChange and Image, Human Resources and Organization, Budget Actuary, Regulation, Business Development, MarketingandService,CorporateResponsibility. 3. IndependentDirectors Seedetailsinsectionc3totheAnnualFinancialStatements.

29

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 4. TheCompanysInternalAuditor a) DetailsoftheInternalAuditor 1) The Internal Auditor is Mr. Igal Harel, who began his service as the Internal Auditor on March 17, 2011. 2) The Internal Auditor conforms to the conditions stipulated in section 146(b) of the Companies Law and to the directives of sections 3a and 8 of the Internal Audit Law 1992 ("Internal Audit law"). 3) TheInternalAuditorisanemployeeoftheCompanyanddoesnotactinanyothercapacityinthe Company in addition to the Internal Audit, except for the position of the ombudsman for public and employees' complaints. Fulfilling these additional roles does not affect his ability to perform hisprimaryrole. 4) The Internal Auditor does not have any material business relations or other material relations with the Company and does not hold any position outside the Company which creates, or may create,aconflictofinterestswithhisroleasanInternalAuditor. b) IdentityoftheSupervisoroftheInternalAuditor 1) The CEO and the Chairman of the Board of Directors of the Company supervise the Internal AuditorandPublicComplaintsCommissioneronbehalfoftheorganization. 2) The identity of the supervisors conforms to the directives of section 148 and section 49 of the GovernmentCompaniesLaw. 3) The obligations and the authorities of the Internal Auditor are set in the procedure The Internal AuditandPublicComplaintsCommissioneroftheCompany. c) WorkPlan 1) In 2010, the internal audit completed a general processes risks review. The risks review served as thebasisforoutlininganewmultiyearworkplanfortheInternalAuditfortheyears20112013. The multiyear work plan (20112013) was approved by the Audit Committee in July 2010 were submitted to and discussed by the Audit Committee in July 2010 and by the Board of Directors in December2010. 2) The Internal Auditor submits a proposed annual work plan, in coordination with the Chairman of the Board of Directors, the Chairman of the Audit Committee and the CEO. The annual work plan is discussed and approved by the Audit Committee and by the Board of Directors. The work plan for 2012 was approved by the Audit Committee and approved by the Board of Directors in December2011. 3) The duties and authorities of the internal auditor are determined by the Audit Committee, in accordancewiththeauthoritydelegatedtoitforthispurposeinthepastbytheCompany'sBoard ofDirectors.TheBoardofDirectorsapprovedonMay24,2012,amotiontoreconfirmitsprevious decision to delegate to the Audit Committee its authorityto determine the duties andauthorities of the Internal Auditor. The Company's Board of Directors did not delegate additional statutory authoritiesgrantedtoanyofitscommittees. 4) Demands to perform audit tasks and sometimes audits with higher priority than other tasks during the work year are initiatedby the Chairman of theBoard ofDirectors, the Chairman of the Audit Committee, the CEO, members of the Board of Directors and the Internal Auditor. In addition,the Internal Audit conducts additional audits that are notplanned in advanceduring the year, pursuant to audit reports of the State Comptroller and pursuant to direct and anonymous complaints received by the Company. All these are integrated in the work plan within the approvedscopeoftheplan. TheInternalAuditorpreparesanannualreporteveryyear,summarizingtheInternalAuditreports completed during that year. The semiannual report and the annual report of the Internal Audit aresubmittedtotheChairmanoftheBoardofDirectors,theChairmanoftheAuditCommitteeof theBoardofDirectorsandtheCEO.

30

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 4. TheCompanysInternalAuditor(continued) c) WorkPlan(continued) 5) Theworkplanfor2011providestheInternalAuditorforunplannedtasksinthescopeof40tasks. 6) During the period of January March 2012, the Internal Audit submitted audit reports, including followupreportsintheareaofcomputerizedinformationsystems. 7) In 2012, the Internal Auditor will audit exceptional transactions with controlling parties and transactionsthatrequirespecialapprovalsduring2011. 8) In December 2011, the Audit Committee and the Board of Directors approved the work plan of theinternalauditfor2012. d) AuditofHeldCompanies 1) WorkplansoftheInternalAuditinclude,fromtimetotime,auditofthesubsidiaries. 2) An independent Internal Auditor was appointed for the National Coal Supply Corporation. The Audit Committee and Board of Directors of the Coal Company supervise the work of the internal auditorinthecoalcompany. As concluded in May 2012 between the legal advisor and the secretary of the Company and the ChairmanoftheBoardofDirectorsoftheCoalCompany,theInternalAuditoroftheCompanywill receive all the material related to the internal audit in the Coal Company that he will require to perform his work. In the opinion of the Company, there is no limitation on transferring the informationfromtheCoalCompanytotheCompany. e) ScopeofEmployment 1) The Internal Audit has 43 budgeted positions for employees who perform audits and handle public complaints (including secretaries and administrators). The Internal Auditor clarifies complaintsfromthepublic,includingemployeecomplaints,assistedbyemployeesoftheInternal Audit.11employeesoutofthebudgetedpositionsaredesignatedtohandlepubliccomplaints.In addition, the Internal Auditor engages outsourced audit services to assist in performing the work plan andadditional requirements, or attend to subjects requiring expertise thatthe internal audit doesnothave.Thescopeoftheoutsourcedauditservicesisnotmaterial. 2) According to the multiyear work plan, as approved in July 2010 by the Audit Committee and approved by the Board of Directors in December 2010, the work scope of the Internal Audit enablesauditsofmaterialissuesintheCompanyaboutonceeverythreeyears. f) PerformanceoftheAudit 1) As stated by the Internal Auditor, audits are conducted according to accepted professional standards of Internal Auditing, in accordance with the applicable laws and in conformance to the Internal Audit Law and to the directives of the Government Companies Authority, furnished from timetotimeincircularsoftheGovernmentCompaniesAuthority. 2) The Board of Directors and the Audit Committee assess that the Internal Auditor conformed to therequirementsspecifiedintheprofessionalstandards. 3) The competence of the Internal Auditor and his compliance with professional standards were examinedbytheLocatinganInternalAuditorCommitteein2011. g) AccesstoInformation The Internal Auditor and his representatives are granted free, continuous and direct access to every hardcopyordigitaldocument,data,database,orinformation,includingfinancialdata,forperforming theirtasks.TheInternalAuditorandhisrepresentativesareentitledtoentereveryassetandinspectit in conformance with the contents of section 9 of the Internal Audit Law. The scope of the outsourced auditservicesisnotmaterial.

31

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 4. TheCompanysInternalAuditor(continued) h) ReportsoftheInternalAuditor 1) Reports of the Internal Auditor are submitted in writing. The Internal Auditor submits a summarized report of the work of the Internal Audit every six months and a followup report on implementationofdecisionsandrecommendations. 2) During the work year,the Internal Auditor submits final versions of auditreports to theChairman oftheBoardofDirectors,totheCEOandtotheChairmanoftheAuditCommitteeoftheBoardof Directors. Audit reports are submitted to the members of the Audit Committee of the Board of Directors through the Secretary of the Board of Directors. The semiannual reports submitted by theChairmanoftheBoardofDirectorstotheFinanceandEnergyandWaterMinistersandtothe ManageroftheCompaniesAuthorityincludeareportontheperformanceoftheInternalAuditin theCompany. 3) During January March 2012, the Internal Auditor presented 15 reports: 7 audit reports and 8 examination reports. During this period, the Audit Committee of the Board of Directors held 4 discussions on the Internal Auditors findings and recommendations which took place on January 12,2012,January19,2012,March1,2012andMarch22,2012. i) EvaluationoftheBoardofDirectorsoftheInternalAuditorsActivities According to the multiannual plan, the Company estimates that the scope of the Internal Auditors activities allows the auditing of material subjects once every 3 years or so. This scope, the character and continuity of the Internal Auditors activities and his work plans are, in the Board of Directors estimate,reasonableandarecapableofrealizingtheCompanysInternalAuditinggoals. j) Wages TheInternalAuditorisanemployeeoftheCompany. The Board of Directors estimates that his wages do not affect the ability of the Internal Auditor to exercisehisprofessionalconsideration. k) Miscellaneous Reviewoftheauditquality,asrequiredbytheGovernmentCompaniesCircularofDecember12,2010, willbeperformedin2012. Thereviewoftheinternalauditqualitywillbeperformedontwolevels: The first level will relate to reviewing the internal audit system of the Company. This review will examine, inter alia, the interface between the Audit Committee and the internal auditor and other organsintheCompany(BoardofDirectors,Management,etc.). The second level will audit the quality of the work of the internal auditor and his team. This level will examine whether the internal auditor functions as required to promote the Company's internal audit objectives. 5. FinancialReportApprovalProcess In accordance with the Securities Law Regulations and the Securities Authority directives dated July 23, 2007 and February 21, 2011, concerning financial report approval procedures (according to Section 36a(b) of the Securities Law 1968), the Company must provide disclosure concerning the Financial Statement approvalprocessandcontrolsoverit,asfollows: a) TheCommitteeforReviewingtheFinancialStatements On January 27, 2011, the Board of Directors approved the establishment of the Committee for Reviewing the Financial Statements (the Committee). The Committee is not the Audit Committee of theBoardofDirectors.

32

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 5. FinancialReportApprovalProcess(continued) b) MembersoftheCommittee TheCommitteeiscomprisedoffivedirectors,asfollows: 1) Dr. Ziv Reich, CPA, an External Director, acts as the Chairman of the Committee, possesses accounting and financial expertise. Dr. Ziv Reich, CPA, B.A. in Business Management specializing in AccountancyfromtheCollegeofManagement,TelAviv,MBAfromBarIlanUniversityandPh.D.in Business Management, Warnborough University, London. In the last five years, Dean of the Insurance School and Coordinator of the Accounting studies in Netanya Academic College. Heads theAcademicPlanandlecturesonaccountancy,taxationandfinance.ActsastheDeputyChairman of the Advisory Committee for Supervision of Financial Institutions in the Ministry of Finance. Chairman of the National Training and Advanced Studies Committee of the Institute of Internal Auditors, Member of the Professional Advisory Committee of the Securities Authority and CEO of The Ramle Foundation for Education, Culture and Development, Member of the Management Board of the Nurturing and Enterprise Center and President of the Internal Auditing Institute. Acts as a Director and Chairman of the Investments Committee in Tamir Fishman & Co and as an ExternalDirectoratAbetransLtd. Member of the following Committees of the Board of Directors: Committee for Reviewing the Financial Statements Chairman; Audit Committee, Budget Committee, Financial Management andRiskManagementCommittee;AgreementsandAssetsCommittee. Prior to his appointment, Dr. Reich, CPA, signed a statement of a candidate for the position of an externaldirector,asrequiredbysection3oftheCompaniesRegulations(DirectivesandConditions ontheSubjectofApprovingtheFinancialStatements)2010. 2) Ms. Iris Stark, CPA, Director, possesses accounting and financial expertise. Ms. Stark, CPA, holds a B.A. in Economics and Accounting and an M.A. in Economics from Bar Ilan University. Acts in the accounting field since 1982, is a Managing Partner of Stark & Stark, Accountants. Academic Manager of the Societies and NonProfit Societies Managers Course at the Israel Management Center. Lectures in Culture Institutes within the framework of LAHAV, Tel Aviv University. Senior lecturerontrainingdirectorsinpublicandGovernmentcompanieswithintheframeworkofLAHAV, advanced studies Tel Aviv University, the Israeli Management Center and MA in Law and Business Management plan at the Bar Association. Lectures managers and accountants on accounting and taxation, specializing in nonprofit institutes, companies and private businesses. Commentator on economics in the program "Sogrim Heshbon" of the Educational Television, Vice President of the InstituteofCPAsinIsrael. Member of the following Committees of the Board of Directors: Strategy Committee; Structural Change and Image Committee; Committee for Reviewing the Financial Statements; Chairperson of budget, financial management and risk management Committee; Corporate Responsibility Committee. Prior to her appointment, Ms. Stark signed a statement about her education and experience on March2,2011,asrequiredbytheCompaniesLaw. 3) Mr. Michael Lazer, CPA, was appointed as a Director in the Company on May 3, 2011. Possesses accounting and finance expertise. Mr. Lazer is an accounting graduate of the Hebrew University (Tel Aviv Branch). Partner in Strauss, Lazer & Co, auditing firm. Mr. Lazer has been working in the field of accounting since 1972, mainly in the taxation field and acts as a consultant to corporations inIsraelandabroad. Member of the following Committees of the Board of Directors: Strategy Committee; Structural Change and Image Committee; Human Resources and Organization Committee; Committee for Reviewing the Financial Statements; Budget, Financial Management and Risk Management Committee,AgreementsandAssetsCommitteeandtheAuditCommittee. Prior to his appointment, Mr. Lazer, CPA, signed a statement of a candidate for the position of directorasrequiredbytheCompaniesLaw.

33

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 5. FinancialReportApprovalProcess(continued) 4) Izhak Lax, Attorney, acts as an external director in the Company since May 2011. Possesses accountingandfinanceexpertise.EarnedaLawdegreeandanM.A.inBusinessManagementfrom BarIlanUniversity.StudiesforaDoctorateinEconomicsattheInternationalUniversityofBusiness &Law.AlsostudiedHistoryandPhilosophyintheOpenUniversity.CalledtotheBarin1993. Mr. Lax practiced as an attorney for many years as a senior partner of MeiZahav Law Office and then in 20022005, acted asthe GeneralManagerof the Claims Department (Liabilities) in Menora Insurance Company Ltd. Mr. Lax also acted as the CEO of "Sha'arei Mishpat College in Hod Hasharon,astheCEOofTheShalemCenterinJerusalem(20072010),astheChairmanofChimNir Flight Services Ltd. (20052007), as the Chairman of the Pension Fund of the Israel Bar Association Ltd. (20072010), as a Director in Yuli Capital Markets Ltd. (20072009) and as the Chairman of the AuditCommitteeof"DorotHa'HemshechofYadVashem"(20052010). At present, Mr. Lax is a partner in "Nevet The BioMedical Investment Ltd. fund, through his fully owned company "Ishon Consulting, Administration and Holdings Ltd., through which he manages his business activities, including a partnership in "Barkan 10" and Barkan 9". Chairman of MaccabiHealthServicesFund,whereheisalsotheChairmanoftheInvestmentsCommittee(since 2002), Chairman of MaccabiDent Ltd., Dental Care Clinics of Maccabi, where he is also the Chairman of the Investments Committee (since 2004), Chairman of the Weitz Centre for Development Studies Ltd. (since 2011), an External Director and Chairman of the Audit Committee atLibertyPropertiesLtd.(since2006),anExternalDirectorandMemberoftheAuditCommitteeat Orda Print Industries Ltd. (since 2010), Member of the Public Committee to Determine the Designation of Legacies bequeathed to the State (since 2010) and member of "Project Masa to encourage long term programs in Israel for Jewish Youngsters Ltd. (since 2010). Mr. Lax also serves as a member of theAudit Committee in Maccabi HealthcareServices (since 2001).Acts as a lecturerintheDepartmentofAdministrationatBarIlanUniversity. Mr. Lax is a member of the following Committees of the Board of Directors: Strategy Committee; StructuralChangeandImageCommittee;AuditCommittee;CommitteeforReviewingtheFinancial Statements;AgreementsandAssetsCommittee;andCorporateResponsibilityCommittee. Priortohisappointment,Mr.Lax,signedastatementofacandidateforthepositionofanexternal director,asrequiredbytheCompaniesLaw. 5) Mr. Arie Rapoport, CPA appointed as an external director on August 7, 2011. Possesses accounting and finance expertise. Accounting and Economics graduate from Tel Aviv University. Owner and Manager of an office for providing accountancy services and accountancy related services, since 1981. Advises companies and businesses in the fields of accounting, finance and taxation. Provides expert opinions or arbitration in the fields of accounting, finance and auditing and as a trustee for freezing procedures/liquidator or manager, all by appointment of the Israeli Courts. Acts as a director and chairman of finance committees in friendly societies (Variety Israel organization and the Arthur Rubinstein Society), represents foreign companies, investors and donorsinIsrael. Acts as the Chairman of the Committee for Interpretation of Professional Behavior Rules (Ethics Committee) of the Institute of Certified Public Accountants in Israeli; acts as Deputy CEO and CustomersDirectorinPartnerCommunicationLtd. Member of the following Committees of the Board of Directors: Strategy Committee; Structural Change and Image Committee; Audit Committee; Committee for Reviewing the Financial Statements; Budget, Financial Management and Risk Management Committee; Regulation Committee. Prior to his appointment, Mr. Rapoport, CPA, signed a statement of a candidate for the position of anexternaldirector,asrequiredbytheCompaniesLaw.

34

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 5. FinancialReportApprovalProcess(continued) c) FinancialStatementsApprovalProcess: The Committee, in its authority according to the Government Companies Regulations (Directives and Conditions Related to the Approval of the Financial Statements) 2010, discusses the Financial Statements of the Company and reviews the different issues concerning the financial reporting. The Committee discusses, inter alia, the following subjects, which are presented, reviewed and explained bytheCompany'sManagement: 1) ValuationsandestimatespreparedfortheFinancialStatements. 2) Internalcontrolsrelatedtothefinancialreporting. 3) CompleteandadequatedisclosureintheFinancialStatements. 4) The adopted accounting policies and the accounting treatment applied to material affairs of the Company. 5) Valuations,includingtheassumptionsandestimatesthatservedastheirbasis,whichisusedasthe basisforthedataintheFinancialStatements. TheCommitteealsoreviewsvariousaspectsofcontrolandriskmanagement,bothaspectsreflectedin theFinancialStatementsandaspectsthataffectthereliabilityoftheFinancialStatements. For discussing the Financial Statements as of March 31, 2012, the Committee held three meetings, on May17,2012,onMay21,2012andonMay29,2012. The meeting held onMay17, 2012, wasattendedby: Committee members;Mr. Harel Zeev Blinde,VP Finance and Economics; Mr. Yigal Harel, Acting Internal Auditor; Mr. David Yahav, Attorney, Legal AdvisorandCompanySecretary;RepresentativesoftheExternalAuditorsBrightmanAlmagorZohar& Co.;andtheRepresentativeoftheGovernmentCompaniesAuthority. ThemeetingheldonMay21,2012,wasattendedby:the,Committeemembers,Mr.HarelZeevBlinde, VP Finance and Economics; David Yahav, Attorney, Legal Advisor and Company Secretary; Mr. Yigal Harel, Internal Auditor; Representatives of the External Auditors Brightman Almagor Zohar & Co.; and Representatives of the Law Firm Herzog Fox Neeman & Co. and the consultant actuary of the Company,Mr.AllenDubin. The meeting held onMay29, 2012, wasattendedby: Committee members;Mr. Harel Zeev Blinde,VP Finance and Economics; Mr. Nisim Hilu, Attorney, Deputy Legal Consultant, Mr. Yigal Harel, Internal Auditor; Representatives of the External Auditors Brightman Almagor Zohar & Co.; and RepresentativesoftheLawFirmHerzogFoxNeeman&Co,. After discussing the Financial Statements, the Committee concludes its recommendations on the approval of the Financial Statements and submits them to the Board of Directors a reasonable time beforetheconvergenceoftheDirectors.TheCompany'sBoardofDirectorsdecidedthatareasonable time for receiving the recommendations of the Committee is at least two business days before the meeting, except in special cases, in which the recommendations will be submitted to the Board of Directors at a shorter time before the scheduled meeting of the Board of Directors and under the circumstances,theBoardofDirectorswillconfirmthatthisisareasonabletime. AfterreceivingtherecommendationsoftheCommittee,theBoardofDirectorsdiscussestheFinancial Statements of the Company and material issues related to the financial reporting. The Company's Management presents the main results of the operations of the Company and the financial data for the reporting period to the Directors, addressing material events that occurred during the period. During thepresentation, theManagementanswers questions askedby theDirectorsandprovides the requiredexplanationsandclarifications,asrequired. The Company's Board of Directors discussed the financial statements of the Company on May 24, 2012 and on May 29, 2012. The meeting held on May 24, 2012, was attended by all members of the Board of Directors, Mr. Eliyahu Glickman, Chief Executive Officer, Mr. Harel Zeev Blinde, VP Finance andEconomics;DavidYahav,Attorney,LegalAdvisorandCompanySecretary;Mr.YigalHarel,Internal Auditor;Mr.AmirLivne,AssistantCEOandHeadoftheStructuralChangeAdministration;

35

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 5. FinancialReportApprovalProcess(continued) Representatives of the Accounting and Economy Division of the Company; Representatives of the FinanceDivision of the Company; Mr. IgalArnon of the Company's Spokesman office, Representatives of the External Auditors Brightman Almagor Zohar & Co.; Representatives of the Law Firm Herzog Fox Neeman & Co.; Representative of the Government Companies Authority and the financial consultants totheBoardofDirectors. The meeting held on May 29, 2012, was attended by all members of the Board of Directors, Mr. EliyahuGlickman,ChiefExecutiveOfficer,Mr.HarelZeevBlinde,VPFinanceandEconomics;Mr.Nisim Hilu, Attorney, Deputy Legal Consultant and Secretary of the Company; Mr. Yigal Harel, Internal Auditor; representatives of the Accounting and Economy Division of the Company; Representatives of the Finance Division of the Company; Representatives of the Budget Division; Ms. Iris BenShahal, deputy Company Spokeswoman; Representative of the Government Companies Authority; Representatives of the External Auditors Brightman Almagor Zohar & Co.; Representatives of the Law FirmHerzogFoxNeeman&Co.andLahav&Co.AttorneysOffice;representativesofS.Horowitz&Co. AttorneysOfficeandthefinancialconsultantstotheBoardofDirectors. d) TheNatureoftheOrgansResponsiblefortheApprovalProcessoftheFinancialStatements The Companys Board of Directors headed by Mr. Yiftah RonTal, the Committee, headed by Dr. Ziv Reich, CPA, acting as the Chairman of the Committee, all other aforementioned Committee members, aswellasCEOMr.EliyahuGlickmanandSeniorVPofFinanceandEconomics,Mr.HarelZeevBlinde. e) Additional Steps Taken by the Company to Ensure Correctness of the Financial Statements and the ReportoftheBoardofDirectors The Company acts in accordance with the Regulations of the Government Companies Authority (Additional Report Concerning Actions Taken and Representations made to Ensure Correctness of the Financial Statements and the Directors Report) 2005, according to which the Company must attach to its Financial Statements, both yearly and quarterly, an additional report on controls enacted and procedures set, in order to ensure the correctness of the annual or quarterly Financial Statements, as the case may be, including signed statements of each position holder in the Company who signed on thosereports. AsfortheprocessesperformedbytheCommitteeandbytheBoardofDirectorspriortoapprovingthe FinancialStatements,seeparagraph5cabove. TheCompanyhasformulatedaWorkingsoftheDisclosureCommitteeontheSubjectofDisclosurein the Financial Statements procedure, which includes the formation of a Disclosure Committee for the purpose of, among other things, confirmation, implementation and execution of examinations of control effectiveness over the periodic Financial Statements, including verification that the information contained in the reports is complete, accurate and proper, as well as for confirming controls and procedures ensuring the disclosure of the aforementioned information and the assessment and reporting of their effectiveness, discussion of inherent weaknesses that require disclosure, reporting and tracking of the correction of these weaknesses, etc. The findings and recommendations of the committee are reported to the Senior Vice President Finance and Economics. In addition, the Company has set a Working Procedure for the Approval of Financial Statements, Changes in Critical Accounting Policies and Changes in Actuary Premises, which sets in place, among otherthings,adiscovery,treatmentandreportingmechanismconcerningeventsandinformationthat may influence critical accounting policies and/or actuarial assumptions according to which the Company operates, including transferring reports and discussions to the appropriate Company persons, comprising the Senior Vice President Finance and Economics, the Senior Vice President Human Resources, the CEO, the Chairman of the Committee for Reviewing the Financial Statements, Members of the Committee for Reviewing the Financial Statements, the Chairman of the Board of DirectorsandmembersoftheBoardofDirectors.

36

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 c. AspectsofCorporateGovernance(continued) 6. TheEnforcementPlan As of the publication date of the report, the Company started an adoption process of an Internal Enforcement Plan for the Company. Following intensive and comprehensive efforts, the Management of the Company, together with its legal advisors, formed an outline for an Internal Enforcement Plan in accordance with the criteria for recognizing internal enforcement plans for securities, published by the Securities Authority on August 15, 2011, constituting the required principles and work processes framework, which the Company requires to complete the adoption and implementation of an effective internal enforcement plan according to the Company's structure, activities and unique characteristics. The Company formed the outline of the Enforcement Plan, while reviewing current work processes and procedures and updating and integrating them in the suggested outline and identifying parties involved in theworkprocesses.OnJuly28,2011,theCompany'sBoardofDirectorsappointedadedicatedCommittee of the Board of Directors the Corporate Responsibility Committee, to attend, inter alia, to the adoption and implementation of the Internal Enforcement Plan in the Company according to tasks designated to it, within the outline of the plan. In its meeting on November 10, 2011, the Corporate Responsibility Committee discussed and reviewed the outline of the Internal Enforcement Plan and decided to recommend to the Company's Board of Directors to approve the outline of the plan. On January 26, 2012, the Corporate Responsibility Committee decided to recommend to the Board of Directors to appoint Mr. David Yahav, legal advisor and Company Secretary as the person in charge of the internal enforcement. In addition, during the work process of outlining the Internal Enforcement Plan, the Company set timetables forimplementingthemilestonesrequiredtocompletetheplan'sadoptionprocess. 7. ExternalAuditorsoftheCompany a. TheExternalAuditorsoftheCompanyaretheBrightmanAlmagorZohar&Co.auditingfirm. InaccordancewiththedecisionoftheGeneralMeetingNo.87onAugust2,2011,theappointmentof theBrightmanAlmagorZohar&Co.auditingfirmastheCompany'sexternalauditorswasreconfirmed for the period starting January 1 2011 and up to December 31, 2011, subject to the approval of the GovernmentCompaniesAuthority.TheGovernmentCompaniesAuthorityapprovedthisappointment. b. As stated in the decision of the General Meeting, the Company's Board of Directors implemented all the directives included in the circulars of the Government Companies Authority (published from time to time) related to procedures of employing external auditors and determining their fees and to financial statements (audited, reviewed, budgetary), reports of the Board of Directors and reports of internalandexternalaudits. The fees of the external auditor are determined in accordance with the rules of the Government Companies Authority (Appointment of External Auditors and their Fees) 1994 and according to its circulars. Current advance payments are paid to the external auditor during the audit year, according to the progress of the regular audit and review work, for services related to the audit and for tax services, up to the ceiling determined for these types of work. The balance of the fee (less advance payments paid) is paid at the end of the audit year, pursuant to the approval of the Government CompaniesAuthority. During the audit year, the external auditor also receives payment of fees related to providing additionalservices,whicharenotincludedintheaforementionedlist,accordingtotheprogressofthe workandsubjecttotheapprovaloftheGovernmentCompaniesAuthority. 8. The Link between Rewards to Senior Position Holders and Stakeholders in the Company and Their ContributiontotheCompany Nomaterialchangesoccurred,comparedtothedisclosureinthefinancialstatementsfor2011.

37

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 d. InstructionsforDisclosureRelatedtotheFinancialReportingoftheCompany 1. TheFinancialReportingoftheCompany The Condensed Consolidated Financial Statements of the Company (the Interim Financial Statements") fulfillthedirectivesoftheGovernmentCompaniesRegulations(RulesforPreparingFinancialStatementsof the Israel Electric Corporation Ltd.) (Temporary Order) 2004 and their amendments ("Government Companies Regulations") where reporting is based on International Accounting Standard (IAS) No. 34 InterimFinancial Reporting. In preparing these InterimFinancial Statements, the Company implemented accountingpolicies,presentationprinciplesandcalculationmethodsidenticaltothoseimplementedinthe preparation of its annual Financial Statements, except for changes in accounting policies, derived from implementation of standards, amendments to standards and new interpretations that came into force as of the Financial Statements date, as detailed in Note 2 b to the Financial Statements in Chapter C of this report. The Financial Statements were prepared in accordance with the directives of Chapter D of the SecuritiesRegulations. OnMay22,2012,theGovernmentCompaniesRegulationswereextendeduptoDecember31,2014. On January 1, 2015, the Company will fully implement the International Financial Reporting Standards (IFRS). The Company consolidates the National Coal Supply Corporation (the Coal Company) in its Financial Statements. The financial data in the Board of Directors Report are data from the Consolidated Financial StatementsoftheCompany. 2. EventsthatOccurredaftertheStatementofFinancialPositionDate SeeNote1ftotheInterimFinancialStatements. 3. CriticalAccountingEstimates Preparation of the Financial Statements in accordance with accepted accounting principles requires the Management of the Company to make evaluations and estimates which affect the reported values of the assets, liabilities, revenues and expenses and also the disclosure concerning contingent assets and liabilities. There were no material changes in the critical accounting estimates, compared to the report of theBoardofDirectorsasofDecember31,2011,excepttheinterestsvectorthatwasusedtocalculatethe discountingoftheactuarialliability. 4. MaterialandHighlyMaterialValuations a) In accordance with Section 8(b) of the Securities Law Regulations and also according to the legal positionNo.10523oftheSecuritiesAuthorityonthesubjectandtheattachedclarification: When a material valuation serves as the basis to determine the value of data in a periodic report, including determining that there is no need to change the value of the data, the report will disclose different parameters detailed in the regulations and in the event of a highly material valuation, it will beattachedtothereport. The Securities Authority determined "quantitative" tests (statement of financial position test and resultstest)toexaminethematerialityofthevaluations.Nevertheless,theSecuritiesAuthoritystated that an alternative test may be defined, where a qualitative examination of the features of the Companyjustifiesit. According to the results test, as determined by the Securities Authority, the effect of the change in value arising from the valuation related to the total net or comprehensive profit respectively, of the Companyinthereportingperiod("TheResultsTestoftheSecuritiesAuthority")shouldbetested.The Company is of the opinion that the profit test (the Results Test) of the Security Authority, is not a reflective test of the Company, considering the unique features of the Company and its activities, as detailedbelow: 1) The Company's profit is low in relation to the volume of operations of the Company and is highly affectedbyfluctuationsofexternalparameters. 2) TherevenuesoftheCompanyarebasedonaratedeterminedbytheElectricityAuthority. 3) The Company is subject to regulatory supervision. Its control on its revenues is almost non existent,sincetherateispredeterminedandthequantityisaffectedbyrigiddemand.

38

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 d. InstructionsforDisclosureRelatedtotheFinancialReportingoftheCompany(continued) 4. MaterialandHighlyMaterialValuations(continued) 4) TheCompanybelievesthattheprofitabilityindexisofsecondaryimportancecomparedtocriteria offinancialsoundnessandtheabilitytorepayobligations. 5) The high differences in profit both in annual and quarterly results depend on factors outside of theCompany'scontrol. 6) A considerable part of the Company's operations is in investment, which is not expressed in the netprofitresults. In light of the qualitative considerations specified in section 1 6 above, the Company concluded thattheResultsTest,asdefinedbytheSecuritiesAuthority,isnotasuitabletoolforreviewingthe valuationmaterialityoftheCompany.TheCompanywillexaminethematerialityofthevaluations according to a different quantity results test that reflects correctly the materiality subject in valuationsintheCompany'sfinancialstatements. Basedontheaforementioned,theCompanywillexaminethematerialityofthevaluationaccordingto thefollowingtests: (a) Statementoffinancialpositiontesttoexaminethevaluationinrelationtothetotalassetsofthe Company, as presented in the consolidated statement of financial position as of the last date of the reported period (identical to the statement of financial position test determined by the SecuritiesAuthority). (b) Results test to examine the effect of the change in value as a result of the valuation on the normative profit of the Company, namely, the theoretical expected profit as determined by the regulator the Electricity Authority (instead of the Results Test of the Securities Authority). The Normativeprofitfor2012isapproximatelyNIS1.3billion. A valuation that maintains a ratio of 10% or more will be considered highly material. A valuation thatmaintainsaratioof5%ormorewillbeconsideredmaterial.Thematerialityofthevaluations will be examined separately for each stand alone asset/liability, provided that there is no dependence between certain assets to certain liabilities requiring an examination as one group. ThesubjectwassubmittedtoandwereapprovedbytheCompany'sCommitteeforReviewingthe FinancialStatementsandtheBoardofDirectors. b) Disclosure with respect to a valuation that served as the basis to determine the value of data in the FinancialStatements Details of valuations classified as material/highly material according to the aforementioned test, in accordancewithregulation8b(i)totheSecuritiesRegulationsarepresentedbelow: The Company conducts very high materiality valuations of the actuarial liability with respect to benefits to employees in accordance with IAS 19. Information regarding this valuation is presented below:

39

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 d. InstructionsforDisclosureRelatedtotheFinancialReportingoftheCompany(continued) 4. MaterialandHighlyMaterialValuations(continued) b) Disclosure with respect to a valuation that served as the basis to determine the value of data in the FinancialStatements(continued) IdentificationofValuationsubject Actuarialobligationforemployeebenefitsinaccordance withIAS19 Thetimingoftheevaluation: March31,2012 Evaluationsubjectvalueimmediatelybeforethe valuationdatehadgenerallyacceptedaccounting principles,includingdepreciationandamortization,not requiredthechangeinvalueaccordingtothe valuation; Determinedinaccordancewiththeevaluation NIS22,434million Identifyingassessorandhischaracteristics: AssessmentwascarriedoutbyErnst&Young(Israel)Ltd. (hereinafter:Ernst&Young)byEmanuelBerzackandthe Actuarialdepartmentstaffsupervisedbyhim.Emanuel BerzackB.Econ.Sc.(ActuarialStatistics)University Witwaterstand,SouthAfrica,isanauthorizedActuary(full memberoftheIsraelAssociationofActuariesFILAA,and theInstituteofActuariesinEnglandFIA).Hisprofessional experienceoverthepast12yearsincludesactuarial estimatesofemployeebenefitsofsimilartypestothatof theCompany,pensionliabilitiesofpensionfunds,insurance liabilitiesofinsurancecompanies,dutiesofanactuaryoran examiningactuaryexaminesorauditor. Dependencyonevaluationorder OnMarch29,2011thenewactuaryoftheCompanyfrom Ernst&Young(Israel)Ltd.,whoprovidesactuarialservices totheCompanyfromthefirstquarterof2010,receiveda letterofindemnificationfromtheCompany.Fordetails,see Note13l.totheAnnualFinancialStatementsasof December31,2011. Evaluationmodelwhichtheappraiserused DCF Assumptionsaccordingtowhichthe Weightedgrossedupinterestrateinthecurrentvalueof appraiserperformedthevaluation,dependingonthe theliabilityis2.77% modelestimates: RealupdateofsalaryduringtheworkperiodIndividual salarydevelopmentmodelofactiveemployeesand includingsalaryincreasebetweencurrentsalaryagreements orgeneralfuturesalaryagreements(offsettinginflationary effect).Realupdateofpensionamountsafteremployment terminationindividualpensiondevelopmentmodelof pensioners(offsettinginflationaryeffect).Pensionersand survivorsmortalityincludingupdatingmortalityrates accordingtotheMinistryofFinancecircularofMay17, 2007.Foradditionalactuarialassumptions,seethe Actuary'sOpinioninAnnexA. TheorganintheCompanythatdecidedtoenteran TheCompany'sHumanResourcesDepartment,which agreementwiththeappraiser convenedtheteamthatdecidedonrecruitingthenew actuaryoftheCompanywasresponsiblefortheinitial agreement.In2011,theengagementcontractwasrenewed bytheAccountingandEconomicsDepartment.

40

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 d. InstructionsforDisclosureRelatedtotheFinancialReportingoftheCompany(continued) 4. MaterialandHighlyMaterialValuations(continued) c) DisclosureofQuantitativeTestsResultsappliedtoExaminetheMaterialityoftheValuation In accordance with the legal position No. 10523 of the Securities Authority when a valuation is classified as material/highly material, as the case may be, according to tests determined by the Securities Authority, while according to the alternate test determined by the Company, the valuation is not material/highly material, results of the quantitative tests applied by the Company should be detailed,includingtestsdeterminedbytheSecuritiesAuthority. Examining the effect of the change in value according to the results test of the Securities Authority is basedonthechangeinvalueaftertaxandalsoaccordingtothenormativeprofittest. As of the date of this report, the Company has valuations of hedge transactions which would have been classified as material/very highly material valuations, when tested according to the tests of the Securities Authority, but according to the alternative test determined by the Company these valuationsarenotconsideredasmaterial/veryhighlymaterialvaluationsasthecasemaybe.
Subject BalanceSheetTest (inNISmillion) 51/79,809 =0%Nonmaterial 19/79,809=0%Nonmaterial 6/79,809=0%Nonmaterial 5/79,809=0%Nonmaterial 14/79,809=0%Nonmaterial 16/79,809=0%Nonmaterial 11/79,809=0%Nonmaterial 26/79,809=0%Nonmaterial 43/79,809=0%Nonmaterial 52/79,809=0%Nonmaterial 25/79,809=0%Nonmaterial 23/79,809=0%Nonmaterial 9/79,809=0%Nonmaterial 9/79,809=0%Nonmaterial 8/79,809=0%Nonmaterial 17/79,809=0%Nonmaterial 1/79,809=0%Nonmaterial 12/79,809=0%Nonmaterial 3/79,809=0%Nonmaterial 3/79,809=0%Nonmaterial 5/79,809=0%Nonmaterial 12/79,809=0%Nonmaterial ResultTest oftheSecuritiesAuthority (inNISmillion) 8%=11/143material 9%= 12/143material 6%= 8/143material 5%= 7/143material 7%= 10/143material 8%= 11/143material 8%= 11/143material 6%= 8/143material 7%= 11/143material 9%= 13/143material 7%=10/143material 5%= 7/143material 10%= 14/143highlymaterial 12%= 17/143highlymaterial 10%=14/143highlymaterial 14%= 20/143highlymaterial 14%= 20/143highlymaterial 28/143= 20%highlymaterial 27/143= -19%highlymaterial 19/143=13%highlymaterial 24/143=17%highlymaterial 14/143= 11%highlymaterial ResultTestNormativeProfit (inNISmillion) 11/1,300=1%Nonmaterial 12/1,300=1%Nonmaterial 8/1,300=1%Nonmaterial 7/1,300=1%Nonmaterial 10/1,300=1%Nonmaterial 11/1,300= 1%Nonmaterial 11/1,300=1%Nonmaterial 8/1,300=1%Nonmaterial 11/1,300=1%Nonmaterial 13/1,300=1%Nonmaterial 10/1,300=1%Nonmaterial 7/1,300=1%Nonmaterial 14/1,300=1%Nonmaterial 17/1,300=1%Nonmaterial 15/1,300=1%Nonmaterial 20/1,300=2%Nonmaterial 20/1,300=2%Nonmaterial 28/1,300=2%Nonmaterial 27/1,300=2%Nonmaterial 19/1,300=1%Nonmaterial 24/1,300=2%Nonmaterial 16/1,300=1%Nonmaterial

SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction SWAPTransaction

41

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 d. InstructionsforDisclosureRelatedtotheFinancialReportingoftheCompany(continued) 5. DisclosureoftheForecastedCashFlowsforFinancingRepaymentofCorporateLiabilities a) According to section 10 (b) (14) to the Securities Regulations on the disclosure of forecasted cash flows to finance repayment of Company's liabilities, the Company's Board of Directors reviewed the forecast cash flow of the Company and the ability of the Company to fulfill its current and expected obligationsontheduedatesthereof. b) The cash flow forecast reviewed by the Board of Directors is based on the new rate base for the generationsegment,appliedsinceNovember1,2011. Thecashflowforecastisalsobasedonthefollowingassumptions: 1) DemandforelectricityforecastsmadebytheCompany. 2) Implementation of the development plan of the Company for 2012, as approved by the Board of Directors and for 2013, based on forecasts of the Company, together with the execution of stage B of the emergency plan, at the financial scope and according to the financing framework approvedbytheElectricityAuthorityinitsdecisiononMarch7,2011. 3) Increase of electricity rates with respect to the added costs arising from the transition to generation with more expensive fuels (mainly diesel fuel), due to the stopped natural gas supply fromEgypt,includingthereducedgassupplyfromtheIsraelireservepursuanttothedepletionof the reserve and the instruction of the Ministry Energy and Water to reduce purchases from this reserveuntilthedateonwhichnaturalgaswillbesuppliedfrom"Tamar"gasreserve. 4) Maintaintheoutlineofthe88%discountonpurchasetax/exciseonpurchasesofdieselfuel. 5) Commencing the use of liquefied gas (LNG) at the beginning of 2013 and the start of natural gas purchasedfrom"Tamar"reservefromthebeginningofJuly2013. 6) OnthesubjectofpaymentsdepositedtheFund: (a) Spread the actuarial deficit of approximately NIS 1.4 billion (as on April 30, 2012) over 10 years, with a monthly payment that will not be less than NIS 50 million, as long as the actuarial deficit exists, according to the amendment of the articles of the Fund, approved by the Commissioner of the Capital Market, Saving and Insurance Division in the Ministry of Finance. (b) Payments with respect to the "current deficit", arising from accrued current rights, will be depositedinthreeequalconsecutivemonthlypayments. 7) Funds raising, as required according to the development of cash flows, will be performed according to the decisions of the Board of Directors relating to this subject. The Company estimates that it will be able to raise the required sums for its current operation, including sums required to finance the additional costs deriving from the transition to generation using liquid fuels due to lack of natural gas, as aforesaid. Financing the aforementioned additional costs will be performed under the agreed upon outline with the State, including and without derogating, the provision of State guarantees that will enable the required funds raising while reducing the funds raising costs and/or other financing means to be provided by the State, to enable regular generationandsupplyofelectricity. c) TheCompanytakesloansfromthebankingsysteminIsraelandabroadinconsiderableamounts. Sincethe endof the1980s the Company started offeringdebentures inthe Israeli market (public and private). From 1996, the Company the Company started to issue foreign currency debentures in private placements to the international market (mainly in the U.S.A. and Europe) according to Reg. S 144A of the American Securities Law. The Company continued to issue debentures over the years, whilemaintainingitspresenceintheinternationalmarketsandinIsrael. This ability of the Company was proven during crisis periods as well, such as the global financial crisis at the end of 2008 and the beginning of 2009 and also in February 2012, when the Company raised fundsintheinternationalmarketinthemiddleofthecurrentcashflowcrisis. See more details on the Company's cash flow condition in Note 1 f to the Interim Financial Statements. A reportofaforecastcashflowisattachedasAnnexAtothisreport.

42

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 d. InstructionsforDisclosureRelatedtotheFinancialReportingoftheCompany(continued) 5. DisclosureoftheForecastedCashFlowsforFinancingRepaymentofCorporateLiabilities(continued) d) Pursuant to noting the report of the Company's Management on steps of the Government and others taken to assist the cash flow condition of the Company, including the letter of the Director General of the Ministry of Finance to the Chairman of the Company on May 28, 2012 on implementing the outlineofthesolutiontothecashflowoftheCompany,asdetailedinNote1ftotheInterimFinancial Statements,the Company's Board of Directors believes that based onthe Company being an essential service provider to the electricity sector and a Government Company and in light of its importance to theIsraelinationaleconomy,GovernmentauthoritieshaveaclearinterestinenablingtheCompanyto purchase the liquid fuels required to generate electricity, due to a lack of natural gas purchases which will create a material cash flow deficit and will therefore act to ensure the financial sources requiredtofinancetheexcessivefuelscostsderivingfromthenaturalgascrisis,includingraisingfunds, secured by State guarantees or other financing means. Accordingly and in light of the steps taken by the Company to reduce expenses and raise the financial sources required, as aforesaid, to bridge the cash flow deficit, the Company's Board of Directors believes that the Company will bridge the cash flow gap successfully, until it will receive the full rate coverage for its costs. Accordingly, the Company'sBoardofDirectorsdeterminedinitsmeetingonMay29,2012,afterreviewingtheforecast cash flow of the Company for the period of 24 months from the end of the financial statement date ("The Forecast Cash Flow Period") and after hearing the estimates of the Management on the possibility of receiving financing from banks and raising a debt in the capital markets in Israel and/or abroad, and considering the steps taken by the Government to assist the cash flow condition of the Company up to the report date, as well as the expected steps of the Government in the coming months,thatthereisnoprobableconcernthattheCompanywillnotmeetallitspresentandexpected obligationsontheduedateswithintheforecastcashflowperiod. The aforesaidon the estimations of the Board ofDirectors of theabilityof the Company tobridge the deficit is a forward looking information, as defined in the Securities Law, which is based on estimates of the Board of Directors according to data available to it on the date of the report, including assumptions which served as the basis of the cash flow, the quantity of natural gas that will be supplied to the Company from Yam Thetis reserve and the operation commencing date of Tamar gas reserve.Nevertheless,itisnotcertainthatallorparttheaforementionedsteps,expectedtoassistthe Company,willberealizedorsucceed,orthattheenvironmentalconditionsinwhichtheCompanyacts will not worsen (among other things, if and insofar as the quantity of natural gas from Yam Thetis reserve will continue to decrease, or that the Tamar gas reserve will not commence operation on the scheduled data) and in such an event, it is not certain that the steps approved up to the date of the reportwillsufficetobridgethecashflowgapoftheCompany. In addition a forecast cash flow report for financing repayment of the Company's obligations for the period April 2012 to March 2014, is attached hereto as Annex A to the Report of the Board of Directors. 6. Evaluations of the Effectiveness of Internal Controls and Disclosure Controls over the Financial Statement No material changes occurred in the evaluations of the effectiveness of internal controls and disclosures controlcomparedtothosepresentedintheReportoftheBoardofDirectorsasonDecember31,2011. 7. Disclosure with Respect to the Financial Reporting Required according to the Government Companies CircularonFinancialstatements a) RegistrationofRightsandAssets Duringthelastfewyears,afocusedandcontinuousprocedureistakingplacetogatherandcoordinate all of the information on all of the Company's assets, which were scattered among departments and districts, including the transformation stations, mobile/temporary/leased facilities, etc., and to organizethemastoeverythingrelatedtoestablishinganassetsledger,registrationofrights(including caveats,insofarasisrelevant),administrationandoversight,includingtheevacuationofsquatters

43

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 d. InstructionsforDisclosureRelatedtotheFinancialReportingoftheCompany(continued) 7. Disclosure with Respect to the Financial Reporting Required according to the Government Companies CircularonFinancialstatements(continued) a) RegistrationofRightsandAssets(continued) from the Company's properties, or to arrange the status of those squatters on the Company's properties. The Company has a complete principal assets ledger (some 330 main sites), as well a ledger of less important assets (about 13,197 sites, primarily transformation stations) which is currently being completed.Inaddition,theCompanyisactingtoregisteritsrightsinitsassets,bothwithregardtothe principalassetsandwithregardtothelessimportantassets. During the reported period, the Company registered its rights with the Land Registry Office with respect to 5 sites, and with respect to 17 other sites, caveats were recorded, 25 lease contracts were signed with the Israel Lands Administration, 83 contracts for purchasing transformation rooms were executed, 5 easements for access to a transformers room were registered and 65 other assets were identified. b) LiabilitieswithrespecttoEmployeeEmployerRelations See Note 11 e to the Interim Financial Statements and also Annex A to the Interim Financial StatementstheopinionoftheCompany'sActuaryasonMarch31,2012.

44

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 e. DedicatedDisclosuretoDebenturesHolders 1. DetailsofDebenturesoftheGroupTradedinIsrael Details of debentures (series 22) as at March 31, 2012, as required in the 8th addition to the Securities Regulationsareasfollows: Debentures(Series22) a) Series Issuedate(initial) May 29, 2002, according to the prospectus of theCompanyonMay21,2002 Totalnominalvalueontheissuedate(initial) NIS500,000,000nominalvalue. NominalvalueonMarch31,2012 NIS6,000,000,000nominalvalue Revaluated nominal value in accordance with linkage NIS7,304,784,809 conditionsforthereportdate(March31,2012) Accumulatedinterest(asofMarch31,2012) NIS52,756,779 ItsfairvalueincludedinthelastFinancialStatements 1 The fair value of the marketable series in the stockexchangevalue,seebelow Stock exchange value of debenture series on March 31,2012 NIS7,793,400,000 Interesttype(fixedorvariable)andrate Fixedannualinterestat6.5%rate Principalpaymentdates 1/12 of the principal every May 20, August 20, and November 20, of each of the years 2012 2014 and on February 20 of each of the years 20132015 from May 20, 2012 until the redemptiondateFebruary20,2015 Interestpaymentdates Interest is paid in quarterly rates on August 20, November 20, February 20 and May 20 of every year, starting from the initial issue date and up totheredemptiondate Linkagebasis Linked (principal and Interest) to the CPI publishedonMay15,2002ofApril2002 It was determined that the debentures can be No convertedtoanothersecurity The entity is entitled to early redemption or enforced No, but nevertheless, is should be indicated that conversion of the debentures to other securities the debentures will be available for early insofar that it exists and the conditions for exercising redemption if the stock exchange will decide on exist delisting debentures when the value of the public's holding in the debentures is lower than the amount determined by the delisting guidelinesofthestockexchange. A warranty was issued for payment of the entity's No liability,inaccordancewithatrustdeed PledgedAssets No Rating Yes,seesectiondbelow b) Detailsoftrusteefortheliabilitiesdebentures(series22): Nameoftrusteecompany: HermeticTrustServices(1975)Ltd. Nameofresponsibleperson: Mr.DanAvnon,Attorney Address: 113,HayarkonStreet,TelAviv,30835 Telephone: 035274867 Fax: 035271451 Website: www.hermetic.co.il
1

MarketvalueonthelasttradingdayinDecember2011,namelyMarch29,2012.

45

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 e. DedicatedDisclosuretoDebenturesHolders(continued) 1. DetailsofDebenturesoftheGroupTradedinIsrael(continued) c) Thedebenturescannotbeconverted.

d) RatingofDebentures(Series22)byaRatingCompany: See Note 7 d to the Interim Financial Statements and section 3 in the Description of the Companys BusinessAffairsinChapterAofthisreport.

e) CommitmenttoFulfilltheConditionsoftheDebentures(Series22) As on the date of the report, the Company fulfilled al the conditions and commitments according to the deed of trust for the debentures (series 22) and there was no cause to place the debentures (series 22) for immediate repayment and the Company did not receive any notice from the trustee to thedebentures(series22)onitsfailuretofulfilltheconditionsandcommitmentsaccordingtothesaid deedoftrust. 2) DetailsofDebenturesRepaidDuringtheReportedYear: TheCompanydidnotrepayCompanydebenturesduringthereportperiod. f. Miscellaneous 1. EnvironmentalPlan,EnvironmentalHazardsandManagementthereof The Company generates and supplies electricity in Israel, while taking steps to protect the environment and reduce environmental hazards along the electricity chain (generation, transmission, transformation and distribution). The Electricity Sector is developed while perpetually balancing different considerations, including: electricity quality, reliability of the supply, cost to the economy and environmental considerations. The Company regards itself as responsible for and obliged to take steps to protect the environmentandreduceenvironmentalnuisancesalongtheelectricitychain. The activity of the Company is exposed to different environmental hazards, including emission of pollutants into the air, storage and use of hazardous and flammable materials, ground and water sources pollution,industrialsewage,asbestos,nonionizingradiationandmore. The environmental requirements applied to the activity of the Company became stricter in recent years (some are still in the legislation process), as well as the supervision and enforcement of these requirements. Air quality is the most relevant environmental issue in the activities of the Company. The flagship environmentalprojectoftheCompanyinthedecade20112017istheinstallationofemissionsreduction devices in the coal fired generation units. The facilities include primary measures (PM) and Selective Catalytic Reduction (SCR), to reduce emission of nitrogen oxides and Flue Gas Desulphurization (FGD) toreduceemissionofsulfurdioxideandconversionofunits14atOrotRabinsitefromcoaltonaturalgas. ExpectedinvestmentcostamountstoapproximatelyNIS8billionplusVAT. For details of environmental hazards and ways of managing them on the subject of the environmental plan, see details in "A Strategic Plan for Sustainable Development in the Company", in the Company's website, www.iec.co.il in The Description of the Companys Business Affairs in Chapter A of the Annual Financial Statements sections 9.11, 8.9, 7.13, 21 and section a in the Description of the Companys BusinessAffairsinChapterAofthisreport. 2. DividendDistributionandAppropriationofIncome According to the directives of the Accounting and Finance Circular of the Government Companies Authority"FinancialStatements201151"(TheGovernmentCompaniesAuthorityCircular"),theCompany isrequiredtorelatetotheappropriationofitsincomeinthisreport.Seedetailsonthissubjectinsection4, toTheDescriptionoftheCompanysBusinessAffairsinChapterAoftheAnnualFinancialStatements. 3 Taxation SeeNote22totheAnnualFinancialStatements. 4. LegalProcedures SeeNote8btotheInterimFinancialStatements.

46

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 f. Miscellaneous(continued) 5. AgreementsincludingAgreementsRequiringGovernmentApproval According to section 11(a)(9a) of the Government Companies Law, a decision of the Company as a Government company, to grant rights or assume an obligation, which may directly or indirectly limit the Government, either in its controlling position or in its status as a shareholder in the Company, including in relation to implementing structural changes and privatization, promotion of competition and regulating thesectorinwhichtheCompanyacts,requirestheapprovaloftheGovernment. According to the directives of the Government Companies circular, the Company is required to provide details of agreements that are subject to the approval of the Government, in accordance with 11(a) of the Government Companies Law. The following are details on agreements entered by the Company in the reportperiodthatrequiredapprovaloftheGovernment: In February 2012, the Company issued debentures in the international market, according to a framework program to raise funds "Global Medium Term Note Program" ("The Program") (according to which the Company issued previously debentures in a total amount of $ 1.5 billion), in the amount of $ 0.5 billion to approved institutional buyers in the U.S.A., according to Rule 144A of the U.S. Securities Act 1933, and outside the U.S., based on Regulation S of this Act. The conditions of the debentures issued according to the program include a cause to demanding immediate repayment of the debt in the event of a change in the controlling shareholder of the Company, therefore, the issue of the debentures required the approval of the Government. On January 29, 2012, the Government decided to approve completion of the debentures issue according to the program up to the amount of $ 0.5 billion, insofar as this approval is requiredforthesubjectoftheeffectofissuingdocumentsonstructuralchangesintheCompany. For more details on the issue of debentures according to the program, see Note 18 c to the Interim FinancialStatementsandsection3intheDescriptionoftheCompanysBusinessAffairsinChapterAofthis report. 6. LimitationsandSupervisiononActivitiesoftheCompany See section 22 in The Description of the Companys Business Affairs in Chapter A of the Annual Financial Statements. 7. Transactions of the Company with Related Parties and Interest Holders, Including Indemnification Letters SeeNote29totheAnnualFinancialStatementsandNote8totheInterimFinancialStatements. 8. DiscussionofRiskFactors See section 29 in The Description of the Companys Business Affairs in Chapter A of the Annual Financial Statements. 9. AppointmentsandRetirementofDirectorsandPositionHoldersduringtheReportingPeriod: On January 12, 2012, Ms. Sarit GiladiDor announced her decision to end her term of employment as spokeswomanoftheCompany. OnFebruary22,2012,Mr.RamErlichmanwasappointedasadirectorintheCompany. OnJanuary22,2012,Mr.MordechaiBenAmiwasappointedasadirectorintheCompany. OnJanuary25,2012,Mr.IgalBenArieendedhistermasDeputyCEOoftheCompany. OnFebruary29,2012,Mr.ShimonEckhausendedhistermasadirectorintheCompany On March 1, 2012, Mr. Avraham Natan announced that he will end his term as a director in the Company onApril10,2012. OnMarch6,2012,Ms.VardaSametwasappointedasadirectorintheCompany. For more details on position holders who ended their term after the report date, see section 4 in the DescriptionoftheCompanysBusinessAffairsinChapterAofthisreport

47

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 The Board of Directors and Management wish to express their appreciation to the Companys employees and itsmanagers. EliyahuGlickman Dr.ZivReich YiftahRonTal ChiefExecutiveOfficer Chairman,Committeefor Chairmanofthe ReviewingtheFinancial BoardofDirectors Statements DateofApproval:May29,2012

48

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 AnnexAtotheReportoftheBoardofDirectors DisclosureoftheForecastedCashFlowsforFinancingRepaymentofCorporateLiabilities 1. Cash flow forecast for the period April 2012 to March 2014, at the base scenario (in NIS million) is presentedbelow:
AprilDecember Year2013 JanuaryMarch 2012 2014 Broughtforward: 1,561 1,831 1,601 Sources: Totalcashflowfromcurrentactions (1,769) 10,227 3,601 Cashflowfromfinancingactions: Privateplacement 4,387 Stateguaranteedprivateplacement 1,500 Stateguaranteedpublicoffering 3,000 3,000 Ministry of Finance obligation for 4,563 State Guarantee and/or other financingsolutions Loanfrombankingcorporations 846 295 Interestondepositsandother 53 69 17 Totalcashflowfromfinancingactions 9,962 7,751 17 Totalcashflowfrominvestmentactions 185 225 40 AnticipatedLiabilities: Cashflowforfinancingactions Obligationsrepaymenttobanks 731 2,039 238 Repayment of debentures to the 1,833 944 611 public Repayment of State guaranteed dentures 5,890 Repayment of Private placement debentures 951 1,613 193 Hedgetransactions (39) 86 (0) Loans financing enterprising 7 5 projects Totalcashflowforfinancingactions 3,483 10,577 1,042 Totalcashflowforinvestmentaction 4,678 5,661 1,459 OffsetVAT (103) 1,590 548 TransferstoCentralPensionFund 51 604 150 Closingbalance 1,831 1,601 2,060 Deposits in dedicated account for emergencyprojectStageB 2,315 1,192 602 Withdrawal from the dedicated account foremergencyprojectStageB 1,291 590 30 Totalinthededicatedaccount 1,025 602 572 Balance after deposits and withdrawals fromthededicatedaccount 806 1,000 1,488

2. Thesensitivityanalysiswasperformedbyreviewingthenetimpactofthedifferentscenarios,comparedto the base scenario of the revenues from electricity, less fuels expenses. The sensitivity analysis was performedforthefollowingscenarios,noneofwhichincludenaturalgasfromEgypt: a) ScenarioADeliveryofnaturalgasinadditiontoMariBreserveandfromadditionalfields. b) ScenarioBWithoutsupplyofnaturalgasfromYamThetisatall. c) ScenarioCSupplyofnaturalgasfromTamarfromJanuary2014insteadofJuly2013.

49

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 AnnexAtotheReportoftheBoardofDirectors(continued) DisclosureoftheForecastedCashFlowsforFinancingRepaymentofCorporateLiabilities(continued) Scenarios Period Year2013 Period 04/2012to12/2012 01/2014to03/2014 Difference Change Differencein Change Differencein Changein inNISBillion in% NISBillion in% NISBillion % ScenarioA AddedIncomewithrespecttofuels 0.9 0.4 Increase(decrease)infuelsexpenses 1.7 0.3 VAToffsetgap 0.2 0.1 0.1 Netimpact 1.5 38.4% 0.5 3.1% 0.3 6.4% ScenarioB AddedIncomewithrespecttofuels 1.0 0.4 Increase(decrease)infuelsexpenses 1.6 0.3 VAToffsetgap 0.2 0.1 Netimpact 1.4 35.0% 0.6 3.3% 0.4 7.1% ScenarioC AddedIncomewithrespecttofuels 1.5 0.6 Increase(decrease)infuelsexpenses 3.6 0.3 VAToffsetgap 0.3 0.0 Netimpact 0.0% *1.8 11.1% 0.3 6.0% * The gap net of VAT in the amount of NIS 1.8 billion in 2013 in scenario C is created by the cash flow effect for the period July December 2013 (addition of NIS 1.5 billion to income), compared to cash floweffectinexpensesofNIS3.6billionforthewholeyear2013.Thisdifferencewillberaisedthrough aStateguaranteeorthroughothermeans,astheStatewilldecide. 3. CashFlowAssumptions: a) Theexaminedscenario("TheBaseScenario"),whichincludesnaturalgassupplyfromYamThetis,only from the Mari B field, without adjacent fields (see other assumptions regarding the fuels mix in sub section5below). b) The attached cash flow is presented at fixed prices as on the end of April 2012. The Company is not exposed materially to changes in market prices, since the input basket of rate component in mostly determinedaslinkedtochangesintheCPI,toachangeinacomponentrecognizedaslinkedtoforeign currency or as foreign currency and to changes in fuels prices and is updated, similar to the effect of changes in the said economical variables on Company expenses. The Company applies a policy of hedging the exposure to foreign currency for components which are not recognized as such in the electricityrate: TherevenuesoftheCompanyfromtheelectricityratearelinkedtotheCPI,whileontheotherhand, aconsiderableshareofthefinancialliabilitiesoftheCompanyislinkedtoforeigncurrency. The Electricity Authority included a financing component in the electricity rate at a rate of 27% of thefinancialliabilitiesoftheCompanythatarelinkedtoforeigncurrency(hedgessum).Thehedged sumisintendedtoneutralize,throughtherate,partofthefinancialexpense/income,derivedfrom theCompany'sexposuretoforeigncurrencyandtransferittoelectricityconsumers. The hedged amount is a partial recognition of changes in exchange rates with respect to the Companiesliabilitiesinforeigncurrency,therefore,forhedgingthefullexposuretoforeigncurrency, the Companyenters hedging contracts, in accordance with the policy ofthe Company.According to thepolicyoftheBoardofDirectors,theexposurerateshouldexceed15%ofthebalanceofloansin foreign currency, and 5% according to the guidelines of the Senior VicePresident of Finance and Economics. Accordingly, the Company enters hedging contracts in a manner that fully hedges the balanceoftheexposureforeverypracticalneed.

50

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 AnnexAtotheReportoftheBoardofDirectors(continued) DisclosureoftheForecastedCashFlowsforFinancingRepaymentofCorporateLiabilities(continued) c) CashflowfromCurrentOperation Cash flow from current operation includes the following main components: revenues from electricity less operation expenses (suppliers + salary), fuels expenses and interest on loans and debenture expenses. 1) ElectricityRateUpdate(includedinthecashflowfromcurrentoperation) According to the decision of the Electricity Authority, published on March 22, 2012, the added costtothefuelscostintheelectricityratewillbespreadovertheyears20122014. It is assumed that the fuels mix for 2012 will not be updated during the year and will only be updatedontheannualupdatedates. Itisassumedthattheaddedfuelscostsfor2012,inexcessofNIS7.7billionandalsotheadded cost derived from the liquid gas prices in 2013 will be spread over the balance of the period, namely,theannualupdatedateinApril2013andApril2014. Rate update rates are presented below (it is assumed that the effect of the rate update on the cashflowwillapplyafter60daysfromtherateupdatedate,ontheaverage). Date April2013 Expectedupdaterate +10.5% Mainreasonsfortheupdate Annualupdate2013

2) Assumptions with respect to the Fuels Component in Revenues from Electricity and Assumptions with respect to Fuels Expenses included in the Cash Flow from Current Operation were based on thefollowing: AccordingtotheletterfromYamThetisonMay14,2012. WithoutnaturalgassupplyfromEgypt. TamarcommencingoperationinJuly2013. The lateral order will be applied: Until Tamar commences operation, 4 units at Eshkol will be operatedwithcrudebeforeusingdieseloil. Operationofpowerstationswithliquidgas,LNG,fromJanuary2013. ReducethePurchase/Excisetaxattherateof88%untilTamarcommencesoperationandthen thetaxratewillberevertedto100%. 3) PrivateElectricityProducers Private electricity producers are expected to commence electricity generation in 2013. The activity of the private electricity producers decreased revenues from electricity and fuels expensesincludedinthecashflowfromcurrentoperations. d) Assumptions regarding suppliers and contractors of the development expenses, included in the cash flow for investment activity and regarding suppliers and contractors of the operation expenses, includedinthecashflowfromcurrentoperationsareasfollows: 1) Cash flow forecast for development and operation for 2012 is based on the budgets of the Company. 2) It is assumed that the budget for development, with respect to suppliers and contractors will be realized at 85% (a conservative assumption, since this item was slightly above the average in recentyears). 3) It is assumed that the budget for development and operation, with respect to suppliers and contractors, for the period from January 2013 to March 2014, is based on long term planning of the department for long term financial planning, with certain adjustments (a conservative assumption,sincetheCompanyusuallyreducesitsbudgetfordevelopmentcomparedtothelong termplanning). Note:Thepreparationsforthesummermayincludeanadditiontothebudgetfordevelopmentin 2012, which was not approved as yet by the Board of Directors, in the amount ofNIS825 million. Thisissubjecttoexternalfinancingandisnotincludedinthecashflow.

51

THEISRAELELECTRICCORPORATIONLIMITED BOARDOFDIRECTORS'REPORT ONTHESTATUSOFTHECOMPANY'SAFFAIRS FORTHETHREEMONTHSENDEDMARCH31,2012 AnnexAtotheReportoftheBoardofDirectors(continued) DisclosureoftheForecastedCashFlowsforFinancingRepaymentofCorporateLiabilities(continued) e) The salary forecast, included in the cash flow from investment activity and in the cash flow from current operations (as part of the operation expenses), provided by the Human Resources Division of the Company, includes salary increments with respect to the agreement entered in January 2011, between the Histadrut and the Government on salary increments to the public sector, which applies totheCompany. f) TransferstotheCentralPensionFund 1) The debt of the Company to the Fund as on the end of April 2012, was approximately NIS1,400 million, tobe spread according to thenewarticles of the Fund over120months, witha minimum transferofNIS50millionpermonth.Allforaslongastheactuarialdebtexists. 2) Pursuant to the arrangement with the Ministry of Finance, starting from May 2012, funds will be transferred from the trust account for nonbudgetary components to the Central Pension Fund (Infinity),intheamountofNIS600million. 3) Postponing Deposits/ Withdrawal of Funds from the Dedicated account for the Emergency Plan, StageB. According to the decision of the Electricity Authority, it is assumed that the deposits in the dedicated account for the emergency plan, due from January 2012 to June 2012 will be postponedtoAugust2012toJanuary2013. g) OffsettingVAT SincetherevenuesoftheCompanyanditsexpenseswithrespecttosuppliersandcontractors(fuels+ equipment + services) include VAT, the offset amount between the expenses to the revenues is transferredtotheTaxesAuthority.

52

TheIsraelElectric CorporationLtd.

Supplement
AdditionalReportRegardingtheEffectivenessofthe InternalControlOverFinancialReporting FortheThreeMonthsEnded March31,2012

ProminentDisclaimer
This English translation of the Additional Report Regarding the Effectiveness of the Internal Control Over Financial Reporting for the three months ended March 31, 2012 ("English Translation") is providedforinformationpurposesonly. In the event of any conflict or inconsistency between the terms of this English Translation and the original version prepared in Hebrew, the Hebrew version shall prevail andholders of the Notes should refer tothe Hebrew versionfor any and all financial

informationrelatingtotheCompany. The Company, its Directors and its Auditors make no representations as to the accuracy and reliability of the financial information in this English Translation, save that the Company and its Directors represent that reasonable care has been taken to correctly translate and reproduce such information, yet notwithstanding the above, the translation of any technical terms are, in the absence of generally agreed equivalent terms in English, approximations to convey the generalsenseintendedintheHebrewversion. The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency.

 SECONDADDENDUM (REGULATION2)
AREPORTOFTHEBOARDOFDIRECTORSANDTHEMANAGEMENTONTHEINTERNAL CONTROLOVERFINANCIALREPORTINGINACCORDANCEWITHGOVERNMENT COMPANIESREGULATIONS (ADDITIONALREPORTSREGARDINGTHEEFFECTIVENESSOFTHEINTERNALCONTROLOVER FINANCIALREPORTING),2007 In the three month period, ended on March 31, 2012, no changes occurred that had a material affect or that are expected to have a material affect on the internal control over financialreportingintheCompany.

HarelZeevBlinde SeniorVicePresidentof FinancesandEconomics May29,2012 EliyahuGlickman ChiefExecutiveOfficer Dr.ZivReich Chairman,Committee forReviewingthe FinancialStatements YiftahRonTal Chairmanofthe BoardofDirectors

TheIsraelElectric CorporationLtd.

ChapterC
ConsolidatedInterim FinancialStatements (Unaudited)

FortheThreeMonthsEnded March31,2012
AccountingandFinancialStatements AccountingandEconomicDivision Haifa,May29,2012

INDEX ReviewReport LettersofRepresentation Interim Consolidated Statements of Financial Position as of March 31, 2012 and 2011 and December31,2011 Interim Consolidated Statements of Operations and Comprehensive Income for the Three MonthsendedMarch31,2012and2011andtheYearendedDecember31,2011 Interim Consolidated Statements of Changes in Shareholders Equity for the Three Months endedMarch31,2012and2011andtheYearendedDecember31,2011 Interim Consolidated Statements of Cash Flows for the Three Months ended March 31, 2012 and2011andtheYearendedDecember31,2011 NotestotheInterimConsolidatedFinancialStatements Page 3 5 9 11 12 14 16

ProminentDisclaimer
This English translation of the Consolidated Interim Financial Statements for the three months ended March 31, 2012 ("English Translation")isprovidedforinformationpurposesonly. In theeventofanyconflictorinconsistencybetweenthetermsofthis English Translation and the original version prepared in Hebrew, the Hebrew version shall prevail andholders of the Notes should refer tothe Hebrew versionfor any and all financial informationrelating to theCompany. The Company, its Directors and its Auditors make no representations as to the accuracy and reliability of the financial information in this English Translation, save that the Company and its Directors represent that reasonable care has been taken to correctly translate and reproduce such information, yet notwithstanding the above, the translation of any technical terms are, in the absence of generally agreed equivalent terms in English, approximations to convey the generalsenseintendedintheHebrewversion. The Company reserves the right to effect such amendments to this English Translation as may be necessary to remove such conflict or inconsistency.

Translated from the Hebrew language

Report on Review of Interim Financial Information
To the Shareholders of the Israel Electric Corporation Limited

Introduction We have reviewed the accompanying financial information of the Israel Electric Corporation Limited ("the Company") which includes the condensed consolidated statement of financial position as of March 31, 2012 and the related condensed consolidated statements of operations and comprehensive income, changes in equity and cash flows for the three-month period then ended. The board of directors and management are responsible for the preparation and presentation of this interim financial information in accordance with the Governmental Companies Regulations (as explained in note 2a-1) and they are also responsible for the preparation of this interim financial information in accordance with Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970. Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of Review We conducted our review in accordance with Review Standard 1 of the Institute of Certified Public Accountants in Israel "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in Israel and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the abovementioned financial information is not prepared, in all material respects, in accordance with the Governmental Companies Regulations (as explained in note 2a-1). In addition to the preceding paragraph, based on our review, nothing has come to our attention that causes us to believe that the abovementioned financial information does not comply, in all material respects, with the disclosure requirements of Chapter D of the Securities Regulations (Periodic and Immediate Reports), 1970.

Emphasis of Matters Without qualifying the above mentioned conclusion, we draw attention to the following matters: 1. The contents of Note 1f in regard to the anticipated material gaps in the Company's cash flows for the years 2012 and 2013, which may occur mainly because of an anticipated shortage in natural gas imported from Egypt, a significant decrease in the gas production from Yam Thetis, and the decision made by the Electricity Authority to spread the increase in the electricity tariff (due to gaps in fuel costs from the natural gas shortage) over several years, and with respect to the actions taken in the present and to be taken in the future by the Company and the government due to the aforementioned events, and the assessment of management and the Board of Directors with respect to the ability of the Company, subject to agreed actions, to bridge these material gaps.

2.

Note 1g regarding the "Assets Arrangement", particularly regarding significant uncertainty and highly material amounts that the Company may be obligated to pay under that arrangement. Note 8c (subsections (1) a-f, (4) and (5)) regarding class action suits and other material claims that were filed against the Company.

3.

4.

Note 2a(1)d and Note 2a(2) regarding the aspects in which the financial reporting principles applied in the Company's financial statements, in accordance with the Governmental Companies Regulations, differ from International Financial Reporting Standards (IFRS).

Additional information pursuant to requirements of the Governmental Companies Authority Notes 11 and 12 include additional information pursuant to requirements of the Governmental Companies Authority (by virtue of section 33b to the Government Companies Law), excluding information regarding land rights as discussed in Note 11h .

Brightman Almagor Zohar & Co.

Certified Public Accountants Member of Deloitte Touche Tohmatsu Limited

Tel-Aviv, May 29, 2012

ADDENDUM (REGULATION2) ADDITIONALREPORT INACCORDANCEWITHGOVERNMENTCOMPANIESREGULATIONS (ADDITIONALREPORTREGARDINGACTIONSTAKENANDREPRESENTATIONSMADETOENSURETHEACCURACYOF THEFINANCIALSTATEMENTS,ASDEFINEDINSECTION8(b)INCHAPTERBOFTHESECURITIESREGULATIONS (PERIODICANDIMMEDIATEREPORTS)1970) I,HarelZeevBlinde,certifythat: 1. I have reviewed the Financial Statements and Directors Report of The Israel Electric Corporation Limited (the Company or the Electric Corporation) for the three months ended March 31, 2012 (collectively "the reports"). 2. To the best of my knowledge and after reviewing the reports, they do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thereports. 3. To the best of my knowledge and after reviewing the reports, the Financial Statements and other financial information included in the Directors Report fairly present, in all material respects, the financial condition, resultsofoperations,changesinequityandcashflowsoftheCompanyasof,andfor,theperiodspresentedin thereports. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Company. Accordingly, we have designed such disclosure controls and procedures, or had established under our charge such disclosure controls and procedures, designed to ensure that material information relating to the Company is made known to us by others in the Company particularly duringtheperiodinwhichthereportswereprepared. 5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's BoardofDirectors,basedonourmostrecentevaluation: a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process,summarizeandreportfinancialinformation. b. Any fraud, whether or not material, that involves management or other employees who have a significantroleintheCompany'sinternalcontrolsoverfinancialreporting. There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to anylaw. HarelZeevBlinde May29,2012 SeniorVicePresidentofFinanceandEconomics

ADDENDUM (REGULATION2) ADDITIONALREPORT INACCORDANCEWITHGOVERNMENTCOMPANIESREGULATIONS (ADDITIONALREPORTREGARDINGACTIONSTAKENANDREPRESENTATIONSMADETOENSURETHEACCURACYOF THEFINANCIALSTATEMENTS,ASDEFINEDINSECTION8(b)INCHAPTERBOFTHESECURITIESREGULATIONS (PERIODICANDIMMEDIATEREPORTS)1970) I,EliyahuGlickman,certifythat: 1. I have reviewed the Financial Statements and Directors Report of The Israel Electric Corporation Limited (the Company or the Electric Corporation) for the three months ended March 31, 2012 (collectively "the reports"). 2. To the best of my knowledge and after reviewing the reports, they do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thereports. 3. To the best of my knowledge and after reviewing the reports, the Financial Statements and other financial information included in the Directors Report fairly present, in all material respects, the financial condition, resultsofoperations,changesinequityandcashflowsoftheCompanyasof,andfor,theperiodspresentedin thereports. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Company. Accordingly, we have designed such disclosure controls and procedures, or had established under our charge such disclosure controls and procedures, designed to ensure that material information relating to the Company is made known to us by others in the Company particularly duringtheperiodinwhichthereportswereprepared. 5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's BoardofDirectors,basedonourmostrecentevaluation: a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process,summarizeandreportfinancialinformation. b. Any fraud, whether or not material, that involves management or other employees who have a significantroleintheCompany'sinternalcontrolsoverfinancialreporting. There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to anylaw. EliyahuGlickman May29,2012 ChiefExecutiveOfficer

ADDENDUM (REGULATION2) ADDITIONALREPORT INACCORDANCEWITHGOVERNMENTCOMPANIESREGULATIONS (ADDITIONALREPORTREGARDINGACTIONSTAKENANDREPRESENTATIONSMADETOENSURETHEACCURACYOF THEFINANCIALSTATEMENTS,ASDEFINEDINSECTION8(b)INCHAPTERBOFTHESECURITIESREGULATIONS (PERIODICANDIMMEDIATEREPORTS)1970) I,Dr.ZivReich,certifythat: 1. I have reviewed the Financial Statements and Directors Report of The Israel Electric Corporation Limited (the Company or the Electric Corporation) for the three months ended March 31, 2012 (collectively "the reports"). 2. To the best of my knowledge and after reviewing the reports, they do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thereports. 3. To the best of my knowledge and after reviewing the reports, the Financial Statements and other financial information included in the Directors Report fairly present, in all material respects, the financial condition, resultsofoperations,changesinequityandcashflowsoftheCompanyasof,andfor,theperiodspresentedin thereports. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Company. Accordingly, we have designed such disclosure controls and procedures, or had established under our charge such disclosure controls and procedures, designed to ensure that material information relating to the Company is made known to us by others in the Company particularly duringtheperiodinwhichthereportswereprepared. 5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's BoardofDirectors,basedonourmostrecentevaluation: a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process,summarizeandreportfinancialinformation. b. Any fraud, whether or not material, that involves management or other employees who have a significantroleintheCompany'sinternalcontrolsoverfinancialreporting. There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to anylaw. Dr.ZivReich Chairman,CommitteeforReviewing May29,2012 theFinancialStatements

ADDENDUM (REGULATION2) ADDITIONALREPORT INACCORDANCEWITHGOVERNMENTCOMPANIESREGULATIONS (ADDITIONALREPORTREGARDINGACTIONSTAKENANDREPRESENTATIONSMADETOENSURETHEACCURACYOF THEFINANCIALSTATEMENTS,ASDEFINEDINSECTION8(b)INCHAPTERBOFTHESECURITIESREGULATIONS (PERIODICANDIMMEDIATEREPORTS)1970) I,YiftahRonTal,certifythat: 1. I have reviewed the Financial Statements and Directors Report of The Israel Electric Corporation Limited (the Company or the Electric Corporation) for the three months ended March 31, 2012 (collectively "the reports"). 2. To the best of my knowledge and after reviewing the reports, they do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thereports. 3. To the best of my knowledge and after reviewing the reports, the Financial Statements and other financial information included in the Directors Report fairly present, in all material respects, the financial condition, resultsofoperations,changesinequityandcashflowsoftheCompanyasof,andfor,theperiodspresentedin thereports. 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the Company. Accordingly, we have designed such disclosure controls and procedures, or had established under our charge such disclosure controls and procedures, designed to ensure that material information relating to the Company is made known to us by others in the Company particularly duringtheperiodinwhichthereportswereprepared. 5. The Company's other certifying officers and I have disclosed to the Company's auditors and to the Company's BoardofDirectors,basedonourmostrecentevaluation: a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process,summarizeandreportfinancialinformation. b. Any fraud, whether or not material, that involves management or other employees who have a significantroleintheCompany'sinternalcontrolsoverfinancialreporting. There is nothing in the aforesaid to derogate from my responsibility or the responsibility of anyone else, pursuant to anylaw. YiftahRonTal Chairmanofthe May29,2012 BoardofDirectors

THEISRAELELECTRICCORPORATIONLIMITED CONSOLIDATEDSTATEMENTSOFFINANCIALPOSITION (NEWISRAELISHEKELS,INMILLIONS) (AdjustedtoNISpurchasingpowerofMarch2012) Note March31 2012 (Unaudited) CURRENTASSETS Cashandcashequivalents ............................. Shortterminvestments ................................. Tradereceivablesforsalesofelectricity .......... Othercurrentassets ...................................... Inventoryfuel .............................................. Inventorystores ........................................... Regulatoryassets,net.................................... 2011 December31 2011 (Audited)

861 715 4,137 722 2,198 124 1,526 10,283

4,633 667 3,143 489 *2,315 131 11,378

1,156 744 3,879 629 1,994 124 2,458 10,984

NONCURRENTASSETS Longtermreceivables .................................. Assets with respect to benefits after employmenttermination: Excesspensionplanassetsoverpensionliability Fundsintrust ...............................................

1,426

1,122

1,995

4 4

3,826 2,061 5,887

5,304 1,934 7,238

5,723 2,055 7,778

Fixedassets,net Fixedassetsinuse,net .................................. Fixedassetsunderconstruction .....................

11i

57,329 4,030 61,359 854

57,420 5,009 62,429 861

56,584 4,787 61,371 850

Intangibleassets,net .....................................

79,809
*Reclassified TheaccompanyingnotesareanintegralpartoftheFinancialStatements. Mr.HarelZeevBlinde Mr.EliyahuGlickman Dr.ZivReich SeniorVicePresidentof ChiefExecutiveOfficer Chairman,Committee FinancesandEconomics forReviewingtheFinancial Statements May29,2012 DateofapprovaloftheFinancialStatements

83,028

82,978

YiftahRonTal Chairmanofthe BoardofDirectors

THEISRAELELECTRICCORPORATIONLIMITED CONSOLIDATEDSTATEMENTSOFFINANCIALPOSITION (NEWISRAELISHEKELS,INMILLIONS) (AdjustedtoNISpurchasingpowerofMarch2012) Note 2012 (Unaudited) March31 2011 December31 2011 (Audited)

CURRENTLIABILITIES Creditfrombanksandothercreditproviders ..... Tradepayables ................................................. Othercurrentliabilities ...................................... Regulatoryliabilities,net ................................... Customeradvances,netofworkinprogress ....... Provisions .........................................................

5,494 2,201 1,475 463 796 10,429

NONCURRENTLIABILITIES Debentures....................................................... Liabilitiestobanks ............................................. Liabilities with respect to other benefits after employmenttermination ................................... Regulatoryliabilities,net ................................... Provisionforrefundingamounts ....................... Deferredtaxes,net ........................................... DebenturestotheStateofIsrael ........................ LiabilitytotheStateofIsrael Otherliabilities .................................................

31,704 4,930
4 5

4,466 1,633 1,374 *769 490 794 9,526 *31,638 *4,787 2,554 3,470 2,186 4,176 2,458 *3,591 *376 55,236 1,103 1,000 16,163 18,266 83,028

4,620 2,031 1,565 401 791 9,408 31,403 5,061 2,652 2,796 2,266 5,513 2,462 3,700 386 56,239 1,103 1,000 15,228 17,331 82,978

2,680 523 2,293 5,033 2,453 3,523 378 53,517

SHAREHOLDERSEQUITY Sharecapital ..................................................... Capitalreserves ................................................ Retainedearnings .............................................

1,103 1,000 13,760 15,863 79,809

*Reclassified TheaccompanyingnotesareanintegralpartoftheFinancialStatements.

10

THEISRAELELECTRICCORPORATIONLIMITED CONSOLIDATEDSTATEMENTSOFOPERATIONS ANDCOMPREHENSIVEINCOME (NEWISRAELISHEKEL,INMILLIONS) (AdjustedtoNISpurchasingpowerofMarch2012) Note Revenues ............................................................. Costofoperatingtheelectricitysystem: Wages .................................................................. Fuel ...................................................................... Transferoffueltoregulatoryassets.................... Purchasesofelectricity ....................................... Transfer of purchases of electricity to regulatoryassets.................................................. Operationofthegenerationsystem ................... Operation of the transmission and distributionsystem .............................................. Depreciationandamortization ............................ Provision with respect to nonrecognition of fixedassetsconstructioncosts Profitfromoperatingtheelectricitysystem ...... Salesandmarketingexpenses ............................. Administrativeandgeneralexpenses.................. Expenses (income) from liabilities to pensioners,net .................................................... 6 FortheThreeMonthsended March31 2012 2011 (Unaudited) FortheYearended December31 2011 (Audited)

6,520 666 5,102 (1,269) 167 (63) 176 64 1,145 (5) 5,983 537 276 223 1,505 2,004 (1,467) 401 (58)

5,211 449 2,217 64 161 75 1,054 13 4,033 1,178 226 187 141 554 624 467 (53) 42 456 168

24,625 1,689 12,755 471 756 360 4,204 (125) 20,110 4,515 882 717 147 1,746 2,769 2,662 (201) (269) 2,192 577

Income(expenses)fromcurrentoperations...... Financialexpenses,net: Financialexpenses .............................................. Capitalizationoffinancialexpenses..................... Transfer of financial income (expenses) to a regulatoryasset/liability ...................................... Financialexpenses,net ....................................... Income(loss)beforeincometaxes ..................... Incometaxes: Otherdeferredtaxes .......................................... Expenses (income) from adjustments of deferred tax balances arising from changes in futuretaxrates ...................................................

134 477 (1,944) (476) (476) (1,468) (1,468)

30 (9) 21 147 147

154 1,211 1,365 (788) (788)

NetIncome(loss) ...............................................

Totalcomprehensiveincome(loss) .................... TheaccompanyingnotesareanintegralpartoftheFinancialStatements.

11

THEISRAELELECTRICCORPORATIONLIMITED CONSOLIDATEDSTATEMENTSOFCHANGESINEQUITY (NEWISRAELISHEKELS,INMILLIONS) (AdjustedtoNISpurchasingpowerofMarch2012) FortheThreeMonthsendedMarch31,2012 Retained Paidup Capital Total earnings sharecapital reserves (Unaudited) BalanceasofJanuary1,2012 ..................... Lossfortheperiod ........................................ BalanceasofMarch31,2012 ...................... FortheThreeMonthsendedMarch31,2011 Retained Paidup Capital Total sharecapital reserves earnings (Unaudited) BalanceasofJanuary1,2011 ..................... Netincomefortheperiod ............................ BalanceasofMarch31,2011 ..................... FortheyearendedDecember31,2011 Retained Paidup Capital sharecapital reserves earnings Total (Audited) 1,103 1,000 16,016 18,119 1,103 1,000 (788) 15,228 (788) 17,331 1,103 1,103 1,000 1,000 16,016 147 16,163 18,119 147 18,266 1,103 1,103 1,000 1,000 15,228 (1,468) 13,760 17,331 (1,468) 15,863

BalanceasofJanuary1,2011 ..................... Lossfortheyear............................................ BalanceasofDecember31,2011 ...............

a. The Company is subject to the Government Companies Law 1975 ("The Government Companies Law"), which states, inter alia, that the decision of the Board of Directors on the appropriation of profits of a Government company,includingadistribution,asdefinedbytheCompaniesLaw,1999,("TheCompaniesLaw"),issubjecttothe approvaloftheGovernmentCompaniesAuthority("CompaniesAuthority"). For the dividends policy, see the statement of changes in equity in the Annual Financial Statements as of December31,2011andfortheyearthenended("AnnualFinancialStatements"). As understood by the Company, the directives of the Government Companies Law as well as the instructions of the circularoftheCompaniesAuthorityondesignatingprofitsforpayingdividendsdonotimposeadutyontheboardof directors of a Government company to decide to distribute a dividend, but oblige it, as a Government company, to receive the approval of the Companies Authority of the decision of the board of directors on this subject and in the event of a conflict between the company's board of directors and the Companies Authority when the board of directors decides to distribute a dividend. When the Companies Authority objects to the decision of the Board of Directors, the Company will act according to the decision of the Companies Authority, as approved by the Government. Thecalculatedamountofthedividendsaccordingtothispolicyfor20042006wasaboutNIS2.5billion.Nodividends were calculated for 2007, since according to the former reporting standards, the Company recorded a loss in that year.Accordingtothispolicy,thedividendsfor2008amounttoaboutNIS358million(afteranupdatewithrespect to the restatements, the calculated sum would have amounted to approximately NIS 548 million). The amount of dividends for 2009 is NIS 779 million (after an update with respect to the restatements, the calculated sum would haveamountedtoapproximatelyNIS843million).

b.

c.

12

 d.

e.

f.

The Company's Board of Directors decided in 2005 to recommend to the General Meeting the distribution of dividendsintheamountofNIS118millionwithrespecttoearningsfor2004,becauseinitsopinion,dividendsshould not be distributed out of the earnings deriving from an accounting change and from an amount deriving from a decreaseinthetaxrate.Thesedividendswerenotpaidasyet. For the time being, the Board of Directors does not recommend the distribution of dividends for the years 2005, 2006,2008,2009.TheCompanydidnotdistributeadividendsince2004. The Company applied to the Director of the Companies Authority to receive his approval of the above recommendationfor2004.TheCompanyalsorequestedtheapprovaloftheDirectoroftheCompaniesAuthorityof the decision of the Board of Directors on distribution of dividends for the years 20052009. The Director of the CompaniesAuthorityclarifiedinhisletterofMay5,2009,thatthissubjectwillbereviewedwithdueconsiderationof thefinancingrequirementsoftheCompany,itsinternalsourcesanddebtraising,requiredtoenabletheCompanyto fulfilltheinstructionsoftheElectricitySectorLaw1996anditsamendments,includingallinstructionsregardingthe preparation for implementing the restructuring of the Electricity Sector, the development plan and the emergency plan of the Electricity Sector. Therefore, the Companies Authority replied that it does not intend to demand a dividenddistributionfortheyears20042008,in2009. On May 23, 2012, the Manager of the Companies Authority announced that the Companies Authority does not intendtodemandadistributionofdividendwithrespectto2009,in2012. The Company did not distribute and did not calculate dividends with respect to 2010 2011, since for 2010 the CompanyrecordedinitsfinancialstatementsaprofitofNIS2millionandin2011theCompanyrecordedalossofNIS 788million. Under the bonus policy in Government Business Companies, as stipulated in the Government Companies Authority circular, dated July 15, 2008, bonus payments are not allowed when no dividends were paid for the year for which thebonusisrequested.TheCompanydidnotpaybonusestoemployeesinyearswherenodividendswerepaid.

TheaccompanyingnotesareanintegralpartoftheFinancialStatements.

13

THEISRAELELECTRICCORPORATIONLIMITED CONSOLIDATEDSTATEMENTSOFCASHFLOWS (NEWISRAELISHEKELS,INMILLIONS) (AdjustedtoNISpurchasingpowerofMarch2012) FortheThreeMonthsended March31 2012 2011 (Unaudited) FortheYearended December31 2011 (Audited)

Cashflowsfromoperatingactivities: Net income (loss) according to the statements of (1,468) operationsandcomprehensiveincome Adjustments required to present cash flows from 493 operatingactivities(AnnexA) Netcashprovidedbyoperatingactivities (975) Cashflowsfrominvestingactivities: Purchase of fixed assets, net of consumers participation (1,069) inassets Purchaseofintangibleassets (50) Proceedsfromsaleoffixedassets 18 Collection(provision)oflongtermdebts,net 36 29 Maturity(deposit)ofdepositsinbanks Netcashusedininvestingactivities (1,036) Cashflowsfromfinancingactivities: Issuanceoflongtermdebentures,net 1,857 Otherlongtermloansreceived Longtermdebenturesrepayment (37) Repaymentofotherlongtermloans (234) Deposit(repayment)ofhedgingtransactions,net (3) Increaseofshorttermcreditfrombanks,net 133 Net cash provided by (used in) financing investing activities 1,716 Increase(decrease)incashandcashequivalents (295) Balance of cash and cash equivalents at beginning of theperiod 1,156 Balanceofcashandcashequivalentsatendofperiod 861 Additionalinformationaboutcashflows Actualinterestpayments,net 839 Actualtaxpayments,net 1 TheaccompanyingnotesareanintegralpartoftheFinancialStatements.

147 752 899 (1,052) (56) 15 57 (123) (1,159) 2,558 15 (544) (273) (224) 71 1,603 1,343 3,290 4,633 735 2

(788) 2,390 1,602 (4,156) (177) 71 (1) (204) (4,467) 4,031 1,085 (2,705) (997) (812) 129 731 (2,134) 3,290 1,156 2,475 7

14

THEISRAELELECTRICCORPORATIONLIMITED CONSOLIDATEDSTATEMENTSOFCASHFLOWS (NEWISRAELISHEKELS,INMILLIONS) (AdjustedtoNISpurchasingpowerofMarch2012) ANNEXA ADJUSTMENTSREQUIREDTOPRESENTCASHFLOWSFROMOPERATINGACTIVITIES FortheThreeMonthsended March31 2012 2011 (Unaudited) FortheYearended December31 2011 (Audited)

Incomeandexpensesnotaffectingcashflows: Depreciationandamortization 1,233 Increase(decrease)indeferredtaxes,net (477) Decrease (increase) in liabilities with respect to 1,760 employeesbenefits,net Revaluation (erosion) of loans and debentures, net, (229) includinghedgingtransactions 27 Increaseinprovisionforrefundingamountstocustomers Decrease in exposure of the Company to changes in foreigncurrencytransferredtoconsumers (91) Increaseinotherregulatoryassets (1,250) Revaluation(erosion)oflongtermdebts 1 (2) Capitalloss(gain)onsaleoffixedassets 972 Changesinassetsandliabilities: Decrease (increase) in trade receivables for sales of (258) electricity Increaseinothercurrentassets (158) Decreaseininventorystores Increaseininventoryfuels (207) Increase in customer advances for work ordered, net of 62 workinprogress Increaseinliabilitiestosuppliers 170 Increase(decrease)inothercurrentliabilities (88) (479) 493 TheaccompanyingnotesareanintegralpartoftheFinancialStatements.

1,149 19 14 (273) 27 (53) (150) (1) (9) 723 82 (140) 2 *(446) 91 369 *71 29 752

4,431 1,360 (287) 46 107 (991) (2,504) (4) 60 2,218 (655) (114) 30 (178) 2 830 257 172 2,390

15

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL a. OperationoftheCompany 1. The Israel Electric Corporation Limited ("The Company") is engaged in the generation, transmission, distribution and supply of and commerce in electricity pursuant to licenses granted to the Company by the State of Israel. The Company is classified as an Essential Service Provider in relation to these services. The Company was declared a monopoly by the General Director of the Israel Antitrust Authority. The directives of the Restrictive Trade Practices Law 1988 apply to the Company. The Company also deals in the construction of the infrastructures required for these activities. Additional information on the operating segments of the CompanyispresentedinNote9below. 2. The Company is a Government Company (the State of Israel holds approximately 99.85% of its share capital) anditissubjecttotheprovisionsoftheGovernmentCompaniesLaw(seeparagraphdbelow). The Company is also a PublicCompany asdefinedby theCompanies Law and also aReporting Corporation,as definedbytheSecuritiesLaw1968. 3. TheseFinancialStatementsshouldbereadinrelationtotheAnnualFinancialStatements,asonDecember31, 2011. b. TheElectricitySectorLaw 1) General FromMarch4,1996,theactivityoftheElectricitySectorhasbeenregulatedundertheElectricitySectorLawandits regulationsandtheCompanyoperatesthereby.TheprovisionsoftheElectricitySectorLawstatethatitspurposeis to regulate the activity in the electricity sector to the benefit of the public, while securing reliability, availability, quality,efficiencyandwhilecreatingconditionsforcompetitionandminimizationofcosts. In accordance with the Electricity Sector Law, the Minister of Energy and Water ("The Minister") is the party in charge of execution of the law. In addition, in accordance with the Electricity Sector Law, the Public Utilities Authority Electricity ("The Electricity Authority"), which was established pursuant to this law, shall act in accordance with its goals and the policy of the government, or the Minister and the Minister of Finance ("The Ministers") in accordance with their lawful authorities in the electricity sector field, and shall be responsible for giving the licenses in accordance with the law and supervision of fulfillment of the provisions of the law and the licenses. In addition, the Electricity Authority fulfills the functions that have been prescribed for it in the Electricity SectorLaw(orthathavebeenimposeduponitinaccordancewithanyotherlaw),includingthesettingofelectricity chargeratesandwaystoupdatethem,establishingofcriteriaforthestandardandqualityoftheservicethatavital serviceproviderlicenseholderprovidesandsupervisionoffulfillmentofitsdutiesinaccordancewiththesecriteria. As of this report, the Company generates, transmits, distributes and supplies most of the electricity that is consumedintheIsraelinationaleconomypursuanttothelicensesthathavebeengrantedtoitforeachsuchtypeof operation,inaccordancewiththeElectricitySectorLaw,whichhavebeenextendedovertheyears,anditoperates as an electricity system administrator. As of the time of this report, the licenses of the Company are valid until January1,2013. 2) ImplementationoftheStructuralChangeasRequiredbytheImplementationoftheElectricitySectorLaw 1. TheElectricitySectorLawestablishes,interalia,aregulatoryframeworkwhoseaimistopromotetheefficiency of the electricity sector, by creating competition in the electricity sector in Israel using various measures (the StructuralChange) AlthoughtheCompanygenerates,transmits,distributesandsuppliesmostoftheelectricitythatisconsumedin the Israeli national economy and operates as the system administrator , the Electricity Sector Law states, that the operations of the Company are to be separated between a number of corporations through a process of decentralizationandpartialprivatizationoftheelectricitysectorinIsraelandthelawprescribesaschedulefor the implementation of these provisions, as well as transitional arrangements until the implementation of the structural change, which will enable the Company to generate, transmit, distribute, supply, sell and trade in electricity according to licenses it received in accordance of the Electricity Sector Law and also act as the electricitysystemadministrator. The directives of the Electricity Sector Law are complex and may be construed or implemented in different forms and the Company has no certainty that its own interpretation of the Electricity Sector Law is the interpretation that will eventually be accepted or implemented, although the Government, in its decision on September12,2006,relatedtotheimplementationoftheElectricitySectorLawinasimilarformtothatofthe Company's interpretation, the Company is not certain that the law will be implemented according to this decision,thattherequiredlegalandGovernmentapprovalsforimplementingthisoutlinewillbeaccepted.

16

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL b. TheElectricitySectorLaw(continued) In the opinion of the Board of Directors and the Management of the Company, the Electricity Sector Law, as currentlyworded,doesnotaddressalloftheissuesthatthestructuralchangeintheCompanyraises,anddoes notregulateexplicitlythemannerofexecutionofthestructuralchange.Itisemphasizedthatamaterialportion of the components of the structural change is not under the control of the Company, but rather of the State. SeedetailsoftheprogressinthisissueinNote1ebelow. 3) PresentingSeparateFinancialStatementsasRequiredbytheImplementationoftheElectricitySectorLaw TheElectricitySectorLawstatesthatanessentialserviceproviderlicenseholdershallprepareFinancialStatements as the Ministers prescribe, after consulting the Minister of Justice with respect to their extent of elaboration, the accountingprinciplestobeusedfortheircompilation,andthedeclarationsandnotesthataretobeattached. Accordingly, in accordance with regulations, conditions and procedures for the granting of a license, an essential service provider is required to submit Financial Statements separately for each area, for each activity and for each profit center, and to submit consolidated statements with respect to its activities in accordance with all of the licenses that are in its possession. A profit center is defined in these regulations as a unit" that has a closed income and expense structure, without cross subsidy with the operations of another unit, and owing to whose actionsFinancialStatementsthatareseparatefromtheotheractionsofthelicenseholderwillbesubmitted. However,the Company doesnot submit auditedFinancial Statements forprofit centers as required inmost of the licenses and does not submit audited annual Financial Statements separately for each area, for each activity, for eachgenerationunitorpowerstation,butsubmitsauditedFinancialStatementsfortheoperationsoftheCompany initsentirety. The submission of Financial Statements other than required in the licenses of the Company is known to the Electricity Authority and to the Ministry of Energy and Water. Notwithstanding, the new generation licenses that the Company has received include similar provisions that require the Company to submit Financial Statements in themannerstipulated. However, in the opinion of the Management of the Company and the Board of Directors, as long as the issue of reportingbyprofitcentersisnotresolved,thereisanexposureaccordingtowhichthereisthepossibilityofstepsor proceedingsbeingtakenagainsttheCompanyforfailuretofulfilltheprovisionsinitslicenses. c. Decisions of the Government and Parties Acting on its Behalf, Regarding the Electricity Sector and Activities of theCompany Over the years, the Governments of Israel and its Ministries have made decisions that concern the electricity sector. Some of the decisions have not yet been implemented due to various considerations. The main subjects affectedbydecisionsoftheGovernmentandofpartiesactingonitsbehalfareasfollows: 1) Promotion and integration of independent power producers in electricity generation while using the Company's transmission system (as of March 31, 2012, the scope of the installed electricity generation capability for independent power producers comprises about 1.8% of the Company's total installed electricity generation capability. Total potential generation capacity of the facilities according to conditional licenses granted to entrepreneurs for building an electricity generation facility, together with the generation capacity ofthefacilitywhichwillbebuiltbyO.P.C.RotemLtd.,accordingtothegenerationlicenseitreceivedaccording to a bid published by the State in 2001, comprise, as on the date of this report, approximately 42% of the installed electricity generation capability of the Company on that date. If all the projects that received conditional licenses and won thebid of theState will materialize (exceptprojectsof renewable energy, where theavailabilitydependsonthepresenceofsun,water,etc.),theywillcompriseapproximately22%ofthetotal installedgenerationcapacityintheStateofIsrael,assumingthattheCompanywillbuildallthepowerstations includedinitsapproveddevelopmentplan(includingAlonTavorCCGTandProject"D"). 2) Incorporating two Government Companies, held by the State of Israel, to operate in the electricity sector: SystemManagementCompanyLtd.andNewPowerStationsfortheProductionofElectricityinIsraelLtd. 3) A change to the structure of the electricity sector and the structure of the Company and, to the extent required,achangetotheElectricitySectorLaw("TheStructuralChange.")(Seeparagraphb2above). 4) GovernmentPolicyonEnergyGenerationfromRenewableSources AGovernmentguidelinetargetisreducingtheexpectedelectricityconsumptionby20%oftheforecastofelectricity consumptionin2020.

17

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL c. Decisions of the Government and Parties Acting on its Behalf, Regarding the Electricity Sector and Activities of theCompany(continued) On July 17, 2011, the Government decided to act to realize Government goals for electricity generation that combine renewable energies in the electricity generation system. This electricity generation goal is expected to be attained by installing renewable energies generation capacity of about 2,760 megawatts, which constitutes about 10%oftheexpectedelectricityenergyrequirementsoftheStateupto2020,aswellasaninterimgoalofgenerating 5% of the electricity requirements for the end of 2014, by installed renewable energies electricity generation capacityofabout1,550megawatts. 5) EstablishingaCommunicationsCompany On July 15, 2010, the Government published its decision on increasing the number of broadband infrastructuressuppliersbytheCompany.Inthisdecision,theGovernmentdecidedtoinstructtheMinisterof NationalInfrastructuresandtheMinisterofFinancetoexercisetheirauthorityaccordingtosection6(d)ofthe ElectricitySectorLaw,1996,andpermittheCompanytoactinthefieldofcommunicationthroughestablishing and operating a communications company that will use a fixed communications infrastructure over the electricitynetwork. Fordetailsonestablishingacommunicationscompany,seeNote1c5totheAnnualFinancialStatements. 6) During, 2010, the Prime Minister instructed to include the General Manager of the Ministry of Energy and Water in the staff work and will consolidate recommendations on the comprehensive management of the Israelielectricitysector. On November 30, 2010, the General Manager submitted recommendations that were presented to the Government. The General Manager determined, inter alia, that in order to meet the forecasted needs of the economy, it is necessary that the steam combined cycle should be completed in three power stations, which were constructed and completed recently, according to the decision on the emergency plan stage A. This is required to provide the electricity sector with an additional installed capacity of about 400 MW in the second halfof2013.Fordetailsonfinancingthesteamadditions,seeNote3totheAnnualFinancialStatements. 7) On November 28, 2010, a Government decision was published on the formation of a national plan to reduce greenhouse gas emissions in Israel. Among other decisions, it was decided to require the Minister of Energy and Water to bring regulations to the approval of the Knesset on efficient electricity consumption in the household, commercial and public sectors. It was also decided to require the Electricity Authority to submit recommendations on different issues related to the electricity rate and require the Minister of the Environment to implement a comprehensive plan for supporting investments in reduction of greenhouse gas emissions(seesectionhbelow). 8) The Ministry of Energy and Water regards the promotion of the development plan for the transmission segment an essential need and intends to promote the plan in an emergency status, including a bimonthly reviewofitsimplementationprogress,jointlywithalltherelatedparties.Concurrently,inlightofthefinancial condition of the Company, the Ministry of Energy and Water intends to examine, together with the Electricity Authority and other Government authorities, the creation of financial and other conditions that will help the Companytoadvancethedevelopmentplaninthisformat.

18

NOTE1: d. TheGovernmentCompaniesLaw TheGovernmentCompaniesLawaffectstheCompany,interalia,inthefollowingaspects: 1) Thebasisofthefinancialreportingandinclusionofadditionalinformation(seeNotes2a,11and12below). 2) Dividenddistributionpolicy(seethestatementofchangesinequity). 3) ManagementofCorporateGovernanceaccordingtomandatorycircularsapplyingtotheCompany. 4) Establishing and maintaining processes and displays relating to the effectiveness of the internal controls over financialreporting. 5) A Government company will act according to the business considerations according to which a non Government company customarily operates, except when the Government, with the approval of the Finance CommitteeoftheKnesset,hassetotheroperationalconsiderations. e. EfficiencyProgramandOrganizationalandStructuralChange Over the years, since the Electricity Sector Law application date, the Government of Israel and Government entities have made several decisions that concern the structural change. Some of these decisions were adopted by the Electricity Sector Law and some were not adopted by the law and were not implemented, as aforementionedinsectionb2above. InSeptember2010,anoutlineinprincipleforimplementingastructuralchangeintheelectricitysectorandinthe Company which was agreed upon between the Company's Management, the Company employees organization, representatives of the Ministry of Finance and the Ministry of Energy and Water and the Histadrut ("The Understandings Outline") that is materially different from the outline stated in the current version of the Electricity Sector Law or in the decisions of the Government. The main principle of this outline is that except the system management activity and certain assets in the generation segment of the Company, which will be transferredtothirdparties,theCompanywillcontinuetoperformallotheractivitiesthatarecurrentlyperformed bytheCompany,asaunifiedcompanyandwillnotbedividedintoseparateentities. The detailed principles of an outline for implementing the structural change in the Company, set out in the UnderstandingsOutline,asrecordedinwritingareasfollows: 1) Activities of the Company will not be incorporated as subsidiaries, including the generation, transmission and distribution activities and also headquarters departments that provide services to the Company; all these will remainintheCompanyasoneunifiedcompany,exceptthefollowing: 2) ThesystemmanagementactivitywillbetakenoutoftheCompanyandtransferredtoaseparateGovernment companythatwillactasthesystemmanager. 3) Inthegenerationsegment: a) ThewholeRamatHovavsitewillbesoldandtransferredtofullprivateorGovernmentownership. b) The activity of CCGT 4 of the Alon Tavor emergency plan will be sold and transferred to full private or Governmentownership.TheCompanywillplanandbuildtheunit. c) Project D the coal operated power station will be structured as a separate company. The Company will planandbuilditandaprivatepartnerwillbeintroducedwithashareholdingof51%. d) The prohibition, in principle, that prevents the Company from building additional power stations will be lifted and the Company will build a nuclear power station, or power stations with an equivalent volume, thatwillbeownedbytheCompany,startingfrom2020,accordingtotheneedsofthedevelopmentplan. e) The Company will be allowed to upgrade and replace power stations that it owns according to its needs andupontheobsolescenceoftheexistingequipment. 4) The Company will be allowed to plan and build power stations and also act in the fields of technology, logistics, computerization and information, in Israel and abroad, and the current limitations on these fields of operationwillbelifted. 5) The Company will operate through profit centers that will enable full transparency and costs attribution accordingtoamodelthatwillbedeterminedinlinewiththenatureoftheCompany'soperations. 6) All the consents to this outline are subject to the approval of all other components of the structural change, including steps to improve the financial condition of the Company, adopting an efficiency plan for the Company, implementing a structural and organizational change, ensuring management flexibility and employeesrightsasonepackage.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) GENERAL(continued)

19

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) e. EfficiencyProgramandOrganizationalandStructuralChange(continued) The Understandings Outline was not yet studied and approved by all the related Government parties. Implementation of the structural change in the electricity sector according to the understandings outline will requiretheapprovaloftheGovernment,theregulatorsandotherthirdparties,enteringsignificantchangesinthe ElectricitySectorLawandinotherlawsandperformingotheractionsthatwerenotconsentedtooradoptedason thedateofthisreport.Asonthedateofthisreporttheimplementationdateandmeansoftheseunderstandings, if implemented is uncertain, as is the answer to the question on the eventual implementation of these or any understandings. The duration of the discussions on the remaining components of the structural change, the Government making the suitable decisions and effecting the required amendments to the Electricity Sector Law and other related laws may require an extended period and the precise conditions of the agreements, decisions and regulation, if any, that will materialize may be different from the conditions expectedby the Company. In the event that the directives of the law will not be changed and no final agreement will be achieved on the components of the conclusions, the Company is not certain about the way it will be required to perform a structural change and the extent of the effect of the structural change on the business, operation results and the financialconditionoftheCompanyisuncertain. In a letter to the Chairman of the Board of Directors of the Company on February 28, 2007, on the subject of regulating Amendment No. 5 to the Electricity Sector Law, the Director General of the Government Companies Authority clarified that the implementation of the reform in the Company according to the Electricity Sector Law, includingAmendmentNo.5totheLawofthatdate,willbeconductedwhileexamining,interalia,theimplications of the structural change for the Companys obligations, with the intent to allow repayment of loans received by theCompany. Moreover, in the opinion on the Company's Board of Directors and Management, implementation of the structural change in the Company (in any outline) involves addressing issues related to creditors of the Company, in light of the agreements with some of them, to the extent that these issues will be affected by the implementation of the structural change, all subject to the effective laws. As on the date of this report, the CompanyandtheGovernmentdidnotcompletetheactionsrelatedtotheseissuesasyet. As mentioned, the discussions on the implementation method of the structural change continue. If and insofar as no final agreement will be reached on all the components of the structural change, and as a result the understandingoutlineorotherunderstandingsconcludedbetweentheCompanyandtheotherpartiesinvolvedin the structural change and also in the directives of the Electricity Sector Law will not be changed and/or the consent of Government authorities, regulators and other parties whose consent if required to implement the structural change according to the understandings outline or to other understandings concluded regarding the structural change will not be implemented, then the Company will be obliged to implement the structural change as it is outlined in the Electricity Sector Law, either as the Company understands that it can be implemented, as aforementioned,oraccordingtoanotheroutline. Implementation of the structural change in the company did not show real progress in the past, due to factors beyond the Company's control, including among others, employees sanctions on the subject of the structural change and also because the negotiations with the different Government parties on the issues of the structural change did not mature into agreements. The Company is acting and addressing related parties in the State, the employees organization and the Histadrut, to reach an agreed upon arrangement, inter alia, with Company employees on the implications that the structural change will have on employees rights, according to which the parties,asmentioned,reacheddecisionsconcludedinSeptember2010intheunderstandingoutline. In December 2010, the Board of Directors decided to make progress in the implementation of the structural change during 2011, including the implementation of the understandings outline and a comprehensive efficiency plan. The Board of Directors called all the involved parties to cooperate closely and open intensive discussions immediately,topromotetheagreeduponprocess. InNovember2011,theBoardofDirectorsinstructedtheManagementoftheCompanytopromotetheprocessof the structural change in the Company, even in the event that the planned reform in the electricity sector will not be fully realized in the coming year and exhaust all the available legal possibilities in the Company's budget and cashflowtominimize,asfaraspossible,theneedtoraiseadditionaldebt.

20

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) e. EfficiencyProgramandOrganizationalandStructuralChange(continued) In December 2011, the Board of Directors of the Company decided during discussions on the Company's budget for 2012, to decrease 400 positions of permanent employees during the second half of 2012 and stated that the Company will begin the implementation of a multiyear plan for a structural change and efficiency Tnufat Or", which will have the first priority in the framework of realizing the comprehensive reform plan in the Electricity sector. Employees dismissal involves the consent of the employees organization. The Company estimates that the retirement of employees costs, either under the implementation of the structural change, insofar as implemented or under the implementation of the multiyear plan for a structural change and efficiency, which, accordingtothedecisionoftheBoardofDirectorswillbeimplementedineithercase,maybematerial.However, these costs are subject, inter alia, to the approval of the relevant State entities, specifically the Ministry of Finance. The final format of the structural change, its implementation date or implications for the Company, its business andresultsareuncertain. f. StatusoftheCompany'sBusiness 1) EventswhichledtoconsiderablegapsinthecashflowoftheCompany: a) Several events, which occurred in the business environment of the Company as detailed below, caused a considerableincreaseinthefuelcostsoftheCompany: (1) FromFebruary2011,toMarch2012,aseriesofexplosionsoccurredinthenaturalgaspipelinefromEgypt. These explosions caused repeated disruptions in the gas supply from Egypt. From April 2012, gas supply from Egypt to the Company stopped completely due to the announcement of the Egyptian Government GascompaniesonaunilateralcancellationoftheagreementwithEMGtosupplynaturalgas. (2) According to announcements received from the partnerships in the natural gas project "Yam Thetis" in October and December 2011, February 2012 and May 2012, the ability to extract gas from this reserve decreasedsignificantly,which,asonthedateadjacenttotheapprovaldateofthisreportisaboutonefifth ofthecontractualgasquantity,accordingtotheagreement. (3) InDecember2010,theMinistryofEnvironmentalProtectionpublishedalateralorder,requiringtheuseof diesel oil prior to using crude, because crude produces higher pollution than diesel. The lateral order resulted in increased fuel costs of the Company, since diesel is a significantly more expensive fuel than crude. Pursuant to the crisis that started in February 2011 the lateral order for Eshkol power station was amendedandenablestransitiontooperationoftwounitsandthenfourunitsusingcrude. TheaforementionedeventsrequiredtheCompanytogenerateelectricityusingafuelsmixthatisconsiderably costlier than planned. Although according to the principles of the rate the high fuel costs will be covered by the rate, the time gap between the date that these expenses were incurred with respect to the more expensive fuels mix and the electricity rate update that will compensate the Company with respect to these expenses,resultsingapsinthecashflowoftheCompany. 2) ActionsandStepsTakenin2011toResolvetheCashFlowGap In light of the aforementioned events, the Company addressed the Government Ministries and the regulators that regulate its activity requesting them to take steps that will help the Company to bridge the gaps in the cash flow. As a result, several steps were taken. The cumulative effect of these steps helped the Company to bridgethegapsinitscashflowsin2011: a) In August, 2011, the Minister of Finance signed an order that stipulates that, starting from February 1, 2011 and up to December31, 2011,purchase tax on imported diesel oil will be 31% of the amount of the purchase tax applied to imported diesel oil on the eve of the amendment. The Company estimated the discountwithrespecttopurchasesofdieseloilin2011atapproximatelyNIS1.5billion. b) In August 2011, the Company received the approval of the Ministry of Environmental Protection for changing the operation order of the generation systems with backup fuel, to enable operation of steam units in Eshkol power station with crude, before operating other generation units with diesel oil. In April 2012, the Company receivedfrom the Ministry of Environmental Protection a procedure for usingbackup fuelintheeventofafailure,orshortageinnaturalgassupplytotheelectricitysystem,whichdetermines, interalia,theoperationmodeofsteamunitsinEshkolpowerstationwithcrude. c) In August 2011, and in December 2011, the Electricity Authority reached decisions on increasing the rate by9.89%,and4.72%,respectively.

21

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) f. StatusoftheCompany'sBusiness(continued) 2) ActionsandStepsTakenin2011toResolvetheCashFlowGap(continued) d) InNovember2011,theCompanyreceivedtheapprovaloftheElectricityAuthoritytodelaytheCompany's obligationtodepositfundsinthededicatedaccountoftheemergencyplan(phaseB). Inadditiontotheaforesaid: TheCompanyraisedatotalamountofNIS1billionascreditfromabankingcorporation. The Company reached a conclusion with the Coal Company to postpone payments of approximately NIS 142million. ThesestepshelpedtoincreasethecashflowsoftheCompanyin2011andsolvedthecashflowsqueezeofthe Companyin2011. 3) ExpectedGapsincashflowsin20122013 Pursuant to the continued natural gas crisis, which began in 2011, and according to forecasted cash flows of the Company,acashflowdeficitisalsoexpectedin2012and2013,inthescopeofbillionsofNewIsraeliShekels. Pursuant to the decision of the Electricity Authority to moderate the implications of the natural gas shortage on the required increase of the electricity rate (see the decision of the Electricity Authority below) an additional largecashflowgapwascreatedfortheCompany. Therefore, the Company, together with the Ministry of Finance and the Electricity Authority, needed to find immediatesolutionstothecashflowsinthecomingmonthsandforthelongerterm. 4) Steps taken after the statement of the financial position date, which are expected to have an effect on the Company'scashflows: TheCompanyappliedtotheMinistryofFinanceandtootherrelatedGovernmentMinistries,requestingitshelp incontendingwiththeexpectedgapsinthecashflow a) Steps taken and to be taken by the Government and the regulators regarding the cash flow condition of the Company: Following additional meetings and discussions conducted between the Company and representatives of the MinistryofFinance,onapossibleoutlineofhelpfortheCompanyinbridgingthecashflowgap,thefollowing stepsweretaken: (1) RequestaStateguaranteeforapublicofferingofdebenturesissuedbytheCompanyandlistedfortrading onthestockexchange. (2) Approved exemption from purchase tax on diesel oil at the rate of 88%, up to December 31, 2012, for as long as there is no significant and regular supply of Israeli gas, nor a significant alternate gas supply, all while protecting the revenues of the State. The Company estimated that the discount with respect to purchasesofdieseloilin2012atapproximatelyNIS5billion. (3) SpreadVATpaymentsandtaxdeductionpaymentduring2012. (4) TheElectricityAuthorityapprovedthepostponementofmonthlydepositsinthededicatedaccountforthe emergency plan (phase B) for the months January to June 2012, in a total amount of approximately NIS 1 billion. In addition the Electricity Authority released on May 25, 2012, NIS 600 million out of this account, subjecttoreturningtheaforesaidamounttotheaccountuptotheendof2012. (5) In March 22, 2012, the Electricity Authority decided to spread the increase in electricity rates over 2012 2014,accordingtotheannualchangerates,asfollows: In2012anincreaseattherateof8.9%. In2013anincreaseattherateof4.4% In2014anincreaseattherateof3.7%. (6)Approval of a State guarantee for a public offering of debentures to be offered by the Company and listed for trade on the stock exchange is subject to the approval of the Finance Committee of the Knesset. Up to the approval date of these financial statements, the Company did not receive the approval. The Company estimatesthatitishighlylikelythatitwillreceivetheapprovalontherequireddate. b) StepswhichtheCompanywillberequiredtoimplementtohelpitscashflowscondition: AsaconditionforreceivingGovernmentassistance,theCompanyactsasfollows: (1) Starting from the issue on the stock exchange onwards, the Company will raise all the financial sources requiredforitsactivity,whicharenotrelatedtotheneedtofinanceextrafuelcosts.

22

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) f. StatusoftheCompany'sBusiness(continued) 4) Steps taken after the statement of the financial position date, which are expected to have an effect on the Company'scashflows(continued) (2) After the date of the report, on April 1, 2012, the Company filed a first draft of a prospectus with the SecuritiesAuthorityfortheofferingofdebenturestothepublic,backedbyaStateguarantee,basedonthe AnnualFinancialStatementsoftheCompanyfor2011,ontheTelAvivStockExchangeinMay2012andwill execute the issue on the Stock Exchange up to and no later than July 1, 2012. The amount of funds raised through the offering on the Stock Exchange will not be lower than the amount of the Government guarantee. (3) TheCompanywillimplementtheefficiencystepsaccordingtothedecisionoftheBoardofDirectors,which willresultinsavingnolessthanNIS400millionperyear. (4) TheCompanyisrequiredtoemployallthelegalmeansavailabletoit,toreleaseanamountofnotlessthan NIS600millionoutoffundsheldintrust(seeNote10below). (5) TheCompanywillimplementthedevelopmentplanforthetransmissiongrid,todeveloptheeconomyand ensureentryofprivateelectricityproducersintotheelectricitysector. The Company is implementing the actions required from it, including actions related to filing a prospectus for raising debentures backed by State guarantee, based on the Financial Statements of the Company for 2011. TheCompanyfiledonApril1,2012,thefirstdraftoftheprospectuswiththeSecuritiesAuthority. c) AnoutlineofprinciplestoresolvetheexpectedgapsinthecashflowoftheCompany DespitetheaforementionedGovernmentassistance,expectedtobridgetheCompany'scashflowgapfor2012 and2013,theaforementionedaggravatedshortageinnaturalgasledtheCompanytoapplytotheMinistryof Finance and to the Government Companies Authority, requesting an urgent solution for financing the purchaseofmorefuel,uptothedateoftheissueontheStockExchange. OnMarch20,2012,anoutlineofprincipleswasconcluded,withtheconsentoftheCompanyandtheMinistry ofFinance,theMinistryofEnergyandWaterandtheElectricityAuthorityaimedatprovidingasolutiontothe cash flow problem of the Company, up to the offering date on the Stock Exchange. Accordingly, on March 22, 2012,theCompany'sBoardofDirectorsdecidedtoadopttheconcludedprinciplesoutline. Themainprinciples oftheoutlineare: (1) TheStateofIsraelwillprovideaStateguaranteetosecurenonnegotiabledebentureswhichwillbeissued by the Company by way of a private placement, or to secure loans which the Company will borrow from thebankingsysteminIsraelorabroad,inatotalamountofuptoNIS1.5billion. On April 5, 2012, the Company completed a private placement of debentures of the "NIS Electricity 2013" series,securedbyaguaranteeoftheStateofIsraelintheamountofNIS1.5billion. (2) The Electricity Authority will release funds that were deposited by the Company in a dedicated account of the emergency plan, expected to contribute approximately NIS 600 million to the cash flow of the Companyuptothepublicofferingdate.Thesefundswillbereturnedatalaterstage,tobeconcludedwith theElectricityAuthority.TheElectricityAuthoritydecidedtoacttoformulateanoutlineforreleasingupto NIS600 million out of thebalance of the dedicated account for the emergencyplan.On May25,2012, the Electricity Authority released NIS 600 million out of the account, subject to returning this amount to the accountuptotheendof2012. (3) The Ministry of Finance will postpone payments of tax deductions which the Company owes, at an approximateamountofNIS200millionforthesecondhalfof2012.TheCompanyreceivedtheapprovalof theTaxAuthorityforspreadingpaymentsoftaxdeductionsforthemonths:MarchJuly2012. (4) TheCompanywillacttoreleaseexcessfundsfromthededicatedtrustaccount,usedtocovernonpension components of the actuarial liabilities of the Company, expected to amount to approximately NIS 350 million, up to the public offering date, and another amount of NIS 250 million up to the end of 2012. On April 30, 2012, the Company received a reasoned decision of the District Labour Court that enables the Company toact in accordance of the decision of theBoard ofDirectorsand releasethe amount ofNIS 600 millionfromthededicatedtrustaccountforcoveringnonbudgetarycomponents.TheCompanyrequested the trustee to transfer the actuarial surplus in the trust account to a trust account for pension rights to entitledemployeesoftheCompany,managedbyInfinity,ManagementofaCentralPensionFundLtd.

23

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) f. StatusoftheCompany'sBusiness(continued) 4) Steps taken after the statement of the financial position date, which are expected to have an effect on the Company'scashflows(continued) c) AnoutlineofprinciplestoresolvetheexpectedgapsinthecashflowoftheCompany(continued) (5) The Company will act to postpone payments and implement other internal solutions in the approximate amountofNIS0.51billion.TheCompanyconcludedpostponementofpaymentswithseveralsuppliers. (6) On May 23, 2012 1 , the Company received a letter from the Director General of the Ministry of Finance on theimplementationoftheoutlineofthesolutiontothecashflowoftheCompany.Accordingtothisletter, following discussions conducted between the Company and representatives of the Ministry of Finance on the cash flow gap of the Company deriving from the severe crisis in the natural gas supply, the State reaffirms that it will grant a guarantee, or other financing solutions to the cumulative cash flow deficit of the Company, caused by the excess fuel costs of the Company and according to the cash flow needs deriving from the purchase of these fuels. According to this principle, the Government will act to place a State guarantee in the amount of NIS 3 billion for issuing debentures to the public based on a prospectus, allsubjecttotheapprovaloftheFinanceCommitteeoftheKnesset.Theletterstatesthatinadditiontothe aforesaid, the Government will provide financing solutions in accordance with the principles of the aforementionedoutline,intheamountofNIS1.1billion,accordingtothecashflowneedsoftheCompany for financing excess cost of fuels purchases, with due attention to the required safety margin. It is also stated that the Company will act to the best of its ability to provide additional financing sources in the courseofitscurrentactivity. 5) EstimatemadebytheManagementandtheBoardofDirectorsoftheCompanyontheAbilityoftheCompany toBridgetheExpectedGapsintheCashFlows The Company's Management and Board of Directors are of the opinion that all the steps taken and expected to be taken soon by the Government, mainly the commitment of the Government to provide a State guarantee, or other financing solutions for the cumulative cash flow deficit of the Company deriving from the excessfuelcostsoftheCompanyandaccordingtocashflowneedsderivingfrombuyingthesefuels,aswellas the actions which the Company intends to take, including raising of funds through an offering on the Stock Exchange, other funds raising to recycle Company debts and also costs cutting, will enable the Company to bridgetheexpectedcashflowsgapsin20122013. g. AssetsArrangement 1) ElectricitySectorLawStipulations With respect to certain rights and assets, which were held by the Company prior to the replacement of the Electricity Concession Ordinance by the Electricity Sector Law (March 5, 1996), the following provisions were determinedintheElectricitySectorLaw(section62): a) Despite the provisions of section 46 to the amendment to the Electricity Concession Ordinance ("section 46 to theconcession"),theliabilitiesoftheCompany,aswellastherightsandassetswhichitheldatthetimethatthe concession expired, and for which it is entitled to compensation from the State pursuant to the aforesaid section,willremainwiththeCompanyandnocompensationwillbepaidforthem("CompensableAssets"). b) TherightsandassetsforwhichtheCompanyisnotentitledtocompensation,asstatedaboveinsection(a),and whichareusedorweredesignatedtobeused,whetherdirectlyorindirectly,foritsoperationspursuanttothis law,willbepurchasedbytheCompanyaccordingtotheirvalueonthedatetherightsandassetswereacquired, in accordance with an arrangement to be signed by the State and the Company; in this section "are used" or "weredesignatedtobeused",aswillbedeterminedbytheMinisters("NonCompensableAssetsinUse"). c) Another noncompensable assets group, which is not used and was not intended to serve the Company in its operations, as to which section 46 of the concession states that the Company is not entitled to compensation upontransferringthemtotheState,wheresection62doesnotregulatethetreatmentoftheseassets,yetinthe absence of use or designated use by the Company, is not part of the "plant" within its meaning in the aforementionedsection46("UnusedNonCompensableAssets").Thelawdoesnotdetailwhichassetswillbe

Asonthedateofthedraft,theletteroftheDirectorGeneraloftheMinistryofFinanceonthesubjectwasnotsigned.

24

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) g. AssetsArrangement(continued) 1) ElectricitySectorLawStipulations(continued) includedundersection(a)above,whichaccordingtotheprovisionsoftheElectricitySectorLaw,remainwiththe Company, and, in accordance with the Electricity Sector Law, it is not required to pay the State for them; or, under section (b) above, which as stated, the assets arrangement is to be prepared. In addition, the Electricity SectorLawdoesnotdefinethemethodpursuanttowhichthevalueoftheseassetswillbedetermined. Section62oftheElectricitySectorLawobligestheCompanytoindemnifytheStatewithrespecttoanypayment paid by the State for any of the Company's liabilities in force at the concession expiration date, arising from its expirationorfromimplementingtheprovisionsoftheElectricitySectorLawregardingtheassetsarrangement. Inthefirstyearfollowingthedateonwhichtheconcessionexpirednonegotiationswereheldandthereforethe parties did not reach an arrangement and, as of the date on which the Financial Statements were signed, the Ministershadnotdeterminedwhichassetsinusearenoncompensable(assetsusedorintendedtobeusedby the Company) and/or any provisions with respect to the acquisition of the aforesaid rights and assets ("the assetsarrangement"). d) Until the arrangement referred to above in section (b) is carried out, the assets and rights, as to which the arrangement is being prepared, will remain with the Company, as they were at the time that the concessionexpired.Ifthepartiesdonotarriveattheaforesaidarrangementwithinoneyearfromthedate that the concession expires, the Ministers will determine provisions as to the acquisition of the aforesaid rightsandassets. 2) ThePositionoftheCompanyRegardingtheAssetsArrangement The Company believes, based on the opinion of its legal advisors regarding the matter of the appropriate interpretation of the assets arrangement, and taking intoconsiderationthe provisions of the Electricity Sector Law mentioned above with respect to the amendment to the Electricity Concession Ordinance, pursuant to which, the vast majority of the assets held by the Company when the concession expired (both fully depreciated depreciable assets and depreciable assets which were not fully depreciated at the time the concession expired, and excluding assets in a marginal amount), are compensable assets and, therefore, they are not supposed to be included in the assets arrangement, therefore, in this case, the implementation of the assets arrangement there should not have, does not have and will not have a material effect on the Company or its financial position, although the matter is to be studied and determined by a Governmental team, appointed for the purpose of defining the implementation mode of the structural change in the Company, to be decided by the Ministers and therefore, there is no certainty that the implementation of the assets arrangementwillnothavesuchaneffect. 3) TheOpinionoftheState On February15, 2000, the Company received a letter from the Deputy Commissioner of Budgets at the Ministry of Finance in which he indicates that as part of the activities of the Governmental team that was appointed to deal with the issue, an economic, accounting and legal State opinion was prepared (and was attached to the letter to the Company), ("the State's Opinion") the implementation of which might have a materialeffectontheCompany. According to the State's Opinion and in reference to the provisions of sections 44c and 46 to the concession, the Company is not entitled to compensation for investments already refunded through provisions for depreciation. Therefore, the State's Opinion included in its definition of the noncompensable assets to which the assets arrangementissupposedtoapply,thefollowingassets: a) All of the Company's assets which at the time the Concession expired were fully depreciated, and this is because of the fact that the investments in them were recognized in the electricity rate through the provisions for depreciation (power plants, transmission and distribution facilities, real estate properties andvariousassetssuchasequipment,machineryandvariousbuildings). b) Assetswhichwerenotfullydepreciated,intheamountofwhatwasdepreciatednetofliabilities,according to a certain percentage which depends on their financing sources primarily the power plants, transmissionanddistributionfacilities,certainrealestateandadditionalequipment. c) The Company's nondepreciable assets primarily intangible assets and shares of investee companies, but notcashandinventory.

25

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) g. AssetsArrangement(continued) 3) TheOpinionoftheState(continued) In the State's Opinion, criteria were determined for classifying the assets, as aforesaid and, in addition, formulae were determined for calculating acquisition value on the basis of the economic value of the assets and the liabilities. There are no data in the economic opinion of the State with respect to the economic value oftheassetsorliabilities,orthemethodfordeterminingit. Thecost,asofMarch31,1996,oftheassetswhichwerefullydepreciated,asdetailedinsectiona)above,asit appears in the Company's Financial Statements as of that date, is approximately NIS 4.46 billion (approximatelyNIS7.28billioninNISofMarch2012). The net depreciated cost, as of March31, 1996, in the Company's books, of the assets detailed in sections b) andc)above,isapproximatelyNIS4.5billion(approximatelyNIS7.32billioninNISofMarch2012). It shouldbe clarified that the aforementioned data are data as of March 31, 1996,yet the determining date is theendoftheconcessiondate,namely,March5,1996. IntheopinionoftheState,thetotalamountofnoncompensableassetsforwhichtheassetsarrangementwill beappliedisapproximatelyNIS7billion. In the Company's opinion, one should not infer the economic value of the assets from the amounts indicated abovewherepursuanttothiseconomicvalue,theamountwhichtheCompanyisliabletoberequestedtopay willbedetermined,evenifthepositionpresentedintheState'sOpinionisaccepted. 4) LetterfromtheDirectoroftheElectricityAuthority Just after the State's Opinion was received, the Director of the Electricity Authority in the Ministry of Energy and Water ("the Director") wrote a letter to the Company, as instructed by the Minister. In the letter, he instructed theCompany not to respond to the Ministry ofFinance's communication with regard to the matter of the assets arrangement, as long as the matter had not been discussed in an orderly manner between the officesoftheMinistersandbetweentheCompanyandtheMinistryofEnergyandWater. 5) TheOpinionoftheCompany TheCompanyisoftheopinion,basedontheopinionofitslegaladvisors,thattheinterpretationofsection62 to the Electricity Sector Law in a manner which will obligate the Company for the payment of the above amounts or any similar amount, in order to purchase the assets from the State, will be contrary to the declared purposes and objectives of the Electricity Sector Law, contrary to the principles of the appropriate interpretation and will constitute an impairment of the proprietary rights of the Company, due to the impairment which will be created to the Company's equity, the possibility of positioning the Company's loans for early repayment, the doubt as to its ability to repay its liabilities and to continue operating as a going concern,whiletheexplicitintentionofthelegislatorwasthattheCompanywillexistandfulfillthefunctionsit wasassignedandthetasksimposeduponitintheElectricitySectorLawandthelicensesgrantedtoitbyvirtue ofit In addition, the acceptance of the aforesaid interpretation, and assuming that the acquisition cost must be recognized in the electricity rate, will obligate the electricity consumers to pay for the assets once again, after the acquisition by the Company was already paid for in the past by the consumers by means of the electricity rate. 6) It should be noted that the Company created several floating charges on all its assets over the years and its rights to the assets arrangement may affect the incidence of these floating charges on assets that will be subjectedtotheassetsarrangement. 7) TheCompanyisoftheopinion,basedontheopinionofitslegaladvisors,thatthecostfortheCompany,ifand to the extent that there will be any with respect to the assets arrangement or in connection with the acquisitiondirectivesoftheMinisters,needstoberecognizedintheelectricityratebase,althoughthereisno certaintyofthis.

26

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE1: GENERAL(continued) g. AssetsArrangement(continued) 8) Certainassets,which,priortothereplacementoftheElectricityConcessionOrdinancebytheElectricitySector Law, were held and which are not used in, and are not intended to be used in, the Company's operations according to the Electricity Sector Law and which, according to the Company's position, based on the opinion of its legal advisors, are not subject to the assets arrangement (noncompensable assets not in use), which consequently are not intended to be transferred to the State, probably will not continue to remain in the Company'spossession.ThepositionpresentedintheMinistryofFinance'sOpinion,assumedthattheseassets willbetransferredtotheState. The Company's policy was and is to purchase assets, which are designated to be used in the Company's operationstogenerateandtransmitelectricity. Therefore, in the Company's opinion, if the aforesaid assets were indeed held, their number is small and their depreciated cost in the Financial Statements is low. As of the date of signing these Financial Statements, no noticewasgivenonbehalfoftheMinistersregardingthismatter. 9) On the basis of all of the above, the Company, based on the opinion it obtained, believes that the implementation of the assets arrangementwas not meant to have and does not have a material effect on the Company or its financial position, although it is subject to the determination of the Ministers, therefore there isnocertaintythattheimplementationoftheassetsarrangementwillnothavethiseffect. h. EnvironmentalProtectionLaws 1) The Company's activities are subject to different environmental protection laws and regulations on different issues, e.g., air pollution, noise abatement, electromagnetic fields, hazardous materials, pollution of land and watersources,asbestosandmore.Someoftheselawsareinforceonthepreparationdateofthisreportwhile otherlawsareintheformationstages.TheCompanybelievesthatasonthedateofthisreportitisinmaterial compliance with the directives of the laws on environmental protection. The Company holds the environmentallicensesrequiredforitsactivityandactstoobtainanymissinglicenses. 2) As at the signing date of the financial statements, several proposed environmental bills and regulations are in variousstagesofenactment. 3) The Company is studying the economical, legal, operational and technical implications which may arise from the directives, laws, regulations and environmental bills, which according to an initial estimate, may have material economic implications for the Company. The Company allocates funds in its budgets to fulfill the directives of the laws applied to it and those expected to be applied. As on the date of this report, and based on the directives of the Electricity Sector Law, the Company estimates that the material costs which will be appliedasaresultofnewregulatoryrequirementsintheenvironmentalprotectionfieldwillbecoveredwithin the framework of the electricity rate. The decision on recognizing the costs is subject to an audit of the ElectricityAuthority. i. Definitions TheCompany IsraelElectricCorporationLimited RelatedParties AsdefinedunderInternationalAccountingStandard24 InterestedParties AsdefinedundertheSecuritiesLaw1968. ControllingShareholders As defined under the Securities Regulations (Annual Financial Statements)2010. Index Consumer Price Index (CPI) as published by the Central Statistics Office. Dollar USdollar. SubsidiaryCompanies Companies either directly or indirectly controlled (as defined under IAS 27) by the Company and whose financial reports are fully consolidatedwiththoseoftheCompany. HeldCompanies Subsidiarycompaniesandinvesteecompanies. InvesteeCompanies CompaniesinwhichtheCompanyhasmaterialinfluence. AnnualFinancialStatements TheAnnualFinancialStatementsoftheCompanyasofDecember31, 2011andfortheyearthenendedandtheaccompanyingnotes.

27

NOTE2: a. TheBasisofFinancialReporting The Interim Consolidated Financial Statements ("The Interim Financial Statements") fulfill the directives of the Government Companies Regulations (Principles for the Preparation of Financial Statements of the Israel Electric Corporation Ltd.) (Temporary Order) 2004, and all relevant amendments (hereafter: Government Companies Regulations),and their basis of financial reporting conforms to the requirements of the International Accounting Standard No. 34, "Interim Financial Reporting ("IAS 34") (as specified in paragraph 1 below). In preparing these Interim Financial Statements, the Company implemented accounting policies, presentation rules and calculation methodsidenticaltothoseimplementedtoprepareitsAnnualFinancialStatements,exceptchangesinaccounting policies derived from implementation of standards, amendments to standards and new clarifications enacted as ofthedateoftheFinancialStatements,asdetailedinparagraphbbelow.TheFinancialStatementswereprepared in accordance with the directives of chapter D of the Securities Regulations (Periodic and Immediate Statements) 1970. 1) GovernmentCompaniesRegulations General The Minister of Finance is entitled, in consultation with the Minister of Justice and, in the event of a public company, in consultation with the Securities Authority, to determine in accordance with a proposal of the Companies Authority, principles for preparing financial statements of a Government company, that was defined by him as a company that provides essential service to the public, including details contained in the statements,theaccountingprinciplesusedintheirpreparationandstatementsandattachednotes. Should the Government Companies Authority feel that the public interest so requires, it is entitled to instruct a Government company as to the manner in which to present details in its financial statements, or in any other report that the Company is required to submit pursuant to any law, provided that the instructions covering this matter are not determined in the rules, laws or generally accepted accounting principles or generallyacceptedreportingprinciples. If the Companies Authority objects to the presentation method of details in the financial statements or any otherreportthattheGovernmentcompanyisrequiredtosubmitpursuanttoanylaw,itisentitled,ifitdeems that a public interest requires it, to instruct the company to disclose the position of the Companies Authority andtodescribethedisputeintheFinancialStatements,tothesatisfactionoftheCompaniesAuthority. According to the Government's decision of August5, 2004, the general accounting standards for Government companies are the same as for the private sector. The unique standards for Government companies aim to supplement the private sector's standards or to elaborate or highlight certain issues regarding Government companies as detailed in the Government Companies Authority's circulars. The unique standards for Governmentcompanieswillbeexecutedinaccordancewiththelaw. ReportingDirectivesinaccordancewiththeGovernmentCompaniesRegulations In January 2012, the Director General of the Government Companies Authority decided to accept the recommendationoftheAdvisoryCommitteetotheDirectorGeneraloftheGovernmentCompaniesAuthority. The Government Companies Authority is of the opinion that the regulations should be extended up to December 31, 2014. Consequently, the Minister of Finance signed the regulations and the Government Companies Authority is acting to publish the regulations in the official gazette. The Government Companies Authority also requires that from January 1, 2015, the Company will fully implement the International FinancialReportingStandards(IFRS),seeNote3ebelow. The Government Companies Regulations, updated as of the date of this report, were published in the Official GazetteonJune30,2008(theoriginalregulationswerepublishedin2004,asaforesaid,andamendedin2008, with the transition of the Israeli economy to international standards. The updated regulation included directives on a standard for regulated companies (see Note 2 a below) due to the fact that the international standards do not include standards related to regulated companies. Under the Israeli standard, prior to the transition period of the economy to international standards, the Company adopted an American standard for regulated companies (RE6)). The regulations were extended several times since then. On May 22, 2012, the Minister of Finance signed the extension of this regulation and it applies to the Financial Statements up to December 31, 2014 and to the interim periods of these years, including comparative data included in these FinancialStatements.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) REPORTINGRULESANDACCOUNTINGPOLICIES

28

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE2: REPORTINGRULESANDACCOUNTINGPOLICIES(continued) a. TheBasisofFinancialReporting(continued) 1) GovernmentCompaniesRegulations(continued) Under the directives of the Government Companies Regulations, Rules for Preparing the Financial Statements oftheCompanyareasfollows: a) The Financial Statements will be prepared in accordance with the International Financial Reporting Standards (IFRS), and their interpretations as published by the International Accounting Standards Board (IASB), including IFRS 1 which, for our purposes, the date of transition to International Financial Reporting StandardsisJanuary1,2007. b) NotwithstandinganyoftheinstructionsofSectiona)above: (1) The Company will prepare its Financial Statements with adjustment for changes in the general purchasing power of New Israeli Shekels (NIS) (according to the rules established in Opinion No. 36, including the provisions set in Opinions Nos. 40, 50 and 56, of the Institute of Certified Public AccountantsinIsrael),seedetailsinsection3below. (2) The Company is a regulated company and therefore, prepares its Financial Statements under the principlesoftheUSFinancialAccountingStandardsBoard(FASB)aslistedinChapterRE6withrespect to regulated activities ("Chapter RE6"), in the combined version of the standards of said Board, including revisions, clarifications or additions to these principles, as they were from time to time (hereafterStandardforRegulatedCompanies),seedetailsinsection2below. c) The manner of applying International Financial Reporting Standards will be modified or adjusted as requiredforpurposesofimplementation. d) The notes to the Companys Financial Statements will include qualitative (rather than quantitative) disclosure to explain how the reporting principles applied in the Financial Statements of the Company differfromInternationalFinancialReportingStandards(IFRS). e) The Report of the Board of Directors will provide an estimate of the financial effect of the difference between the effect of the Standard for Regulated Companies and the effect of the Accounting Opinion on itemsofequityandnetincome. f) Should the Company fail to meet the reporting conditions listed in the directives of the Companies AuthoritytheCompanywillnotprepareitsfinancialreportsaccordingtotheexceptionsdetailedinsection babove. 2) MainPrinciplesoftheAmericanFinancialAccountingStandardsBoard(FASB),SpecifiedinChapter"RE6"on RegulatedOperations Under the financial reporting principles of the Company in accordance with the Government Companies Regulations, the Company applies the Standards of the Financial Accounting Standards Board in the U.S.A., (FASB) as listed in Chapter RE6, which deal with the effects of certain types of regulation on the accounting policies (the Standard). The Standard was published in order to determine and define how generally accepted accounting principles must be applied for regulated companies and how decisions by the regulatory agency must be reflected in the Financial Statements of these companies. Under certain circumstances, the Standard permits accounting treatment other than that accepted with regard to the timing of attribution of expenses and income to operations, all for the purpose of reflecting and creating proper matching between expenses and income incurred by the Company on the dates when they are recognized for purposes of the electricityrates. TheStandardapplieswhenallthreeconditionslistedbelowaremet: a) Regulationofratesratesofregulatedproductsorservicesareeitherestablishedbyanindependentthird party regulator or by a committee so empowered, or are subject to authorization by such regulator or committee,allunderlegalorcontractualprovisionsgoverningconsumerrates b) Specific coverage of costs regulated rates are so constructed as to cover the specific costs (including requiredreturnoncapital)associatedwiththeprovisionoftheregulatedproductorservice. c) Competition and collectability from customers in view of the demand for the regulated product or serviceandalsoofthelevel ofdirectandindirectcompetition,itwouldbereasonabletoassumethatthe ratesestablishedsoastocoverthecostsarechargeableandcollectible.

29

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE2: REPORTINGRULESANDACCOUNTINGPOLICIES(continued) a. TheBasisofFinancialReporting(continued) 2) MainPrinciplesoftheAmericanFinancialAccountingStandardsBoard(FASB),SpecifiedinChapter"RE6"on RegulatedOperations(continued) These conditions may also be applied to separate portions of activities, such as generation or transmission of electricity,ortoaspecificsectorofconsumers. In the event that the conclusion is reached that the company no longer meets the conditions listed above for theapplicationoftheStandard,theregulatoryassets/liabilitiesshouldbedeleted,basedindirectivesdefined inthesaidstandard. A company meeting the conditions above will capitalize the expenses which would have otherwise been attributedtothestatementofoperationsandcomprehensiveincome,whiletheregulatoryagencyestablishes rates which would cover these expenses in the future. Expenses capitalized as above are a regulatory asset. Suchcompanies must also record regulatory liabilities consisting mainly of refundingconsumers forcollection orpostponementofincometoalaterdate(seeNote5below). The Standard requires that the regulated entity reevaluate the probability of coverage of regulatory assets as ofanydatethatitpublishesFinancialStatements. IntheeventthattheconclusionisreachedthattheCompanynolongermeetstheconditionslistedinsection1 above for theapplication ofthe Standard"Chapter RE6"andnotall regulatedassets are coveredbythe rates, theregulatoryassets/liabilitiesshouldbeerasedfromthestatementoffinancialposition. ProvisionforAssetsImpairmentaccordingtoSFAS90 The Company applies the American Standard SFAS 90, included in Chapter RE6, regarding assets which were defined as assets where construction was recently completed ("Assets built after determining the previous rate base which therefore were not included in that rate. Namely, assets for which no first rate was determinedaftercommissioningthereof"). CapitalizationofFinancingCosts Financing and capital costs with respect to construction of fixed assets that are recognized in the electricity ratearerecordedaspartofassetsunderconstruction,whena"verycertain"probabilityexiststhatthesecosts willberecognizedintherate.Financingandcapitalcostsarecapitalizedtoassetsunderconstructionuntilthe date on which these assets are substantially complete for the designated use. Capitalized financing costs with respect to construction are recorded as a reduction of financing expenses. Capitalized capital costs with respecttoconstructionarerecordedasotherincome. 3) Principles of Adjusting the Financial Statements According to Changes in the General Purchasing Power of theNIS General: (a) As stated above, the Company prepares its Financial Statements on the basis of historical cost, adjusted forchangesinthegeneralpurchasingpoweroftheNIS.Seedetailsonprinciplesofadjustingthefinancial statements according to changes in the general purchasing power of the NIS in Note 2 a3 to the Annual FinancialStatements (b) Theadjustedvaluesofnonmonetaryassetsdonotnecessarilyrepresentthemarketvalueoftheseassets ortheirvaluetotheCompany,butonlytheircostadjustedforchangesinthegeneralpurchasingpowerof theNIS. (c) Intheadjustedstatements,theterm"cost"shallmean"adjustedcost". (d) The comparative figures in these Financial Statements were adjusted to NIS of the statement of financial positionmonth. 4) QualitativeDisclosure The main differences between the financial reporting rules applied in the Financial Statements and the IFRS arelistedbelow: a) As aforementioned, the financial statements of the Company include regulatory assets and liabilities deriving from the application of Chapter "RE6"of the American standard, while the IFRS rules do not include a standard that corresponds with Chapter "RE6" standard regarding recording regulatory assets andliabilities.

30

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE2: REPORTINGRULESANDACCOUNTINGPOLICIES(continued) a. TheBasisofFinancialReporting(continued) 4) QualitativeDisclosure(continued) b) The international standard include no other Standard which compares to the directives of SFAS 90 and when testing assets impairment there is no differentiation between assets completed recently and the other assets. According to SFAS 90 rules, the Company tests a provision for impairment of assets completed recently and in addition, implements the instructions of IAS 36. According to the IFRS rules, the provisionforassetsimpairmentiscalculatedaccordingtoIAS36. c) AccordingtoChapterRE6rules,theCompanycapitalizesfinancingandreturnoncapitaltoassetscosts.All thisdefersfromIAS23thatdeterminescapitalizationoffinancingcoststoassetsunderconstructioncosts, does not allow capitalization of the return on investment and is based on the actual financing costs of assetsunderconstruction. d) Under the Companys financial reporting principles as based on the Government Companies Regulations, the Company applies the provisions of Opinion No. 36 with regard to the preparation of Financial Statements adjusted by changes to the general purchasing power of the Israeli currency, including such provisionsasarecoveredunderOpinionsNos.40,50and56oftheInstituteofCertifiedPublicAccountants in Israel, which are similar in substance to the provisions of International Accounting Standard No. 29. At the same time, according to the 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 (hyperinflation)(inIsraeluptoDecember31,2003).Fordetailsoftheadjustmentprinciples,seeNote2a3 totheAnnualFinancialStatements. 5) TheElectricitySectorLawprescribesthatlicensedvitalserviceproviderswillpreparetheirfinancialstatements asrequiredbytheMinistersinconsultationwiththeMinisterofJusticewithregardtotheirlevelofdetail,the accounting principles under which they are prepared, and any attached declarations and notes. Such instructions and obligationswith regard tothe Companys FinancialStatements have not yet been established bytheMinisters. 6) HighlyMaterialValuations In accordance with Section 8b of Chapter 1 of the Securities Regulations (Periodic and Immediate Reports) 1970, the Company is required to attach to its Financial Statements valuations that are highly material to the Company. Therefore, the Company applied a quantitative qualitative test that considers as highly material a single asset/liability valued at 10% or more of the total assets of the Company as of the Financial Statements date or a single asset/liability, where the change in their value is 10% or more of the normative profit of the Company(beforetax)inthereportedperiod. b. New Standards and Clarifications Published which are not in Force and were not Adopted by the Company in EarlyAdoption,Expectedto,orMayAffectFuturePeriods: 1) IFRS9"FinancialInstruments" The standard specifies the instructions for classifying and measuring financial instruments. For details of the standardseeNote2z1totheAnnualFinancialStatements. At this stage, the Company's Management cannot estimate the effect of this standard on its financial position andresultsofitsoperations. 2) IFRS13"FairValueMeasurement" This standard replaces the guidance on individual fair value measurement in different international financial reporting standards with guidance grouped in one standard that will serve as the guidance for fair value measurement. Accordingly, it specifies guidance for fair value measurement of all the items measured at fair valueinthestatementoffinancialpositionorfordisclosurepurposes. Fordetailsofthestandard,seeNote2z2totheAnnualFinancialStatements. At this stage, the Company's Management cannot estimate the effect of the implementation of this standard onitsfinancialpositionandresultsofitsoperations.

31

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE2: REPORTINGRULESANDACCOUNTINGPOLICIES(continued) b. New Standards and Clarifications Published which are not in Force and were not Adopted by the Company in EarlyAdoption,Expectedto,orMayAffectFuturePeriods:(continued) 3) IAS19Employeebenefits(2011) The standard changes the current guidelines of the International Accounting Standard No. 19 "Employee Benefits"(IAS19)invariousaspects. Fordetailsofthestandard,seeNote2z3totheAnnualFinancialStatements. At this stage, the Company's Management cannot estimate the effect of the implementation of this standard onitsfinancialpositionandresultsofitsoperations. 4) IAS 1 (amended) Presentation of Financial Statements (on Presentation of Items of Other Comprehensive IncomeIntheStatementofOperationsandComprehensiveIncome) The amendment states that the presentation of items included in other comprehensive income will be separatedandpresentedinoneoftwogroups: Itemswhichwillbeclassifiedinthefuture,toprofitorloss. Itemsthatwouldnotbeclassifiedinthefuturetoprofitorloss. Theamendmentalsostatesthatintheeventthattheitemsoftheothercomprehensiveincomearepresented beforetaxeffect,thetaxeffectwillbepresentedseparatelywithrespecttoeachofthegroups. TheamendmentwillbeappliedretrospectivelyforannualperiodsbeginningonorafterJanuary1,2013. c. ExchangeRatesandLinkageBasis 1) Balances in foreign currency or linked thereto are included in the Financial Statements at the representative exchangeratespublishedbytheBankofIsraelandineffectasofthestatementoffinancialpositiondate. 2) CPIlinkedbalancesarepresentedatthelastknownindexonthestatementoffinancialpositiondate(indexof themonthprecedingtheFinancialStatementsmonth)accordingtothetermsofthetransaction. 3) ThefollowingaredataoftheCPIandexchangeratesoftheNIS/USdollarandtheratesofchangetherein: ConsumerPriceIndex RepresentativeExchangeRate CPIfor Known oftheEuro oftheUSDollar month CPI Points AsoftheFinancialStatementsdate Asof March31,2012................................................... 217.10 216.27 3.715 4.953 December31,2011 ............................................ 216.27 216.27 3.821 4.938 March31,2011................................................... 213.15 212.73 3.481 4.949 December31,2010............................................. 211.67 210.89 3.549 4.738 % % % % Ratesofchangeintheyearendedon For the three months ending on March 31, 2012................................................................. 0.38 (2.77) 0.30 For the three months ending on March 31, 2011................................................................. 0.70 0.87 (1.92) 4.46 FortheyearendedonDecember31,2011 ........ 2.17 2.55 7.66 4.22

32

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE3: THEELECTRICITYRATE a. General 1) TheMannerofDeterminingtheChargeRate For details of the manner of determining the rate bases in the generation, transmission and distribution segments,seeNote3a1totheAnnualFinancialStatements. 2) RateUpdateMechanism For details on the rate update mechanism for both the annual and the current update, see Note 3 a2 to the AnnualFinancialStatements. 3) RateUpdatesfor2012 In its decision on March 22, 2012, the Electricity Authority updated the formula of the current update date of therates.Itstatedthattherateswillbeupdatedaccordingtotheearliestofthefollowingrulesrelatedtothe cost of the inputs basket of the rate in effect, where the rate will be decreased only after completing the collection of the supplement to the recognized cost of the fuels, under the rate outline determined in this decision: (1) A change in the cost of the recognized inputs basket of all the systems at the rate of about 3.5% at least, providedthatfourmonthselapsedfromthelastupdate. (2) Theannualupdatedate,startingfrom2013. This decision also determined an outline for spreading the increase in the electricity rates for the years 2012 2014, during a period of natural gas supply squeeze to the energy sector in Israel, all pursuant to the significant continued disruptions in the supply of natural gas for electricity generation and the other exceptional circumstances detailed in this decision and in view of the Government assistance which was approved already and will be consolidated shortly. The update of the recognized costs at an average rate of 8.9%appliedafterthisdecisionbecameeffectiveonApril1,2012. Thedeterminedrateoutline: a) Updateoftherecognizedcostsandspreadingtheadditiontothefuelscosts The Electricity Authority recognizes an addition to the recognized fuel costs in 2012 of NIS 7.7 billion in currentprices,comparedtotherecognizedcostinthelastratesupdate.Theadditiontothefuelcostswillbe spreadintheelectricityratesin20122014,asfollows: In2012NIS1.3billion In2013NIS3.1billion In2014NIS3.3billion The Electricity Authority will also acknowledge an addition to the recognized cost of other generation components costs, which were expected to be updated in the coming annual update, contributing an increaseofabout2%intheelectricityrate. b) Anadditiontotherecognizedcostofthetransmissionanddistributionsegments The Electricity Authority recognized an addition to the recognized cost for the transmission and distributionsegmentsin2012,contributinganincreaseofabout1/2%intheelectricityrate. The addition will be in effect until a new rate base will be determined for the transmission and distributionsegments. ThenewratebaseforthetransmissionanddistributionsegmentsbecameeffectiveonApril1,2012. c) The expected rate outline for the years 2012, 2013 and 2014 is a rate increase of 8.9%, 4.4% and 3.7% respectively.

33

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE3: THEELECTRICITYRATE(continued) a. General(continued) 4) RatesUpdatefor2012(continued) d) UpdateandReckoningMechanisms Annual Updates the annual update for 2012, scheduled for April will be postponed until the required information will be provided by the Company and the required costs audit will be conducted. In this update,theElectricityAuthoritywillalsoreviewthegasincentiveformulaandtheCompany'sclaimonthe increased fuels costs deriving from assumptions of the Electricity Authority on power stations maintenancedates. Differencescreatedbetweentherecognizedcostsintheannualupdatefor2012andtherecognizedcosts accordingtothisdecisionwillbeexpressedintheannualupdatefor2013. CurrentupdatesseeNote3a2btotheAnnualFinancialStatements. The recognized costs for the transmission and distribution segments, including the addition according to thisdecision,willremaineffectivewithoutanamortizationfactoruntilanewratebasewillbedetermined forthesesegments,whichwillbecomeeffectivefromApril1,2012,asaforementioned. e) CashFlowBridging The monthly deposits in the dedicated account for phase B of the emergency plan in the amount of NIS 167millionforthemonthsJanuaryJune2012willbepostponedandresumedstartingfromAugust2012 uptoJanuary2013.ThepostponementofthesedepositsamountstoNIS1million. The Electricity Authority will act to define an outline for releasing up to NIS 600 million from the balance offundsinthededicatedaccountfortheemergencyplan,tobeusedbythecompany,subjecttodifferent conditions (see also Note 1 f above). On May 25, 2012, the Electricity Authority released NIS 600 million fromtheaccount,subjecttoreturningthissumtotheaccountuptotheendof2012. f) DedicatedAccountforFuel Adedicatedmechanismwillbeestablishedformanagingthefundsofthesupplementforfuelcosts. The Company delivered a letter to the Electricity Authority on this subject on April 18, 2012, discussing the issue of management and supervision of the dedicated account for fuels in detail and requesting the Electricity Authority to publish an updated decision on this subject, specifying that the fuels purchase supervision mechanism will be based on retroactive audit and reporting and that the funds will not be managedinadedicatedaccount. g) GovernmentAssistance This decision and the outline for spreading the rate increase are based on the assumptions of Government assistance as concluded on February 26, 2012 (the publication date of the document for a hearing) and recently, with respect to complementary Government assistance (excise tax exemption, provision of guarantees, spreading VAT payments, spreading income tax payment and extending the effectiveness of the Government Companies Regulations). This Government assistance was subject to certain conditions and especially to the contribution of the Company to implementing efficiency steps, continued credit raising, performingactionstodeveloptheelectricitysector,includingentryofprivateelectricityproducersandusing the trust account funds deposited with respect to benefits and bonuses to Company employees for non pension components, which were not recognized for deposit in the Central Provident Fund for Pension, accordingtothelegalmeansavailabletoit(seealsoNote1fabove). b. TheGenerationSegmentRate 1) General On February 1, 2010, the Electricity Authority published a decision on updating the new rate base for the generation segment for the years 20102014. This decision and the rates derived from it became effective on February15,2010.SeedetailsinNote3btotheAnnualFinancialStatements. 2) The Main Points of the New Rate Base for the Generation Segment and their Effect on the Financial Statements a) Fordetailsoftheratebaseandthedepreciation,seeNote3b2totheAnnualFinancialStatements.

34

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE3: THEELECTRICITYRATE(continued) b. TheGenerationSegmentRate 2) The Main Points of the New Rate Base for the Generation Segment and their Effect on the Financial Statements(continued) b) CostsReductionDuetoFailuretoMeetNormativeOperationDates("Fines") The Electricity Authority determined normative operation dates for operating generation units which are expected to operate during the test period (20102014). In accordance with the decision of the Electricity Authority,iftheCompanyfailstomeetpredeterminednormativetimetablesforcommencingoperationof generation units, the recognized income of the Company will be decreased under a reduction mechanism, calculatedonadailybasis("TheFines"). Estimatedcosts reduction (NISmillion) 89 WithrespecttoHaifa3generationunit(see(1)below) ................................................. WithrespecttoAlonTavorCCGT(StageAandB)(see(2)below) ................................. 389 478 Total................................................................................................................................. (1) The Haifa 3 generation unit was not synchronized on the updated normative synchronization date (November 2011), due to events beyond the Company's control. This created an exposure to a fine of approximatelyNIS 89 million. The Companyapplied on January 29, 2012 to the Director General of the Electricity Administration in the Ministry of Energy and Water, requesting the approval and update of the operation date of this unit to March 2012. At the end of March 2012, the Company updated the MinistryofEnergyandWaterandtheElectricityAuthoritythatthisunitwassynchronizedonMarch14, 2012. In a meeting with the professional team at the Electricity Authority on May 15, 2012, the Electricity Authority expressed its willingness to consider the reasons for postponing the normative operationdateofthisunit. (2) In its decision on March 24, 2011, the Electricity Authority updated the normative operation date of Alon Tavor "Emergency" Stage A to July 2012, and Stage B to July 2013. However, due to inability to find a financing source for constructing the unit, its construction did not yet begin, which exposes the CompanytoafineestimatedatNIS389million. TheCompanyestimatesthatifadecisionwillbemadetobuildtheunitandafinancingmechanismwill beprovided,theupdatedoperationdatesoftheprojectwillbeconcluded. Consequently, and as a result of other available actions it will employ, the Company estimates at a probability level of more likely than not, that the Electricity Authority will update the operation dates accordingtoupdateddevelopmentplansandthattheCompanywillavoiddeductionofthesefines.The CompanydidnotrecordanyprovisionforthesefinesinitsFinancialStatements. TheManagementreviewsthisestimateperiodicallyandupdatesitaccordingly. c) FinancingCosts Fordetails,seeNote3b2ctotheAnnualFinancialStatements. d) TheHedgingMechanism Fordetails,seeNote3b2dtotheAnnualFinancialStatements. e) OperatingCosts SeedetailsoftherecognizedoperatingcostsinNote3b2etotheAnnualFinancialStatements. On February 26, 2012, the Company applied to the Electricity on the subject of several issues for which decision on recognition was not reached as yet, including recognition of the full costs of the spare parts inventory. The Company requested recognition of these costs within the annual update in 2012. The Company estimates that these costs will be recognized. Therefore, the Company did not record any provisionforimpairmentwithrespecttothisiteminitsFinancialStatements.

35

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE3: THEELECTRICITYRATE(continued) b. TheGenerationSegmentRate 2) The Main Points of the New Rate Base for the Generation Segment and their Effect on the Financial Statements(continued) f) FuelsCosts The fuel basket is calculated every year as part of the annual rate update, according to a forecast of a representative load curve chosen from load curves related to different climates. The fuel basket will be retroactively updated every year, according to the actual demand curve and arising from new, relevant professional information. The difference will be refunded to the consumers or to the Company with interestandlinkage. ThefuelsmixwillapplytoacalendaryearforthemonthsfromJanuarytoDecember. g) Gasincentive Following the cancellation of the gas incentive in 2011, the Company has applied to the Electricity Authorityonnumerousoccasions(thelasttimeonJanuary19,2012),requestingtoreceiveagasincentive for 2011, subject to the mechanism determined by the Electricity Authority under the new rates base for thegenerationsegment. It should be noted that the decision of the Electricity Authority on March 22, 2012, states, that the Electricity Authority will review the natural gas incentive formula in the annual update date for 2012 (see Note3b2gtotheAnnualFinancialStatements).

h) DepreciationofFuelOperatedPowerStations Fordetails,seeNote3b2htotheAnnualFinancialStatements.

i) InvestmentsinOperationalPowerStations(includingRenovations) Fordetails,seeNote3b2itotheAnnualFinancialStatements.

j) InterestDuringConstruction Fordetails,seeNote3b2jtotheAnnualFinancialStatements.

k) ConversiontoGascosts According to the Electricity Authority, the new rate base for the generation segment determines partial recognition of conversion to gas costs, applied only after the unit commences operation with gas. On February 26, 2012, the Company applied to the Electricity Authority on the subject of several issues for which decision on recognition was not reached as yet, including recognition of the full costs of conversion to gas of units that were already operated with gas. The Company requested recognition of these costs within the annual update in 2012. A discussion with the professional team of the Electricity Authority, in May 15, 2012, addressed several issues related to the annual update for 2012. The professional team of the Electricity Authority indicated that the decision on the annual update for 2012 will also address these issues, and will also review recognition of additional costs, in excess of the normative and review the recognition of the conversion to gas costs. The Company estimates that these costs will be recognized. Therefore, the Company did not record any provision for impairment with respect to this item in its FinancialStatements. 3) ThepositionoftheCompanywithrespecttothenewgenerationchargeratebasis The Company has many reservations with respect to the new rate basis for the generation segment, which it believes may have a material effect on the Company, inter alia due to nonrecognition of the full costs of constructionandoperationofthegenerationunitsoftheCompanyandduetothemechanismofreductionof costsrecognizedintherateintheeventthattheCompanydoesnotmeetthenormativeoperationdatesthat havebeenprescribedforthenewgenerationunitsoftheCompany. The Company has asked on numerous occasions for discussion before the plenum of the Electricity Authority on its main contentions against the decision of the Authority on this subject. As of the date of the report, no suchdiscussionhasbeenheld.

36

NOTE3: c. TheTransmissionandDistributionSegments The electricity rates for the transmission and distribution segments were determined according to the decision of the Electricity Authority, which became effective on July 5, 2002. On the subject of "Electricity Rates and Criteria, andtheMannerfortheirUpdatingfortheyears20022005",seeNote3ctotheAnnualFinancialStatements. On March 28, 2012, the Electricity Authority published the decision on the subject of "Spreading the Increase in ElectricityRatesfortheyears20122014inaPeriodofNaturalGasSupplySqueezeintheEnergySectorinIsrael". Thisdecisionstates,thattheElectricityAuthorityrecognizes,interalia,anadditiontotherecognizedcostfor2012 for the transmission and distribution segments in the approximate amount ofNIS240 million as an advance, until a new rate base will be determined for these segments, to be effective from April 1, 2012. This addition contributes about 1.2% to the increase of the electricity rate. The differences which will be created between the recognized costs on the date of determining the new rates base and the recognized costs will be included in the compensation for the delayed update. It was also determined that the recognized costs for the transmission and distribution segments, including the addition according to this decision will remain effective without an amortizationfactoruntilanewratebasewillbedeterminedforthesesegments. Since the rate base will become effective on April 1, 2012, and since the Company does not have information on the scope of the expected nonrecognition, if any, the Company estimates that according to the Electricity Sector Law,thecostswillbefullyrecognized. Based on all the aforementioned, the Company did not record a provision with respect to fixed assets of the transmissionanddistributionsegmentsinitsFinancialStatements. The Company applied to the Electricity Authority on March 14, 2012, and requested to discuss several subjects related to determining a new rates base for the transmission segment. A document for a hearing was not publishedasyetonthissubject.Asofthedateofthisreport,noresponsewasreceivedtothisrequest. d. Main costs incurred by the Company which are not covered by rates as granted by the Electricity Authority for PreviousYearsandGeneralDisputes The Company disputes numerous decisions of the Electricity Authority in previous years on many open subjects, on which the Electricity Authority did not yet reach a decision, including the liability for pension and general disputes. The Company is conducting a correspondence with the Electricity Authority and as of the signing date of these financialstatements,thesesubjectsarestillunderdiscussionandnodecisionwasreachedregardingthem. The Company's Management and Board of Directors are conducting an ongoing dialogue with the relevant Government bodies, including the Electricity Authority, in an attempt to advance the discussions regarding issues indisputeregardingtheelectricityrate. e. AdjustmentoftheRatetotheImplicationsoftheAdoptionofInternationalFinancialReportingStandards The International Financial Reporting Standards (IFRS) were adopted in Israel on January 1, 2008. These standards do not allow the Company to prepare its Financial Statements according to changes in the relevant purchasing power of the currency unless high inflationary conditions exist (in Israel, up to December 31, 2003) only. Adoption of the financial reporting rules in accordance with IFRS would have required the Company to incur materialadditionalfinancingcosts.TheCompanyappliedtotheElectricityAuthorityonthesubject,explainedthe significance of the financial reporting according to the IFRS and requested to adjust the rate of the company to the IFRS, due to the significant difference between the real financing costs and the nominal financing costs (see Note2aabove). The Minister of Finance decided that during the years 2007 2011, the Company will adopt reporting rules in accordance with the Government Companies Regulations (according to which the Company continues, inter alia, toadoptreportingrulesadjustedfortheCPI). In January 2012, the Director General of the Government Companies Authority decided to accept the recommendationoftheAdvisoryCommitteetotheDirectorGeneraloftheGovernmentCompaniesAuthority.On May 22, 2012, the Government Companies Regulations for preparing financial statements were extended by the Minister of Finance up to December 31, 2014 and from January 1, 2015, the Company will fully implement the InternationalFinancialReportingStandards(IFRS).

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) THEELECTRICITYRATE(continued)

37

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE3: THEELECTRICITYRATE(continued) e. Adjustment of the Rate to the Implications of the Adoption of International Financial Reporting Standards (continued) Inresponse,theCompanyannouncedthattheimplicationsoftransitiontoimplementationoffullIFRSare: 1) CancellingthepreparationoffinancialstatementsadjustedtotheCPI. 2) American standards on regulated companies will not be applied, essentially preventing the creation of regulatoryassets/liabilitiesanderasingtheexistingassets/liabilities. The Company estimates that ceasing the adjustment of the financial statements to the CPI, without a corresponding adjustment in the structure of the electricity rate, will erode profitability, because financing costs of the Company will increase by approximately NIS 400 million (before tax effect) with respect to each percent increase in inflation. Moreover, the equity of the Company will be eroded by approximately NIS 170 million. The Company will not be able to record regulatory assets/ liabilities) and will be exposed to fluctuations in the results oftheactivities.Inaddition,thedecisiondoesnotclarifythetransitionalarrangementsforfullimplementationof theIFRS,northeimpactoncomparativefiguresinthefinancialstatements. In light of all the aforesaid, the Company believes that the transition to full implementation of the IFRS should be accompanied by an appropriate rate solution that will reflect the nominal financing costs and also by updates of therate,topreventasignificantdelaybetweenamountsduetotheCompanyortoelectricityconsumersandthe collection date, in order to prevent severe damage in the future which will eventually erode the equity of the Companyandimpairitsabilitytoraisefunds.Moreover,inviewoftheuniqueconditionoftheCompany,itshould bedeterminedhowtoapplythemanneroftransitiontofullimplementationoftheIFRS. Thepresentelectricityrateisnotadjustedtothetransitiontotheaforementionedreportingprinciples. f. PetitionsLodgedAgainsttheElectricityAuthority OnOctober20,2010,theCompanyfiledapetitiontotheDistrictCourtinJerusalem,onthesubjectoffreedomof information, relating to the request of the Company to instruct the Electricity Authority to forward to the Company all the minutes of the meetings of the Electricity Authority plenum related to the decision of the Electricity Authority on February 15, 2010, on the rate base for the generation segment for the years 20102014 andalsotoforwarddocumentsonwhichmembersoftheElectricityAuthorityplenumbasedtheirdecisiononthe rate base and specifically regarding claims made by the Company. The Company needs these documents for contending with the aforesaid decision of the Electricity Authority on the rate base, which has a significant financial implication for the Company and for all electricity consumers in Israel and which, in the opinion of the CompanydoesnotreflecttherealcostsoftheCompanyadequately,asstipulatedintheElectricitySectorLaw. On February 21, 2012, the parties reached a compromise agreement, that received the effect of a court decision, inwhichitwasagreed(withoutbecomingaprecedent)thattheElectricityAuthoritywillforwardtotheCompany all the minutes requested in the petition, related to the decision of the rate base. It was also agreed that the Company may request additional specific documents and that this request will be addressed according to the freedomofinformationlaw. As a result of the petition, the Company received for the first time the "Claim Response" book and expects to receive for the first time minutes of the ElectricityAuthority's plenum meetings. This documents are important in providing the Company with the ability to ensure that the decisions of the Electricity Authority were made accordingtoaproperprofessionalbasisandafteramethodicalandthoroughauditofallthedataandconsidering alltherelatedconsiderations;andtotheCompany'sabilitytoobjecttothedecisionsoftheElectricityAuthorityin awellreasonedandbasedadministrativepetition,intheeventthattherearesoundreasonstodoso. g. NewCriteriaforRelationsoftheCompanywithPrivateElectricityProducers On February 6, 2011, the Electricity Authority published a document for a hearing on the subject of Company relationswithprivateproducersonconnectinghighandultrahighvoltage. The Company submitted its response to the document for a hearing. The Electricity Authority did not yet publish itsdecisiononthesubject. The Electricity Authority published over the recent period several rate arrangements for private producers who operateconventionaltechnologies,cogeneration,pumpedstorageandrenewableenergyindifferentvoltages,for thepurposeofregulatingtheactivitiesoftheseproducersintheElectricitySector.

38

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE3: THEELECTRICITYRATE(continued) g. NewCriteriaforRelationsoftheCompanywithPrivateElectricityProducers(continued) OnApril23,2012,theElectricityAuthoritypublishedadecisiononprinciplesforrecognizingcostsofasupplierof anessentialservicewithrespecttobuyingelectricityandprovidinginfrastructureservicestoconventionalprivate electricity producers in permanent availability transactions, producers of pumped reservoir and producers of renewable energy through solar energy to the transmission grid, wind farm and bio gas facilities. These principles include details of current payments paid to the producer, special payments or expenses to producers and financingsupportarrangements. h. FixedAssetsImpairmentTestaccordingtoIAS36 SeeNote11htotheAnnualFinancialStatements. i. Reduction with respect toNonRecognition of Building Costs of Generation Units According to theAmericanSFAS 90Standard.

TotalCumulativeProvisionfordecreased assetsvalueason March31 December31 2012 2011 2011 (NISinmillions) (Unaudited) (Audited) With respect to new generation units (including estimatedcostofassetscompletion) The Company revalued the differences between the recognized building costs of generation units and the cost to the Company, consisting of the actual costs paid up to March 31, 2012, and the forecast of costs for completing the unit, for the purpose of determining the provision for impairment as of March 31, 2012. The valuation for this report also included an updated estimate of Company's costs, according to the updated valuationoftheforecastcompletionoftheprojects. TheestimationofthedifferencetakesintoaccountequipmentcostslinkedtothechangesintheGTWHprice list. The calculation of the recognized costs takes into account the GTWH 2010 price list. The Company receivedtheGTWHbookletfor2012inMarch2012.TheCompanyisstudyingtheinformationinthisbooklet and applied to the Electricity Authority regarding the recognition mode of equipment costs, pursuant to the publicationofthebooklet.TheCompanydidnotreceivetheresponseoftheElectricityAuthorityasyet. TotalexpecteddifferencebetweentherecognizedconstructioncostandthecostoftheCompany,comprised of costs expended up to March 31, 2012, and forecast cost as of the date of the statement of financial positionisapproximatelyNIS913million. This calculation does not include Alon Tavor CCGT, because the Board of Directors did not decide to execute thisproject. SeemoredetailsinNote11itotheAnnualFinancialStatements. 826 971 831

j. EmergencyplanfortheElectricitysectoranditsFinancing The Company constructs power stations in recent years according to an emergency plan, approved by the MinisterofNationalinfrastructures. 1) EmergencyPlanStageA FordetailsontheemergencyplanStageA,seeNote11j1totheAnnualFinancialStatements. 2) EmergencyPlanStageB OnDecember15,2010,theBoardofDirectorsapprovedanoutlineforfinancingthethreesteamturbineadd onsprojectofStageBoftheEmergencyPlanatanestimatedtotalcostofNIS3.5billion. On March 7, 2011, the Electricity Authority published a decision to spread a debt of NIS 2 billion out of the Company's debt to consumers up to 2025, for financing construction of the three steam additions included in phase B of the emergency plan. On March 17, 2011, the Board of Directors reached a decision approving actions of the Company's Management to start construction of the three steam additions. See details in Note 11j2totheAnnualFinancialStatements.

39

NOTE3: j. EmergencyplanfortheElectricitysectoranditsFinancing(continued) In its decision on the subject of spreading the increase in the electricity rates for the years 20122014, on March 22, 2012, the Electricity Authority stated that due to the cash flow squeeze of the Company, the monthlydepositsinthededicatedaccountforstageBoftheemergencyplanwillbepostponed.Seedetailsin sectiona3eabove

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) THEELECTRICITYRATE(continued)

40

NOTE4: a. Excessofamountsofpensionplanassetsoverthepensionobligation Fairvalueofplanassets(seesectionm2below) ....... Presentvalueofpensionobligations(seesectionl 1below) ...................................................................... CostofPreviousservicenotrecognizedasyet linkingpensionstotheCPI(seesectiono3below) .... Unrecognizedactuariallosses(seesectiono1 below) ......................................................................... Presentvalueofpensionobligationswithrespect tospecialagreementsonearlyretirement(see sectionl3below) ........................................................ Excesspensionplanassetsoverpension obligations ................................................................... b. FundsinTrust*

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION

March31 2012 2011 NISinmillions (Unaudited) 21,603 20,656 (15,467) 379 5,568

December31 2011 (Audited) 21,332 (16,490) 1,092 5,934

(19,653) 748 1,342 4,040

(214) 3,826

(264) 5,304

(211) 5,723

March31 2012 2011 NISinmillions (Unaudited)

December31 2011 (Audited)

Fairvalueoffundsintrust ......................................... 2,061 1,934 2,055 * Funds in trust are designated to cover actuarial liabilities to employees and liabilities related to termination of employeeemployerrelationsandareinvestedinGovernmentdebentures(assetsaccordingtosection104Aof IAS19)(seeNote19totheAnnualFinancialStatements,sectionpbelowandNote1fabove). c. Liabilitieswithrespecttootherbenefitsafteremploymenttermination March31 2012 2011 NISinmillions (Unaudited) Present value of obligation with respect to other benefits after employment termination, (see sectionl2below)** .................................................... 2,567 2,137 Unrecognized actuarial gain (see section o 2 below) ......................................................................... 132 417 Cost of Previous service welfare supplement not recognizedasyet........................................................ (19) Liabilitywithrespecttootherbenefitsafter employmenttermination............................................ 2,680 2,554

December31 2011 (Audited)

2,471 181 2,652

41

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE4: EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) c. Liabilitieswithrespecttootherbenefitsafteremploymenttermination(continued) **Compositionaccordingtotypesoftheotherbenefits: March31 December31 2012 2011 2011 NISinmillions (Unaudited) (Audited) Discountedelectricity................................................. 1,015 847 1,017 V.A.T. and grossed up tax with respect to discountedelectricity ................................................. 366 285 342 Retirementbenefits ................................................... 819 701 790 Welfareaddition ........................................................ 40 Holidaygiftsincludinggrosseduptax ........................ 327 304 322 Total obligation for other benefits after employment termination as of the end of the period ..................................................................... 2,567 2,137 2,471 d. ThePensionPlanoftheCompany 1) The pension regulations from 1958 apply to all Company tenured employees and pensioners and their survivorswhowereadmittedtoworkintheCompanyuptoJune10,1996 2) The estimated financial liability for pensions and grants for termination of employeeemployer relations is basedonactuarialcalculationscalculatedbyanexternalactuary.Theliabilityiscalculatedinaccordancewith rights and assumptions of the Company submitted to the actuary for the calculation. The benefits to employees after employment termination include additional entitling components. Permanent employees of the Company whose employment began on June 11, 1996 onwards (who are not entitled to the aforementioned budgetary pension generation C) are also entitled to additional entitling components. The discountratesusedtocalculatetheactuarialliabilityconformtomarketyieldsongovernmentdebenturesas ofMarch31,2012. 3) The Company has an obligation (perpetual) to incur costs of welfare actions in an amount equaling 0.49% of thesalaryofeachemployeeandfromthepensiontowhicheachpensioner/survivorisentitled. e. CollectiveSalaryAgreement("SalaryAgreement") On January 31, 2011, two collective agreements were signed between the Company, the national employees organization and the Histadrut, with the approval of the authorized parties in the Ministry of Finance and the GovernmentCompaniesAuthority.Thesalaryagreementismainlybasedonthesalaryagreementofemployeesin thepublicsector,signedonJanuary12,2011,andentitlesemployeestoasalaryincrementof5.75%,tobepaidin three stages (the last stage will be paid in January 2013). This agreement also includes settlement of salary deviations, against a deduction of 0.5% of the corresponding salary increment of the public sector and in return for a waiver of a wage supplement at the rate of 0.3% due to be paid to the employees by force of the previous salary agreement (see section 1 below); and in parallel, an agreement was signed on the changing the pensions update mechanism of those included in the budgetary pension arrangement, to linkage to the CPI (see section 2 below). 1) ThemainprinciplesoftheSalaryAgreement a. InFebruary2011,anincrementattherateof2.25%waspaidretroactivelyasofJanuary1,2011. Thedifferenceupto3.75%waspaidonJanuary1,2012. Thedifferenceupto5.75%willbepaidasfromJanuary1,2013. b. InFebruary2011,aonetimegrantofNIS2,000grosswaspaidtoemployeesandpensioners/survivors inaccordancewiththesalaryagreement. c. The agreement includes, inter alia, an update of the supplement for child daycare rate and a gradual increasetotheprovisionsanddeductionstothepensionfund,asspecifiedintheagreement.

42

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE4: EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) e. CollectiveSalaryAgreement("SalaryAgreement")(continued) d. SettlementofSalaryDeviation: Entitlementforastarrankand14thsalary: An employee who started work in the Company before January 1, 2004 will be entitled to a star rank anda14thsalaryuponreaching20/25yearsofworkintheCompanyforawoman/manrespectively. AnemployeewhostartedworkintheCompanyonorafterJanuary1,2004willnotbeentitledtoastar rankanda14thsalaryatall. e. The agreement also defined entitlement to a rank upon retirement (which was approved by the Supervisor of Wages and Work Agreements in the Ministry of Finance in 2001) and the manner of acquiring the rights during unpaid leave. From the application date of the law for changing the update method of budgetary pension, 2012, an employee entitled to budgetary pension who will retire from the Company is entitled to a retirement rank immediately upon retiring from the Company, regardless ofthedateonwhichhe/shereceivedthelastrankasanemployee. 2) ThemainprinciplesofthePensionAgreement A pension agreement was entered on January 31, 2011, on changing the pensions update mechanism of those insured in the budgetary pension to linkage to the CPI. A supplementary collective agreement was entered on January 15, 2012, dealing mainly with the postponement of the date set for completing the law on changing the pension linkage methods. Subsequent to discussions on the draft law in the Knesset, another collective agreement was entered on February 20, 2012, that included a certain change to the agreement,atnoaddedcosttotheCompany. On March 5, 2012, the law on "Changing the Update Method of Budgetary Pension 2012" was published intheofficialgazette.Thelawcompletesandregulatesthepensionagreement. The main principles of the law, the collective agreement of January 31, 2011 and the supplementary agreementofFebruary2012areasfollows: a) A change in the existing pension update mechanism in the Company for those insured in a budgetary pension, similar to the agreement applied to the State in 2008, which links the pensions to the CPI, to maintain theirreal value. The change is effective from January 2012. Pensions will be linked tothe CPI fromJanuary2013(accordingtotheannualchangeintheCPIin2012),andthereafter. b) A one time bonus payment to pensioners entitled to a budgetary pension who retired from the Company before January 1, 2011 ("existing pensioners/survivors"). The first part was paid in February 2011andthesecondpartwaspaidinJuly2011. c) Payment of a percentage addition to the pension, at the rate of 8% or 12% to existing pensioners/survivors(accordingtotheirgrade)fromJanuary2012. d) In addition, a small group of pensioners (of defined low ranks), will be entitled to a percentage supplement of 6% to the pension until 4 years elapse from the publication date of the said new law. This supplement will be financed by reducing the payment to the welfare fund for pensioners (as mentionedinsectione)below.Pursuanttotheaforesaid,theCompanywillallocatefrom2012andup toJuly1,2023,onlyhalf(50%)ofthetotalamountforthewelfareofpensionersentitledtobudgetary pension,untilthefullfinancingiscompleted. e) From January 2012, a welfare fund will be established for pensioners entitled to budgetary pension, similar to the fund established for public sector employees, all subject to the aforesaid in section 2 d above. f) In the framework of the approval of the pension agreement by the Supervisor of Wages and Work Agreements in the Ministry of Finance the entitlement to budgetary pension from the Company of every employee and pensioner of generation B (whoever started work on April 1975 up to June 10, 1996inclusiveandbecameatenuredemployeeoftheCompany)andtheirsurvivorswasapproved. The effect of this law on the Annual Financial Statements, expressed in the financial statements for this quarter, is an increase of the actuarial liability of the Company by approximately NIS 2.8 billion against increased pension and compensation expenses of approximately NIS 1.5 billion, an increase in salarycostofapproximatelyNIS0.5billionandanassetforspreadingofapproximatelyNIS0.8billion. Calculation of the actuarial liability, as calculated by the actuary of the central provident fund for pension of Company employees in accordance with the rules of the Capital Market, Insurance and Savings Division of the Ministry of Finance, included the linkage of pensions to the CPI in its calculations,therefore,thelawdidnotaffectthecashflowoftheCompany.Seesectionl1cbelow.

43

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE4: EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) e. CollectiveSalaryAgreement("SalaryAgreement")(continued) 3) It should be mentioned, that the Supervisor intends, as part of this annual work plan, to review the conditionsofthewages,workandpensionpaidtoCompanyemployeesandpensionersinthefuture.This review will examine the effectiveness of the salary components in the Company, where, in the first stage of the audit, the Supervisor will use information provided by the Company to the team of regulators, established for the purpose of increasing the coordination and efficiency of the supervision of the Company. On February 20, 2012, a senior deputy (enforcement) Supervisor of Wages and Work Agreements in the Finance Ministry addressed the Company on the subject of paying increased compensation to employees employedunderaspecialagreement.Theseemployeesareentitledtosupplementarycompensationfrom the Company of one salary with respect to each year of the first two years of employment and to two additional salaries, starting from the third year onwards, exceeding the current monthly provision of 8.33% that is deposited in the pension fund. The Supervisor claims that this arrangement deviates allegedly from instructions 29 to the Foundations of Budget Law. The opinion of the Company, as sent to the Supervisor of Wages and Work Agreements on March 25, 2012, payment of increased compensation to employees employed under a special agreement (employees engaged to a temporary position, for performing projects during a limited period, where the prospect of receiving a tenured status is most unlikely), is bound by a series of collective agreements, entered decades ago, the first of which was entered before the Foundations of the Budget Law was regulated, of which the Government Companies Authority was fully aware. The Company did not receive, as yet, the response of the Supervisor of Wages and Work Agreements to the opinion of the Company. The Company estimates that this is not a material subject. On March 22,2012, theDeputy Supervisorof Wages addressedtheCompanyonallegeddeviationsinthe subject of global pension overtime to Class B Management members, on payment for overtime, not according to the actual performance, on payments for living and food expenses and on the command addition. The Company rejects the allegations in the letter of the supervisor completely, since in the Company's opinion these are not deviations from salary, but rather salary components, paid according to the law. The Company believes that the explanations, arguments and documents it holds, which will be forwarded to the Supervisor of Wages, will prove that these components are paid in accordance with the law. The scope of the exposure (theoretical only, since the Company completely rejects the said in the Supervisor'sletter)isasfollows: GlobalPensionOvertimetoMembersofManagement: Theimpact(decrease)ontheactuarialliabilityasofMarch31,2012,isestimatedatNIS30million. PaymentforOvertimeNotAccordingtoActualPerformance: The letter of the Supervisor of Wages does not provide sufficient details for quantifying the exposure. It refers to subjects related to records and reporting practices. This demand does not have an actuarial impact. PaymentsofLivingandFoodExpenses Thisdemanddoesnothaveanactuarialimpact. CommandAddition The Company estimates the impact (decrease) on the actuarial liability as of March 31, 2012, at NIS 270 million. f. Release of funds from the dedicated account of the Company for covering its actuarial liabilities (non budgeted pension components) is performed in accordance with the agreement entered on March 26, 2000, between the Company and the Trust Company of the United Hamizrachi Bank Ltd., ("The Trust Account"). On March 20, 2012, an outline of principles was concluded, with the consent of the Company andtheMinistryofFinance,aimedatprovidingasolutiontothecashflowproblemoftheCompany,upto the offering date on the Stock Exchange. Accordingly, on March 22, 2012, the Company's Board of Directorsdecidedtoadopttheconcludedprinciplesoutline,whichstates,interaliathattheCompanywill acttoreleasesurplusfundsheldinthededicatedtrustaccountforcoveringthenonbudgetedpension

44

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE4: EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) e. CollectiveSalaryAgreement("SalaryAgreement")(continued) components in its actuarial liabilities, expected to amount to approximately NIS 350 million, up to the offeringdateontheStockExchangeandapproximatelyNIS250millionuptotheendof2012.Theoutline ofprinciplesissubjecttotheapprovaloftheFinanceCommittee,whichwasnotgrantedasyet. On March 26, 2012, the Company received the recommendation of the regulators team on the subject of releasing funds from the dedicated trust account. The team believes that it is appropriate for the Company to take all the required steps, including versus the trusteeor the beneficiaries, according to any law, to release the funds which in the opinion of the team, the Company is not obliged to deposit in the trust account. The Company is studying the recommendations of the team and its implications and addressed the regulators team on April 24, 2012, requesting the legal opinion which served as the basis fortherecommendationoftheteam. The document of the regulators team did not specify a sum. At this stage, the Company is studying the implications, especially from the legal aspect. After transferring approximately NIS 600 million, a balance of approximately NIS 1.4 billion will remain. Therefore, it may be that the decision of the regulators team mayincludereleaseoffundsuptothisamount. On March 29, 2012, a reasoned decision was made by the Haifa District Labour Court on the request for temporary relief, filed by the Company against sanctions opened on this subject (see Note 8 d Labour Disputes),enablingtheCompanytoactaccordingtothedecisionoftheBoardofDirectorsandreleasethe amount of NIS 600 million from the dedicated trust account for covering its actuarial nonbudgeted pensioncomponents.Theemployeesorganizationfiledarequesttoappealthesaiddecision. OnApril30,2012,theNationalLabourCourtdecidedthatthereisnoreasontointerfereinthedecisionof theDistrictLabourCourt.OnMay8,2012,theCompanyaddressedarequesttothetrusteetotransferthe funds from the trust account to the Central Pension Fund gradually, according to the directives of the Fund's articles and the decision of the Company's Board of Directors. A hearing on the main subject is scheduledforJune5,2012. g. The Company conducted an updated wages research within the framework of the multiannual plan for reviewingtheactuarialassumptions,withrespecttopensionersandactiveemployeespriortotheimpact of the linkage agreement (after the application of the linkage agreement, this component is relevant only for active employees). This research is based on wages data in the past (salary agreements and cost of living increments). Pursuant to the results of the research, the Company changed the assumption of the real wages development in the actuarial estimate of the liability as of March 31, 2012. The effect of the changed assumption is a decrease in the erosion from 1.54% to 1.38%, which is an increase of approximately NIS 190 million in the liability with respect to the erosion of the wages chart, after deductingtheeffectofinflation. This update does not have a material effect on the statement of operations of the Company as of the statementoffinancialpositiondate,duetothespreadingmechanismofIAS19,appliedbytheCompany. h. On the indemnification Letter to the Actuaries of the Company, see Note 13 m to the Annual Financial Statements. i. The aforementioned reserve sections, with respect to employees after termination of employment, as of March 31, 2012, December 31, 2011 amount to a total of NIS 22,434 million, NIS 19,172 million respectively. j. The State Comptroller notified the Company on February 22, 2009, of his decision to include, inter alia, thefinancialconditionoftheCompanyandtheprovisionsforemployees'rightsinhisauditplansfor2009. k. Pursuant to the aforementioned in paragraph (j) above, the Company received a draft of the State Comptroller'sreportonthesubjectofthepensionarrangementsintheCompanyandonJuly4,2010,the Company submitted its response to the draft report to the State Comptroller. In December 2011, the Company received an updated draft of the State Comptroller's report and submitted its response to that reportonMarch29,2012.

45

NOTE4: l) Reserves 1) Changesinthepresentvalueoftheobligationforpensions Presentvalueoftheobligationforpensionsasofthebeginning oftheperiod .................................................................................. Costofinterest .......................................................................... Currentservicecost .................................................................... Previous service cost changes in the plan terms following decisionsoftheWagesOfficerintheMinistryofFinance ........ CostofrecognizedPreviousservicepensionlinkagetoCPI ... Cost of non recognized Previous service pension linkage to CPI .............................................................................................. Benefitspaid .............................................................................. Actuariallosses ......................................................................... Present value of the liability for pensions as of the end of the period .........................................................................................

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued)

FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 16,490 119 57 1,983 748 (152) 408 19,653 15,792 113 53 78 (135) (434) 15,467

FortheYear ended December31

2011 (Audited) 15,792 452 201 78 (538) 505 16,490

2) Changesinthepresentvalueoftheobligationforotherbenefitsafteremploymenttermination Present value of the obligation for other benefits after employmentterminationasofthebeginningoftheperiod ..... Costofinterest .......................................................................... Currentservicecost .................................................................... Previous service cost recognized welfare increment linking pensiontoCPI ............................................................................ Previousservicecostwelfareincrementnotrecognizedasyet linkingpensiontoCPI(seesectiono3below) ......................... Benefitspaid .............................................................................. Actuarialgainsincludedinthestatementofoperations........... Actuarial losses (gains) included in the statement of financial position ....................................................................................... Present value of the obligation for other benefits after employmentterminationasoftheendoftheperiod ............... FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 2,471 17 12 21 19 (13) 40 2,567 2,220 15 11 (9) (2) (98) 2,137
FortheYear ended December31

2011 (Audited) 2,220 65 45 (52) 193 2,471

46

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE4: EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) l) Reserves(continued) 3) Changesinpresentvalueoftheobligationwithrespecttospecialagreementsonearlyretirement 2011 (Audited) Present value of the obligation as of the beginning of the 278 278 period ............................................................................................ 211 8 Costofinterest .......................................................................... 1 Additional provision for employee retirement due to employmenttermination ........................................................... 3 1 Previous service cost changes in the plan terms following decisions of the Wages Officer in the Ministry of Finance and 6 5 implementationofthewagesagreement ................................. CostofserviceinthepastpensionslinkagetoCPI ................. 17 (84) Benefitspaid .............................................................................. (21) (20) Actuarial losses with respect to the obligation included in the statementofoperations ............................................................. 1 1 4 264 211 Presentvalueoftheobligationasoftheperiodend ................. 214 m) Funds 1) CentralPensionFund a) From March 8, 2005, the Company deposits funds to cover pension liabilities for pension for employeesincludedinthepensionplanintheCentralPensionFund("Fund"). The Pension Fund acts by force of the Income Tax Regulations (Rules for Approving and Managing Pension Funds) 1964 ("income tax regulations"). The fund was managed by the managing company in accordance with these regulations. CPY managed the fund up to April 30, 2010 and as of May 1, 2010,InfinityAdministratingtheMainPensionFundLtd.,managesthefund. b) AccordingtotheFinancialStatementsofthe"Fund",theactuarialliabilityasofMarch31,2012isNIS 22,894 million and the debt of the Company on that date is approximately NIS 1,292 million. According to the Financial Statements of the Company, its actuarial liability for the pension obligationsofMarch31,2012isNIS22,434million,neutralizingobligationswithrespecttootherpost employment termination benefits which are not managed by the Central Pension Fund amounting to NIS2,567million,theobligationisNIS19,867million. c) The difference of approximately NIS 3 billion (the gap decreased considerably compared to the December 2011 report, following the implementation of a linkage agreement in the Company) betweentheliabilityaccordingtothefinancialstatementsofthe"Fund"andtheliabilityaccordingto the Company records derives from differences between the actuarial assumptions used by the Fund to calculate the actuarial liability and the assumptions and models used by the Company to calculate the actuarial liability (in accordance with the principles of IAS 19). The Company calculates the actuarialliabilityinaccordancewiththeaccountingrulesappliedtotheCompany(inaccordancewith the principles of IAS 19), while the Fund acts in accordance with the instructions of the Capital Market, Insurance and Savings Division Officer, where the Actuary of the Fund noted that the assumptions used to prepare the statement of financial position comply with the instructions of the Capital Market, Insurance and Savings Division Officer for preparing actuarial statements of financial position. The main difference between the assumptions derives from the real increase in salary assumption. The Company calculates the liabilities according to an individual development model of employees, while the actuary of the Fund already applies the real increase assumption to active employees that relates to expected salary increments, which cannot be included in the assumptions of Company calculationsaccordingtothedirectivesofIAS19. FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited)
FortheYear ended December31

47

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE4: EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) m) Funds(continued) d) The Articles of the Central Pension Fund that fix, inter alia, the payment arrangements between the Company and the Fund, were amended in 2010 with the approval of the Capital Market, Insurance andSavingsDivisionoftheMinistryofFinance,asfollows: (1) Supplementswithrespecttothedebtarisingfromtheincreasedliabilitytopensioners (a) Currentwillbecompletedwithin3monthsinequalpaymentsthatwillnotexceedthesametax yearinanycase. (b) Exceptional(arisingfromachangebeyondthesolecontroloftheCompany)willbepaidwithin 12monthsinequalpaymentsduringthesametaxyear,inanycase. (2) Additionswithrespecttoadebtarisingfromincreasedliabilitytoactiveemployees (a) Currentwillbecompletedwithin3monthsinequalpayments. (b) Exceptional(arisingfromachangebeyondthesolecontroloftheCompany)willbepaidwithin 120monthsinequalpayments. The monthly payment will not be less than NIS 50 million, provided that the comprehensive debtbalanceexceedsNIS50million. e) TheCompanydepositedinthepensionfundNIS151millioninthefirstquarterof2012. f) TheFundapproveditsfinancialstatementsasofMarch31,2012,onMay23,2012. g) TheFundpresentsthevalueofitsassetsatfairvalueaccordingtoIFRSprinciples. h) According to the forecast of the Company, the expected transfers to the Central Pension Fund (Infinity) will amount to approximately NIS 600 million for 2012. Pursuant to the decision of the nationalcourt,theCompanyaddressedthetrusteeonMay8,2012andrequestedhimtotransferon May 31, 2012, NIS 50 million from the trust account to the Central Provident Fund for Pension. This requestwillbefollowedbyadditionalrequeststotransferfundsfromthetrustaccounttotheCentral ProvidentFundforPension,untilthesurplusofapproximatelyNIS600willbeexhausted. 2) Changesinthefairvalueoftheassetsoftheplan Fairvalueofplanassetsasofthebeginningoftheperiod ........ Anticipatedyieldonplanassets ................................................ Deposits ...................................................................................... Benefitspaid .............................................................................. Actuarial(gains)lossesonplanassets ........................................ Fairvalueofplanassetsasoftheperiodend ............................ Employeesparticipationintheplan ........................................... FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 21,114 21,332 149 146 153 151 (195) (166) (565) 140 20,656 21,603
FortheYear ended December31

2011 (Audited) 21,114 607 665 (701) (353) 21,332

FortheYear ended December31

FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 6 6

2011 (Audited) 25

48

NOTE4:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued)

n) Funds in trust are designated to cover actuarial liabilities to employees and liabilities as related to the termination of employer/employee relationships and which are invested in Government bonds (see also Note 1f). 1) Changes in fair value of funds intrustdesignated to cover actuarial liabilities (assetsaccording to section 104A): Fairvalueofplanassetsasofthebeginningoftheperiod ........ Anticipatedyieldfromfundsintrust ......................................... Actuarialgains ............................................................................ Fairvalueoffundsintrustasoftheperiodend ........................ 2) Yieldoffundsintrust: FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) Anticipatedyieldfromfundsintrust .......................................... 14 13 Actuarialgainsfromfundsintrust ............................................ (7) (67) Actualyieldfromfundsintrust ................................................. (53) 6 Anticipated annual yield rate of funds in trust as of the beginningoftheyear.................................................................. 2.88% 2.77% o. ActuarialGains(Losses) 1) Changeinactuarialgains(losses)notrecognizedwithrespecttopensionobligationandplanassets Actuarial losses, not recognized as of the beginning of the period ............................................................................................ Actuarialgains(losses)createdduringtheperiod: Withrespecttoactuarialliabilityforpensions........................... Planassets .................................................................................. Actuarialgainsrecognizedasattheendoftheperiod ............. Actuariallossesnotrecognizedasoftheendoftheperiod ..... FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) (1,092) (408) 140 18 (1,342) (252) 434 (565) 4 (379)
FortheYear ended December31 FortheYear ended December31

FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 1,987 2,055 14 13 (67) (7) 1,934 2,061

FortheYear ended December31

2011 (Audited) 1,987 58 10 2,055

2011 (Audited) 58 10 68 2.88%

2011 (Audited) (252) (505) (353) 18 (1,092)

49

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE4: EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) o. ActuarialGains(Losses)(continued) 2) Changeinactuarialgains(losses)notrecognizedwithrespecttootheractuarialobligationsandtrustassets Actuarial gains, not recognized as of the beginning of the period ............................................................................................ Actuarialgains(losses)createdduringtheperiod: Withrespecttootherbenefitsafteremploymenttermination Trustassets(assetsaccordingtosection104A) ........................ Actuariallosses(gains)recognizedfortheperiod...................... Actuarialgainsnotrecognizedasoftheendoftheperiod ....... 3) ChangeinpreviousservicecostnotrecognizedpensionlinkagetotheCPI Supplementtononrecognizedcostofpreviousservice ........... Cost of previous service welfare increment not recognized asyet.......................................................................................... Costofpreviousservicerecognizedfortheperiod* .................. Previous service cost, not recognized as of the end of the period ......................................................................................... FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 757 19 (9) 767
FortheYear ended December31

FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 181 (40) (7) (2) 132 394 98 (67) (8) 417

FortheYear ended December31

2011 (Audited) 394 (193) 10 (30) 181

2011 (Audited)

* Cost of previous service will be spread over 86 months, consisting of the average years for active employees entitlementtomatureandtobeincludedinthecostofwagesandpension.

50

NOTE4: p.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued) AmountsPresentedinCostofSalariesandinExpenseswithrespecttoLiabilitiestoPensioners FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 64 138 (142) 59 129 (144)
FortheYear ended December31

CostofSalariesandExpenseswithrespecttoLiabilitiesto Pensioners Current service cost after deducting employees participation inthepensionplan ........................................................................ Costofinterest ........................................................................... Anticipated gain on plan assets after deducting management fees ............................................................................................. Changes in plan terms arising from decisions of the Supervisor of Wages and implementation of the wages agreement ................................................................................ CostofrecognizedpreviousservicepensionlinkagetoCPI ... Cost of non recognized previous service pension linkage to CPI .............................................................................................. Actuarialloss(gain),net,recognizedfortheperiod ................. Total cost recognized in salaries cost and expenses with respecttoliabilitiestopensioners.............................................. Anticipatedyieldfromplanassets ............................................... Actuarialgains(loss)onplanassets ........................................... Actualyield(loss)onplanassets ...............................................

2011 (Audited) 223 524 (588)

1,992 9 25 2,086

250 (15) 279

287 (63) 383

FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 149 146 (565) 140 (416) 286

FortheYear ended December31

2011 (Audited) 607 (353) 254

51

NOTE4:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) EMPLOYEEBENEFITSAFTEREMPLOYMENTTERMINATION(continued)

q) MainActuarialAssumptionsAppliedtotheActuarialLiabilityandPlanAssets FortheYearendedDecember31 2009 2011 2010 (Audited) (Unaudited) Weighted annual real interest rate grossed in the present 2.81% 3.09% 2.77% valueoftheobligation ........................................................ Anticipated annual real rate of return grossed in the fair 2.88% 2.77% 2.88% valueofplanassets.......................................................... individual salary development model of the active Realupdateofsalariesduringtheworkperiod............... employees (according to salary table + ranks promotion according to work agreements +tenure promotion + individual advancement evaluation and the assumption that the salary table is eroded at a rateof1.38%comparedtotheCPI*)andalsoinclusion of salary increments with respect to current salary agreements. Real update of pension amounts after employment PensiondevelopmentmodeltheCompanychanged termination ...................................................................... thecurrentmechanismforupdatingpensionsofthose insuredinthebudgetarypensionarrangement, accordingtowhich,thepensionswillbelinkedtothe CPI,formaintainingtherealvalueofthepensions.The changeiseffectivefromJanuary2012.Linking pensionstoCPIwillbegininJanuary2013(according totheannualchangeintheCPIin2012),onwards. Pensioners and next of kin mortality, including updated AccordingtotheMinistryofFinancecirculardated mortalitydata May17,2007. * Theassumptionwithrespecttofutureannualsalaryincrementwithrespecttogeneralsalaryagreements andcostoflivingincrementnetoftheCPI(thegeneralupdateofthesalaryscale),willbe1.38%peryear (anerosionof1.38%inrealterms).TheCompanyadvisedtheactuaryaboutthisactuarialassumption afterusingalongtermstatisticstoexaminetheannualpriceincreasedatawithrespecttogeneralsalary agreementsandcostoflivingincrementcomparedtotheincreaseoftheCPI.AftertheCompany examinedthedata,itisoftheopinionthatthisassumptionisreasonable(seealsosectiongabove). r) The funds for pensions cover all the liabilities of the Company to employees included in the pension plan, assumingthattheemployeeswillretireinaccordancewiththeacceptedactuarialestimates. In the event that all employees included in the pension plan are discharged immediately, the liability amount for these employees is significantly higher than the liability amount presented in the Financial Statements.TheManagementoftheCompanyestimatesthatsuchaneventisnotexpected.

52

NOTE5:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) REGULATORYLIABILITIES

a. The Companyapplies the accountingprinciples of the USFinancial Accounting Standards Board (FASB) as listed in Chapter RE6 which permit, under certain conditions, an accounting treatment other than by that acceptable with regard to the timing of expense/income attribution to operations, all for the purpose of reflecting and creating propermatchingbetweenexpensesandincomeincurredbytheCompanyonthedateswhentheyarerecognized forpurposesoftheelectricityrates.Oneoftheconditionsfortheimplementingthesaidstandardsstipulatesthat regulated rates be so constructed as to cover the specific costs (including required return on capital) associated withtheprovisionoftheregulatedproductorservice(seealsoNote2.a.2). b. Detailsoftheamountsoftheregulatoryliabilities,net March31 December31 2011 2011 2012 NISinmillions (Unaudited) (Audited) WithrespecttotheerosionoftheCompany'sliabilitiesinforeign currency,passedontotheelectricityconsumers(seesection3 below) (1,370) (2,400) (1,462) Withrespecttothegapbetweendatesforactualupdatingrates andthetheoreticalrateandothers(seesectiondbelow) 221 604 401 106 123 104 Withrespecttosocialrate(seesectionebelow) Withrespecttoaccountssettlementwithprivateproducersand loadmanagementarrangements(seesectionfbelow) 786 376 560 WithrespecttoprovisionforfinesElectricityAuthority(see sectiongbelow) (20) (20) Withrespecttoconsecutivenonupdateofthefuelcomponent intheratelessgapsinfuelscostsbetweenquarters(seesection hbelow) 3,308 (285) 2,039 Withrespecttoconsumersparticipationinfinancingconstruction ofassetsunattributedasyettoconstructioncost (538) Withrespecttoconsumersparticipationinfinancingemergency planstageB(seesectionibelow) (2,064) (2,077) (2,068) 19 (23) 106 Withrespecttocoalpricedifferences(seesectionjbelow) Total 1,003 (4,239) (338) Presentedincurrentassets 1,526 2,458 Presentedincurrentliabilities (769) Presentedinnoncurrentliabilities (523) (3,470) (2,796) Total 1,003 (4,239) (338) c. TheHedgingMechanism Fordetailsontheformerhedgingmechanism,seeNote20CtotheAnnualFinancialStatements. The balance of the regulatory liability with respect to the former hedging mechanism, less the refund to the consumers,asofthestatementoffinancialpositiondatewithrespecttothisdebtofapproximatelyNIS0.9billion, andwithrespecttothenewhedgingmechanismapproximatelyNIS0.5billion. The Company recorded in its Financial Statements with respect to the hedging asset, linkage differences and real exchangeratedifferences,inthefinancialexpensesitemapproximatelyNIS134million. d. AssetwithRespecttoaGapbetweenRateUpdatingDates For details on the regulatory asset with respect to the gap between rate updating dates see Note 20 d to the Annual Financial Statements. The amount accumulated with respect to the failure to update the electricity rates and the theoretical collection (without the fuel component), net, as on March 31, 2012, is NIS 221 million. The change in the asset for the period from January 1, 2012 to March 31, 2012 is calculated as the gap between the theoretical recognized cost with due consideration of the decision of the Electricity Authority on the annual update for 2011 and estimated costs on which the Electricity Authority did not reach a decision as yet and the actual recognized cost less the theoretical collection, delay in updating electricity purchases from private producersandafrequencysheddingarrangementamountingtoNIS7millionnet.

53

NOTE5: e. AssetwithRespecttoSocialRate Fordetailsontheassetwithrespecttosocialrate,seeNote20etotheAnnualFinancialStatements. As of the statement of financial position date, the Company created a NIS 123 million regulatory asset for collecting reduced payments from needy populations. According to the decision of the Electricity Authority, this cost,consistingabout0.5%oftherecognizedcostsoftheCompanywillbechargedtoallelectricityconsumers. f. AssetwithrespecttoLoadManagementArrangements The Company recorded a regulatory asset with respect to the gap in the timing of the recognition of the costs arising from the arrangements, diesel generators, migrant peak and purchase of electricity from owners of photovoltaic facilities and from private produces under the rate in relation to the date of recording these expensesinthebooks.AsonMarch31,2012,thebalanceoftheregulatoryassetisNIS786million. This balance also includes, for the first time a regulatory asset with respect to purchasing electricity from private producers, according to the mechanism of the electricity authority for recognizing purchases of electricity, included in its decision on March 22, 2012. The balance of this asset is the total cost paid to private producers duringthefullyear2011andthefirstquarterof2012.ThesecostsarecollectedintheratefromApril1,2012. g. WithRespecttoProvisionforFines The Company has a regulatory liability as of March 31, 2012 amounting to approximately NIS 20 million with respecttofailuretomeetthetimetablesofHaifa4stageAgenerationunits. h. AssetWithRespecttoNonUpdateoftheFuelsComponentintheRate,Net For details of regulatory assets with respect to nonupdate of the fuels component in the rate see Note 20 h to theAnnualFinancialStatements. As of March 31, 2012, the balance of the regulatory asset with respect to consecutive nonupdate of the fuels componentisNIS3,308million. In addition, according to the decision of the Electricity Authority on March 22, 2012, on spreading costs of electricity rates for the years 2012 2014, it was decided to recognize a supplement to the recognized costs of fuels for 2012 in the amount of NIS 7.7 billion, as follows: forecasted excess fuels cost of NIS 5.8 billion in 2012 and NIS 1.9 million with respect to the consumers fuels debt to the Company in 2011. The addition to the fuels costs will be spread in the electricity rates in 2012 2014 in the following division: in 2012 NIS 1.3billion, in 2013 NIS 3.1 billion and in 2014 NIS 3.3 billion (see Note 3 a3). Consequently, the net regulatory asset (less the inter quarterly balance of an asset, attributed to the short term) as on March 31, 2012, in the amount of NIS 1,201 million, which will be collected in the coming year is presented in current assets and a regulatory assets of NIS 2,107millionispresentedinthelongtermliabilities,netsection. i. LongTermLiabilitywithrespecttoConsumersParticipationinFinancingStageB SeeNote20jtotheAnnualFinancialStatements. The balance of the longterm regulatory liability with respect to consumers participation in financing stage B of theemergencyplanasonMarch31,2012,isNIS2,064million,aspresentedinthelongtermliabilitiessection. j. Asset/LiabilitywithrespecttoCoalPriceDifferences The Company records a regulatory asset with respect to price differences in coal costs for the reporting period, for which the rate coverage is expected to be received in the subsequent periods. These gaps are created between costs of coal prices paid to the Coal Company and the coal price in the updated electricity rate. Therefore, the Company recorded a regulatory asset of NIS 106 million in the Financial Statements as of December31,2011. Thebalanceoftheregulatoryassetwithrespecttopricedifferencesincoalcosts,asofMarch31,2012,isNIS19 million.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) REGULATORYLIABILITIES(continued)

54

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE6: a. Revenuesfromsalesofelectricity ............................................... Variousincome ........................................................................... Total............................................................................................ b. Seasonalfactors: In the State of Israel, the demand for electricity is seasonal in nature. In this context, the seasons of the year are defined as the summer season (July through August), the winter season (December through February) and the spring transitional season (March through June) and the autumnal transitional season (SeptemberthroughNovember). Demandismuchhigherinthesummerseason(duetotheuseofairconditioners)andinthewinterseason (duetotheuseofheatingsystems)ascomparedwiththetransitionalseasons. In summer and winter, the average electricity consumption is higher than that during the transitional seasonsandisevencharacterizedbypeakdemandduetoextremeconditionsofheatorcold. In addition, the Company's revenues in the various seasons are affected by the change in the rates to consumers who pay according to load and time ("LTR"), and which represent about54.1% ofthe electricity consumption, since the LTR rates are, on the average, much higher during the summer and winter, as comparedwiththeLTRratesduringthetransitionalseasons. FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 5,150 6,453 61 67 5,211 6,520
FortheYear ended December31

REVENUES Revenuesarecomposedasfollows:

2011 (Audited) 24,365 260 24,625

ElectricitysalesinthereportedperiodandtheaveragesalepriceperKWhwereasfollows: Electricitysales(millionsofkWh)................................................. GrossaveragerevenuesperkWh(inAgorot) ............................. Totalelectricitysales,gross(inNISmillion) ................................ Less: Customersparticipationinassets .............................................. Collection and provision with respect to other regulatory assets ........................................................................................ Revenuesfromelectricitysales,net(inNISmillion) ................ AveragenetrevenuesperkWh(inAgorot) .............................. FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 12,599 13,844 38.7 44.77 4,876 6,198 7 255 6,453 46.61 267 5,150 40.88
FortheYear ended December31

2011 (Audited) 53,062 39.74 21,088 3 3,274 24,365 45.92

OnApril1,2012,theelectricityrateincreasedbyabout8.9%onaverage.

55

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE7: FINANCIALEXPENSES(INCOME),NET a. Financialexpenses(income),net FortheThreeMonthsended March31,2012 Other financial Erosion expenses of liabilities Total (income) 530 104 4 32 670 (58) (31) 581 (713) (161) 592 13 (269) 165 (104) FortheThreeMonthsended March31,2011 Other financial Erosion expenses of liabilities (income) Total NISinmillions (unaudited) 536 (407) 129 (183) (57) 73 40 113 596 (21) 142 121 45 86 18 104 401 674 (207) 467 (58) 134 477 (53) (41) 580 83 (124) (53) 42 456 FortheYearended December31,2011 Other financial expenses (income) Erosion of liabilities

Financialexpenses(income)on: Debentures Loans Hedgetransactions Loansandaccountreceivables Capitalizationoffinancingexpenses, net Transferoffinancing(expenses) incometoregulatoryasset Financialexpenses,net

Total

(Audited) 2,078 805 361 366 (1,173) 19 120 86 2,578 84 (201) (134) 2,243 (135) (51)

2,883 727 (1,154) 206 2,662 (201) (269) 2,192

56

NOTE7: b. Gain(loss)fromerosionofliabilities,net(1)

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) FINANCIALEXPENSES(INCOME),NET(continued)

2011 (Audited) Loss(gain)resultingfromthechangeintheCPIfor ................... 60 Loss (gain) resulting from the change between the known CPI andtheCPIfor ............................................................................ 35 85 (95) Lossfromrealrevaluationofforeigncurrency,net(2) .............. (285) (147) (186) Loansandreceivables................................................................. 18 86 13 Total (207) 84 (269) (1) Beforecapitalizationoffinancialexpenses(income)andtransferofincometoregulatoryasset. (2) Net of the effect of hedge transactions, after the offset of the effect of erosion of deposits and from other loansthatweredepositedinbanks. c. RaisingCapitalandMaterialRepayments AftertheStatementofFinancialPositionDate 1) RaisingCapital On February 10, 2012, the Company issued debentures, distributed by Barclays Capital and USB Investment BanktoinstitutionalbuyersinandoutsidetheU.S.A,inatotalamountof$0.5billion,nominalvalue,outofa GMTNforissuingdebenturesinatotalamountofupto$2billion,nominalvalue.Thesedebentures,issuedin theframeworkoftheGMTN,wereregisteredontheSingaporestockexchange.Thedebentureswereissuedat anominalinterestrateof6.7%(effectivereturntoredemption6.81%).Theprincipalofthedebentureswillbe paidoffinonepaymentonFebruary10,2017. This offering is added to previous offerings in the framework of the GMTN plan, executed in May 2008, in the amount of $ 1 billion, nominal value and in January 2009, $ 0.5 billion, nominal value. Therefore, the cumulativeamountoffereduptonowundertheGMTNplanis$2billion,nominalvalue. AftertheStatementofFinancialPositionDate a) On April 5, 2012 the Company published a bid for floating private (nonnegotiable) debentures, not linked to the CPI, of the NIS Electricity 2013 series, backed by a state guarantee, through the distributors Clal Finances and Leader Capital Markets to parties mentioned in section 15 a(b)(1) or (2) in the Securities Law 1968.ThisissuanceamountedtoNIS1.5billionnominalvalueinreturnforreceivinganidenticalsum(price 100) at a nominal interest of 3.03% (3.03% effective rate). The principal will be paid in one payment on April10,2013. b) Regarding thefloatingbacked by aStateguarantee after the statementof financial position date, see Note 1fabove. 2) RepaymentsaftertheStatementofFinancialPositionDate OnMay20,2012,negotiabledebenturesofseries22wererepaidinthenominalamountofNIS500million(a total of NIS 616.3 million including linkage differences) issued by the Company at the Tel Aviv stock exchange underanofferingtothepublicinMay2002,forofferingatotalnominalvalueofNIS6billion. d. CreditRating 1) On April 5, 2012, the international rating company, Standard & Poor's and the local rating company Maalot Standard&Poor'sincludedtherating(ilAA)ofthedebenturesinthenegativeoutlooklist. 2) OnMay24,2012,thelocalratingcompanyMidroog,announced: a) Achangeoftheoutlookofseries22and2022fromstabletonegative. b) TheAaaratingofElectricity2013seriesremainsunchanged. c) Ratingtheadditionalseries,backedbyaStateguarantyintheapproximateamountofNIS3billion,atAaa.

FortheThreeMonthsended March31 2012 2011 NISinmillions (Unaudited) 25 (1)

FortheYear ended December31

57

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,RELATEDPARTIES,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES a. RelatedParties 1. MinorTransactionsProcedure The Company and its consolidated companies carry out, or are likely to carry out, as part of their normal business activities, transactions and/or obligations to carry out transactions with a controlling party, or in whichthecontrollingpartyhasapersonalinterest("ControllingPartyTransaction"). Usually, these transactions are not material to the Company or its consolidated companies, from both the quantitative and qualitativeaspects and are generally carried outunder similar terms to terms of transactions with third parties. Moreover, from the Company's point of view, these transactions are mostly integral to its currentactivity,sincetheCompanyisontheonehandaGovernmentCompany,wherethecontrollingpartyis theState,andontheotherhand,asupplierofavitalandcentralservicetotheIsraelieconomy. StartingfromMarch2012,theCompanyimplementstheminortransactionsprocedureinaccordancewiththe SecuritiesRegulations(AnnualFinancialStatements)2010. 2. IndemnificationofDirectorsandOfficersoftheCompany On May 29, 2012, the Company's Audit Committee and Board of Directors approved the issue of a commitment in advance to indemnify theDirectors of the Company, the CEO of the Company, the CFO of the Company and the Legal Consultant and Secretary of the Company ("Officers"), subject to the approval of the generalmeetingoftheCompany. Theeventsforwhichthecommitmenttoindemnifywasapprovedare: Making a decision to offerprivate placements and act to raise debts by the Company, that arenot performed through or based on a prospectus and the responsibility deriving from it, all with respect to private placementsanddebtraisingtobeperformeduptoJune30,2013,providedthattheproceedsofthesaiddebt raising will be designated, in accordance with a written advance approval to be furnished by the Director General of the Government Companies Authority, for covering excessive fuels costs exceeding fuels costs which will be recognized in the rate, as part of the outline that was published by the Electricity Authority for spreadingtheincreaseinelectricityratesoveraperiodofthreeyears("OutlineoftheElectricityAuthority"). Preparation,approval,signingandpublicationofaprospectusbytheCompany,includingthedisclosureunder thesaidprospectusandissuingdebenturesbytheCompanyonthebasisofthesaidprospectus(includingthe entering of an agreement on extending a guarantee with the State of Israel and receiving a guarantee of the StateofIsraelforthesaidfloatingandincludingtheverydecisiontoissuedebenturesbytheCompanyforthe purposeofcoveringexcessivefuelscost,inexcessoffuelscostswhichwillberecognizedintherateaspartof the Outline of the Electricity Authority) ("The Floating"), provided that the proceeds of the float of the debentures to be issued by the Company will be designated to cover excessive fuels cost, in excess of fuels costs which will be recognized in the rate as part of the Outline of the Electricity Authority and that the prospectus will be published before the end of the period determined in the outline of the Electricity Authorityforspreadingtheincreaseinelectricityrates,namely,nolaterthanJune30,2012. The commitment in advance to indemnify the officers was approved by the Company's Audit Committee and BoardofDirectorsretroactively,inawaythatwillalsoapplytothefloating. The version of the indemnification letter, including the maximum indemnification amount, will be submitted totheapprovaloftheauthorizedorgansintheCompany,asrequiredbythelaw.

58

NOTE8: b. Agreements 1) AgreementontheSupplyofGasfromtheTamarField Afterthestatementoffinancialpositiondate,onMarch14,2012,theCompanyenteredanagreementforthe supplyofnaturalgasfromtheTamarfield,locatedabout90kmwestofHaifa,withtheholdingpartnersinthe Tamar Field. According to the agreement, the Company undertook to buy from the holding partners of Tamar field ("The Sellers") natural gas in a total minimum quantity of about 42.5 BCM, and a maximum quantity of approximately 78 BCM, with an option to the Company, which can be exercised up to April 2013, to increase thequantitytoabout99BM. The agreement specified two Price ReOpener points, after 8 years and after 11 years, from the gas supply date from the Tamar project. The range of the change in the first adjustment point (after 8 years) will be an addition or a reduction of 25% and on the second adjustment date the price adjustment range will be an additionoradeductionof10%. Thegaspricewasdeterminedintheagreementaccordingtoabasepriceandlinkageformulabasedmainlyon the U.S. Consumer Price Index. The base price for 2011 was determined at $5.042 per heat unit (MMbtu), to be linked in each of the years, from 2012 to 2019 to the American Consumer Price Index with an addition of 1%(andadeductionof1%inthesubsequentyears). The agreement includes a "Take or Pay" mechanism, which obliges the Company to pay for the right to purchase a minimal quantity of natural gas, even if it does not use it, at an annual quantity of 3.5 BCM in the first five years and later on at a quantity of 2.5 BCM per year, and during the option period, insofar as exercised,afterbuildingthesecondsupplypipe,theannualquantitywillincreaseto5BCMperyear(subjectto adjustments according tothe sales scopeof Tamar partnership and the volume of electricity generatedby the Company). The agreement is subject to the approval of the following: The Electricity Authority, the Restraint of Trade Authority in the Ministry of Finance and the Government Companies Authority and if needed, the Government. In addition, the agreement stipulates that in the event that these approvals are not received within forty five (45) days from the agreement signing date (namely, up to April 29, 2012), the parties will discuss within seven (7) days of the said date, the likelihood of receiving the approvals, where soon after the saiddiscussionthesellerswillhavetherighttoannouncethecancellationoftheagreement.Asonthecurrent date,thepartiesdidnotdiscussthesubjectofreceivingtheapprovals. The aforementioned approvals were not received as on the current date, thus, the sellers are entitled to announcethecancellationoftheagreement. OnMay21,2012,theElectricityAuthoritypublishedadocumentforahearingontheprinciplesforrecognizing the costs with respect to purchasing natural gas. The last date for filing responses to the hearing is June 4, 2012. The Company is studying the commercial and legal implications of the document and will report again onthesubject,asrequiredbyanylaw. 2) E.M.G. In 2005, the Company's Board of Directors approved the agreement that was reached by the Company with E.M.G. for the supply of natural gas over 15 years, with an option for the Company to extend it by five additionalyears.SincethebeginningofthegasdeliveryfromE.M.G.inMay2008,E.M.G.hasnotfulfilledtheir contractualcommitments.Intheirnotifications,E.M.G.claimthatthereisageneralgasshortageinEgypt,due todelaysinoperatingnewgasproductionsitesthatlimitthedeliveryvolume;increaseddemandsforgasthat exceed forecasts and failures in the delivery system, caused by on overload on the gas delivery and handling systems. Following the amendment of the gas sales agreement between the Egyptian Government and E.M.G., the parties updated in 2009 the terms of the original agreement signed in 2005, adapting it to the developments sincethen. Inthebeginningof2011,thegassupplyfromEgypthasbeendisruptedbyrecurringattacksonthenaturalgas pipeline in Egypt, severely affecting the supply of gas from Egypt. The actual quantity supplied in 2011 was 40%lessthanthecontractualquantity.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) AGREEMENTS,RELATEDPARTIES,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued)

59

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) b. Agreements(continued) As the gas supply was stopped, EMG notified the Company about a force majeure event, since the attacks on the gas pipeline were acts of terror. The Company's Board of Directors decided in September 2011, that the Company will enter an arbitration process versus the national Egyptian gas supply companies and EMG, to receive compensation for the damages incurred and that will be incurred by the Company by nondelivery of the gas from Egypt until the gas supply from "Tamar" will begin, amounting, as claimed by the Company, to more than $2 billion. On April 22, 2012, the Egyptian Government gas companies announced the cancellation of their agreement with E.M.G., which is the natural gas supplier to the Company. The agreement for the purchaseofnaturalgasbetweentheCompanyandE.M.G.wasnotcancelled. c. ContingentClaimsandLiabilities 1) Claimsrequestedtoberecognizedasclassactions a) OnAugust30,2000,arequestwasfiledwiththeTelAvivDistrictCourtagainsttheCompanyandtheState, to approve a claim as a class action ("The Request for Approval"), (Civil Claim (District Tel Aviv) 2433/00, Various Civil Requests 24959/00), later amended, inter alia, after the Class Actions Law 2006 ("Class Actions Law")came into force. Under the amendment, the request for approval was later divided into two requests, one against the State in the Administrative Affairs Court and the other in a Civil Court, heard by thesameboard. The request for approval dealt with the collection of the special surcharge to the electricity rate. The claimant claimed, inter alia, that this special surcharge is a "hidden tax" that is being unlawfully collected, and that the Company must return it, together with interest and linkage, in the amount of approximately NIS 2,847million in values of the date on which the claim was filed. It should be noted that the special addition which was intended to finance the Company's liability for pension of active employees and pensioners who started working in the Company up to March 31, 1975 and accumulated up to March 5, 1996, is an addition to the electricity rate which was fully collected from consumers, from 1997 to 2005 inclusive(byforceofthepensionagreementinJune1996betweentheGovernmentandtheCompanyand by force of section 62(e) to the Electricity Sector Law), up to the end of 2005, when the collection of the specialsurchargeended. TheCompanyhadcollectedanominalsumofNIS8,831milliononaccountofthespecialsurcharge. According to a procedural accord between the parties that received the force of a decision, the parties waived conducting cross examinations of the declarers in the case and filed written complementary pleas. Thepartiescompletedfilingtheircomplementarypleasduring2010. At this stage, the parties are awaiting the decision of the court on the request for approval that will relate toeitherthethresholdclaimsonlyortheactualrequestforapproval. The Company's legal advisors believe that the Company has good defense arguments for both rejecting in limineandrejecttheactualclaimandbelievethatitismorelikelythannotthatitwillberejected. b) 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 ("Consumer Protection Law"), abusing the status of a monopoly according to the Trade Restriction Law 1988, enrichment by force of the Unjust Enrichment Law 1979 and deceit and negligent wrongs in the Damages Act [new version] 1968 ("Request for Approval on the subject of salary payments"), (Civil Claim (District Tel Aviv) 1756/09, Various Civil Requests 13822/09). The claimant alleges that the Company collects through electricity bills illegal amounts from electricity consumers,aspartofthepriceoftheelectricityitsupplies,tocoverexcessive,illegalandinvalidsalary(all allegedly according to the claimant's claim) of Company employees. The claimant claims that the accrued amountoftheallegedlyillegalsalarypayments,collectedincontrastwiththeGovernmentCompaniesLaw 1975 and the Foundations of Budget Law 1985, amounts to NIS 5 billion over the last seven years. The claimalsoclaimsthattheCompanysubmitsmisleadingdatatotheElectricityAuthority. Inaddition,onAugust30,2009,arequesttoapproveaclassactionagainsttheCompanywasfiledwiththe Petach Tikva District Court for causes based on the Consumers Protection Law, the Trade Limitation Law, UnjustEnrichmentLaw,DamagesLawandContractsLaw("TheRequestforApprovalonthesubjectof

60

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) c. ContingentClaimsandLiabilities(continued) 1) Claimsrequestedtoberecognizedasclassactions(continued) pension") (Consumer Claim (District Tel Aviv) 22050809). The claimants claim, that an error in the actuarial calculations of the pension to which Company employees are entitled led to the increase of the Company's pension liabilities. The claimants also claim that the cost of the increased pension liability was allegedly passed on to the 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 said error, but refrained from correcting it and even presented erroneousdatatotheElectricityAuthority. Afterseveralpreliminaryproceedingsrelatedtobothoftheaforementionedrequestsforapproval,theTel Aviv District court decided, that these two requests will be joined. In May 17, 2010, all the claimants filed jointly a joint request for approval ("The Joint Request"). After filing the claims and holding several hearingsoftheproofstothejointrequest,anorderwasissuedforwrittensummarizedclaims.Theparties filed their summaries in writing and are waiting for the decision of the court on the request for approval. The Companys legal advisors estimate that the Company has good defense arguments for both dismissing in limine the request for approval and the actual claim and that it is more likely than not that the joint requestwillbedismissed. c) OnJuly6,2009,aclaimandarequestwasfiledwiththeTelAvivDistrictCourtagainsttheCompany,("The Request for Approval") to approve a claim as a class action (Civil Claim (District Tel Aviv) 1745/09, Various CivilRequests13678/09). This claim was filed by a group of 512 claimants, residing in Gush Etzion dealing in granting adequate compensation to group members for alleged pecuniary and nonpecuniary damages caused by repeated disruptionsandfaultyelectricitysupplytovillagesintheGushEtziondistrict. The claimants claim that the average electricity disconnections in the Gush Etzion area are ten to fifteen times higher than the national average of high voltage lines failures. The claimants claim that the faults in electricity supplyarecausedbyfaultymaintenanceoftheelectricitygridsthatsupplieselectricitytoGushEtzion.Theclaim requests the court to order the Company to execute within a reasonable time, all maintenance works required to prevent exceptional failures in electricity supply (and also to repair new failures immediately) and also requests the court to order compensation relief, for pecuniary damage amounting to approximately NIS 5 million (and alternately establish a mechanism to review the entitlement and to prove the alleged pecuniary damage)andfornonpecuniarydamage(sufferingandmentalanguish)approximatelyNIS34million. Consequently, the amount of the claim which the court is requested to approve as a class action is approximatelyNIS39million. Following the hearing of evidence and issuing of the order for written summarized claims, the parties filed theirsummariesinwritingandarewaitingforthedecisionofthecourtontherequestforapproval. In the opinion of the legal advisors of the Company, the Company has good defense claims for both dismissinginliminetherequestforapprovalandtheclaimanditismorelikelythannotthattherequestfor approvalwillbedismissed. d) On November 10, 2009, a request to approve a class action against the Company and ten other respondents was filed with the Petach Tikva District Court, by force of principles in the Damages Law and Consumers Contracts Law ("The Request for Approval" "The Respondents", respectively) (Consumer Claim (CentralDistrict)112841109). The claimants claim that each of the respondents violated their obligation to provide free of charge telephone services to the customers to be used for calls on matters of faults, defective goods or faults in services provided by the respondents to their customers, all according to section 18 b of the Consumer ProtectionLaw1981("ConsumerProtectionLaw"). RegardingtheCompany,theclaimantsclaimthataconsumerthatcallsthecallcenter(103)fromamobile phonepaysthefullchargeforthiscallandsimilarly,alsoaconsumerwhocallsoneofthedirecttelephone numbersoftheCompanyfromanytelephone(bothmobileandlandline)paystheregularpriceforacall. The claimants claim that the accumulated amount of the aggregate damage allegedly incurred by the members of the group, amounts to NIS 24 million over the last three and a half years. Alternately, insofar asitwillbedeterminedthatnofinancialcompensationcan

61

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) c. ContingentClaimsandLiabilities(continued) 1) Claimsrequestedtoberecognizedasclassactions(continued) be paid under the circumstances, the court is requested to order a compensation to the public benefit of the group members in an amount equal to the alleged enrichment of the Company. Relief was also requestedbyrequiringtheCompanytoactimmediatelytocreatetollfreetelephonelines. On June 16, 2010, the claimants filed an amended request to approve the claim as a class action (to which another claimant was added, as detailed below, and after four respondents were deleted previously). Accordingly, the Company filed its amended response to the request for approval on October 31, 2010. According to an agreement between the parties in the hearing, which received the force of a decision, the parties waived interrogation of witnesses in the request for approval process. It was also concluded and stated that the claimants will file their summaries up to May 31, 2012. The Company will file its response summariesuptoSeptember16,2012.TheclaimantsareentitledtofileresponsesummariesuptoOctober 9,2012.Thedecisionontherequestforapprovalwillbeissuedafterthepartieswillfiletheirsummaries. Itshouldbementionedthattherequestforapprovalwasunitedrecentlywithanotherrequesttoapprove the claim as a class action (Consumer Claim (Haifa District) 139760411). This claim was filed to the Haifa district court on April 10, 2011 and is based on similar claims by force of section 18b to the Consumer ProtectionLaw("TheSecondRequestforApproval").Pursuanttounitingitwiththerequestforapproval,a decision was issued on August 10,2011, ordering the deletion of the second request for approval, without anorderforexpenses. In the opinion of the legal advisors of the Company, the Company has good defense arguments for both the dismissal of the request for approval and the claim itself and estimates that it is more likely than not thattheclaimwillbedismissed. e) On February 15, 2011, a request to approve a class action against the Company was filed at the Petach TikvaDistrictCourt,intheamountofNIS166million("TheRequestforApproval)(ConsumerClaim(Central District)278170211).TherequestforapprovalclaimsthattheCompanycollects,contrarytothelaw,two separate fees,one for disconnecting a consumer from the electricity supply (for any reason) and theother forreconnectingtheconsumer. Alternately, the applicant claims that the Company was prevented from collecting the said "double" fees up to March 1, 2006. Moreover, the applicant claims that the Company collects illegal charges for disconnection and connection, performed, allegedly "in the premises" as if these actions were performed "outside the premises" (where the fixed commission is higher). The applicant filed additional claims for which he requests declaratory relief and mandatory injunctions only. According to the claims the calculationoftheinterestthattheCompanychargesitscustomersforpaymentinarrearsiserroneousand contrary to the law and that the Company interprets "invoice generation date", mentioned in the criteria book, incorrectly, in a manner that decreases the period for paying the electricity bill, while offending the consumers. The Company filed its response to the request for approval on August 10, 2011, while the response of the applicant was filed on November 20, 2011. A preliminary hearing of the request for approval was conducted on April 4, 2012. In the opinion of the legal advisors of the Company, the Company has good defense arguments for dismissing the request for approval in limine and for dismissing the claim and estimatethatitismorelikelythannotthattheclaiminprinciplewillbedismissed. f) On September 15, 2011, the Israeli Consumer Council filed a request to approve a class action against the Company at the Central District Court, on grounds of violation of a legislated obligation, negligence, Consumer Protection Law and General Contracts Law ("The Request for Approval) (Consumer Claim (Central District) 334920911). The request for approval claims that the Company allegedly violates its legal obligation, enforced by Section 3(b) of the Electricity Sector Regulations (Ways of Proving Eligibility for a Reduced Payment) 2007, Section 4(b) of the Electricity Sector Regulations payment for electricity consumption according to the law (Reduced Payments for Entitled Disabled Holocaust Survivors) 2010, Section 4(b) of the Electricity Sector Regulations (Reduced Payment to Disabled Receiving OldAge Pension for the Disabled) 2011, to periodically publish general information in the media on rights for decreased paymentforelectricityconsumption,accordingtothelaw.

62

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) c. ContingentClaimsandLiabilities(continued) 1) Claimsrequestedtoberecognizedasclassactions(continued) Accordingly, to bring the requested information to the attention of all the families of those entitled to decreased payment, the court was requested to act as follows: (a) to oblige the Company to immediately fulfill its obligations according to the law; (b) to include concrete content in the aforesaid publication obligationaccordingtothelaw,bydetailingthespecificsofthispublication(location,frequency,language, contents); (c) to order the Company to publish through a range of commercial TV channels and/or dedicated radio channels at peak broadcasting hours and a monthly frequency during the first year after the claim is accepted (and at a bimonthly frequency later on) all as requested in the request for approval and according to the decision of the court, a broadcast of one minute at least, including the said general information; (d) to order the Company to return to those among the group members that are entitled to the benefit of the reduced payment to receive the difference with respect to the reduced payment, with linkage differences and the interest according to the Accountant General, from the entitlement date up to theactualrefunddate. TheCompanyfileditsresponsetotherequestforapprovalonJanuary17,2012,whiletherespondentfiled itsresponseonFebruary16,2012.PreliminaryhearingswereconductedonFebruary20,2012andonMay 13,2012. Another preliminary hearing wasscheduled forJuly 11,2012. In the opinionof the legal advisors of the Company the likelihood that the request will be granted cannot be estimated at this preliminary stage. It should be noted that any person who is entitled to consume electricity at the reduced rate is credited retroactively with payment differences to which he is entitled according to the law, starting from thedateonwhichthelawappliedtohimcameintoforce.Atthesametime,theCompanyiscreditedwith respecttothereducedrates.Therefore,asthingsstand,nosignificantfinancialexposureisexpectedtothe Companyfromthedemandfortherefundremedy. 2) ClaimsforthepollutionoftheKishonRiver In the framework of a claim filed against Haifa Chemicals Ltd., Oil Refineries Ltd., the Association of Municipalities (Haifa region Sewage) and the municipality of Haifa ("The Defendants") (Civil Claim (Haifa District) 972/00, 414/04, 577/04, 670/04). by 95 soldiers of the IDF and soldiers estates (the current number of claimants is 74), claiming that the soldiers allegedly became ill with various types of cancer as a result of their exposure to the water of the Kishon, Haifa Port, Shemen Shore and the surrounding water during their military service, in 2005, a joint notice was filed on behalf of the defendants against multiple third parties, among whom is the Company ("The First Claim"). At present these claims are at the stage of the hearing of evidenceofexpertsonbehalfofthedefendantsandthirdparties. In 2007, another claim was filed, consolidating 17 claims by soldiers and estates (at present, the number of claimants in this case is 16), against the same defendants in the first claim and against their insurers (The SecondClaim")(CivilClaim(HaifaDistrict)842/07).Inthisclaimalso,ajointnoticewasfiledbythedefendants against multiple third parties, among them the Company (due to the claim that the power station at Haifa contributedtothepollutionoftheKishonwater). It shouldbe noted that in these claims, the questionof the narrow meaning of thecausal relation comes first, namely the causal relation between the claimed exposure of the claimants to substances claimed to be found inthewateroftheKishonRiveranditssurroundingandtheirdiseases,consideringtherelevantcircumstances ofeachoftheclaimants. Sincethecaseinvolvesbodilyinjuryclaims,intheframeworkofwhichnodefinedaggregatecashamountwas asserted on the date that the claims were filed, as the different parameters of which are the basis for the calculation of the damage for each plaintiff are determined in a clarification procedure of the claim, and since these are complex claims that raise complex scientific and legal issues, it is not possible to know at this initial stage what the damage that was caused to each of them is, all the more so what the relative part of each defendantandthirdpartybeingsuedinthisclaimis. It follows that, in the assessment of the Company's attorneys, the aggregate amount for the claim, for both claimsofestatesandclaimsoflivingclaimants,isintherangeofbetweenNIS650millionandNIS800million, includinglegalfeesandcourtexpenses.TheCompany'sattorneyspointoutintheiropinionthatthereference isonlytoageneralestimate,basedontheassumptionsthattheymakeintheabsenceofdataatthisstage.

63

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) c. ContingentClaimsandLiabilities(continued) 2) ClaimsforthepollutionoftheKishonRiver(continued) In addition, this estimate disregards the various benefits that the plaintiffs are receiving and/or will receive in thefuturefromthirdparties.Itshouldbepointedoutthatthereferenceistoanassessmentoftheamountof theclaimsandnottotheassessmentoftheriskofdefendantsandthirdpartiesingeneralandtheCompanyin particular,sinceatthisstagedataisunavailablethatwouldenablemakingsuchanassessment. In view of this complexity, the Company's attorneys will be able to update their assessment only in the future whentheyobtainadditionaldatainthecourseofclarificationofthecase.IntheCompany'sopinion,basedon the opinion of its attorneys, data that would enable evaluating the Company's risk is unavailable at this stage Nevertheless,theCompanyestimatesthatitishighlyunlikelythattheCompanywillincuramaterialsum. 3) ClaimonPollutionfromthe"RamatHovav"IndustrialZone Three actions (in which the hearing was enjoined) were lodged in the Beer Sheva District Court in 2007, amounting to NIS 250 million, against the Ramat Hovav Local Industrial Council (The "Council") and the State of Israel ("The State") (Civil Claim (Beer Sheva District) 1069/07, 1070/07, 1144/07). The action was originally included 82 claimants, whose number as of the Financial Statements date is 68, was lodged by Bedouin inhabitants of the northern Negev, who live near the council and inhabitants of Omer and southern neighborhoods of Beer Sheva, residing near Ramat Hovav site, because of different diseases, including respiratorydiseases(includingasthma)andcancer,allegedlycausedbytheirprolongedexposuretohazardous materialsemittedfromRamatHovavsiteand/orfromhighvoltagelinesoftheCompany. OnMay21,2008,theCouncil(withouttheState)filedastatementofdefenseagainsttheactionsandanotice toathirdparty,interaliaagainsttwelveplantsoperatingatRamatHovavsite,includingtheCompany,against which the Council claims that insofar as the plaintiffs sustaineddamages, these were causedpursuant to their direct or indirect exposure to electrical equipments owned and/or controlled by the Company and are under the responsibility of the Company, e.g. high voltage lines, transformers, etc. It should be noted that the hearing of the notices to third parties was enjoined with the hearing of the main claim. In addition, the court ordered the splitting of the hearing of the case, where in the first stage each plaintiff will have to prove a causalrelationandthesecondstagewillclarifyissuesrelatedtothebroadresponsibilityinDamagesLaw,such as the obligation of caution, contributing blame and determining the measure of responsibility of all the defendantsandthirdpartiesandamongthem. On March 30, 2009 the Company filed a statement of defense, in which it denied the claims against it and refutedanyresponsibilityforthediseasesoftheclaimants. On April 6, 2010 and on April 11, 2010, the Company, together with the defendants and some of the third parties filed its evidence in response to the claim for the purpose of the initial clarification stage of the claim (thenarrowcausallink). The hearing of evidence on the narrow causal relation ended on December 13, 2011. The claimants filed their summaries on March 15, 2012 and the Company is expected to file its summary together with the other defendantsandthirdpartiesonJune15,2012. These are complex and unique claims that raise highly complicated scientific questions about the existence of a causal connection between the materials and disease. The extreme complexity of the causal relation between material and disease increases in light of the interaction among the materials, especially in view of the fact that the plaintiffs allegedly suffer from a wide range of different diseases, other possible causes of disease and the contribution, if any, of each defendant/third party to the alleged pollution that allegedly causedthediseasesoftheplaintiffs. In view of such complexity, the legal consultants of the Company can only update their estimates later after additionaldetailscometolightduringthelegalprocess.IntheCompany'sopinion,basedontheopinionofits attorneys, data that would enable evaluating the Company's risk is unavailable at this stage, yet the Company estimatesthatthelikelihoodthattheCompanywillbechargedwithamaterialamountisverylow.

64

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) c. ContingentClaimsandLiabilities(continued) 4) DerivativeClaims On September 10, 2009, a letter was sent to the chairman of the Board of Directors from the representatives ofMr.DovZelinger,whoclaimstoholdseveralsharesintheCompany.Mr.Zelingerrefersinthislettertotwo offerings of debentures issued by the Company abroad, inMay 2008 and in January2009 ("The Debentures"). Mr. Zelinger claims that the Company announced in August and September 2009 that an error was found in the actuarial calculation of the pension funds to which Company employees are entitled, leading to an increaseinthepensionliabilitiesoftheCompany.Mr.Zelingerclaimsthatduetothesaiderrorintheactuarial calculation,theinterestratepaidbytheCompanyonthedebenturesishigherthantherateitwouldhavepaid wereitnotforthesaiderror,therebycausingdamagestotheCompany. Inlightoftheaforementioned,Mr.ZelingerrequeststheChairmanoftheBoardofDirectorstoensurethatthe CompanywillfileaclaimwithrespecttothesedamagesagainstthemembersoftheBoardofDirectorsrelated to each of the debenture offerings and against the Actuary of the Company, who according to Mr. Zelinger, violated their duties to the Company and are responsible, according to his claim, for the damages incurred by theCompanywithrespecttothiserror. Mr.ZelingernotifiedthatthesaidletterisapreliminaryappealaccordingtotheCompaniesLaw,priortofiling a request to the court to permit him to file a derivative claim on behalf of the Company against the members oftheBoardofDirectorsandtheCompany'sActuary. On October 28, 2009, the Company sent a written response to Mr. Zelinger. In its letter, the Company dismissed Mr. Zelinger's claims, both the claim against the members of the Board of Directors and the Company's Actuary for violating their duties to the Company and the claim that the Company incurred damagesarisingfromtheerrorintheprovisionforpensioncalculation. OnSeptember 5,2010 (about oneyear after the response of the Company) the representative ofMr. Zelinger addressed the representative of the Company and claimed, in a general manner, that in his opinion, claims that were detailed in his first letter are well founded. In addition, Mr. Zelinger requested different details related to the dismissal of his appeal by the Company. The Company did not issue a response to the claim of Mr.Zelinger. It is impossible to estimate, at this stage, the risk to the Company from the aforementioned, since no request was filed to approve filing of a derivative claim (which is not a claim against the Company, but a claim by the Company),therefore,itisimpossibletoknowwhatargumentswillbeincludedintheclaim(ifany)andagainst whom will the derivative claim be directed, or its scope, and since the full relevant facts have not crystallized atthisstage. Atthesametime,duetothefactthattheCompanyfurnishedindemnificationlettersandinsurancetoofficers in the Company for such events, the Company estimates that if a derivative claim of the plaintiff (on behalf of the Company) against the officers will be filed and received and it will be determined that the case is covered by the insurance, the insurance company will assume the payment and the risk to the Company is at the rate ofthemaximumdeductible(amountingto$250,000). Alternately,iftheclaimisacceptedanditwillbedeterminedthattheinsurancecoveragewillnotapplyinthis case, but the indemnification letters furnished to officers are in force, the officers will pay the Company and theCompanywillhavetoindemnifythemaccordingtothestipulationsoftheindemnificationletters.Itshould also be noted that the indemnification letter states a limited sum. If and insofar as the court will decide on a sumthatishigherthantheindemnificationceiling,theofficerswillbeobligedtopaytheCompanythebalance oftheamount,exceedingthecoverage.Nevertheless,andsincetheindemnificationceilingissetat25%ofthe equity of the Company, as on June 30, 2009, and linked to the CPI in Israel from the CPI of July 2009 ("The Maximum Indemnification Amount"), the Company believes that it is unlikely that such a scenario will materialize. 5) ClaimontheSubjectofaCollectiveSaleRate OnFebruary1,2010,aclaimwasfiledagainsttheCompanyby131collectivesettlements("TheOriginalClaim" and"TheClaimants",respectively). The claimantsclaim that they are entitled to pay the Company according to the "Collective Sale Rate" for high voltage consumers (to be distinguished from high voltage Load and Time Rate ("LTR") consumers), in view of the definition of the said rate in the book of criteria, published by the Electricity Authority, noting the discriminationoftheclaimantscomparedtoothercollectivesettlements,whoconsumelowvoltageelectricity fromtheCompanyandarebilledaccordingto"collectivesalerate"forlowvoltageconsumers.

65

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) c. ContingentClaimsandLiabilities(continued) 5) ClaimontheSubjectofaCollectiveSaleRate(continued) Accordingly,thecourtisrequestedtograntdeclaratoryrelief,accordingtowhichtheclaimantsareentitledto bebilledas"CollectiveSaleRate"forhighvoltageconsumers,asofSeptember1,2005anduptoSeptember1, 2009 (the date on which the outline for regulating the activity of historical electricity distributors as determined). Pursuant to the requests to dismiss the request ad limine, filed by the Company, the claimants had to amend the claim twice and on February 4, 2011, filed a "claim amended a second time" ("The Amended Claim"), to which 25 more claimants were added with consent and also 6 claimants that were included in the original claim were withdrawn, with consent. The amended claim claimed in addition to the declarative relief claimed in the original claim, financial relief for the period from September 1, 2005 to September 1, 2011, in the total amount of NIS 96 million (plus interest and linkage). Declaratory relief was claimed on the entitlement of the claimants to be billed according to the "Collective Sale Rate" for high voltage consumers, for the period from September1,2011.OnOctober31,2011,theCompanyfiledanamendeddefensedocumentonitsbehalf.No datewasscheduledasyetforapreliminaryhearingoftheclaim. It should be noted that the possible implications of the claim depend, inter alia, on the position of the Electricity Authority. The Company believes that if the claim will be accepted, the Electricity Authority will recognizethecostsarisingfromit. In light of the arguments of the Company, as detailed in the amended statement of defense and after confronting these arguments with the claims of the claimants alone, as detailed in their second amended claim, the legal advisors of the Company believe, as of this date, that the Company has good defense argumentsagainsttheclaimanditismorelikelythannotthattheclaimwillbedismissed. 6) ClaimsforPaymentofOtherMunicipalTaxes,LeviesandFees As of the statement of financial position date, there are demands against the Company for municipal taxes in amounts exceeding the relevant provision that was recorded in the Financial Statements by about NIS 670 million.ThesedemandsderivefromthechangesinclassificationoflandsheldbytheCompany,thedemandto increasetheareasbeingbilledandthedemandwithrespecttomunicipaltaxrates. TheCompanyestimates(basedinpartontheopinionofitslegaladvisors),thatthereisalowprobabilityitwill be required to pay these amounts, for which the Company did not make a provision in its Financial Statements. In addition, as of the statement of financial position date, the Company has demands with respect to levies and fees in amounts exceeding the provision recorded in the financial statements by approximately NIS 248 million. In the opinion of the legal advisors of the Company, as on the date of the report, the Company does nothavetheabilitytoestimatetheexposuretothesedemands. 7) ThePlanningandBuildingLaw The Planning and Building Law prescribes that the holders of rights in land who were adversely affected by a zoningplanareentitledtoindemnificationfromthelocalcommitteesforthesectorstowhichthiszoningplan applies. In order to set up 400 kilovolt lines, zoning plans are required. The Company undertook to indemnify the local committees for the sectors to which these zoning plans apply for the full amounts that the committees will be obliged to pay to the landowners who will be adversely affected, as stated above (aside from one plan, in which the burden of indemnification will be divided among the institutional bodies that are involved in the plan). These undertakings for indemnification were delivered after it was made clear to the Companythatnotprovidingthemwouldresultinthefailuretoapprovetheplansortheirsuspension. The National Board approved an outline plan in the area of the southern district of the Ministry of Interior which states that the relocation of the 161 kV lines will be approved under an outline plan rather than under anauthorizationprocessplan(wheretheCompanyauthorizestransferofthe161kVlinesasofthisdate). As of the statement of financial position date, claims are pending against several local committees in an amount of about NIS 600 million, in excess of the provisions that were recorded in the Company's Financial Statements. In the Company's opinion, based on the opinion of its attorneys, which takes into consideration the opinion of the real estate assessor advising the Company with regard to the above claims, if all of its arguments shall be rejected and the Company shall be forced to expend funds for these claims, then the Company's exposure for these claims will not exceed the provision that was recorded in the Financial Statements.

66

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) c. ContingentClaimsandLiabilities(continued) 7) ThePlanningandBuildingLaw(continued) The Company is of the opinion that should any amounts whatsoever be paid, they will be part of the cost for setting up the relevant transmission lines, and due to the indispensability of the transmission lines, and based on the opinion of its attorneys, if and when the Company pays indemnification with respect to the indemnity letters,theElectricityAuthoritywillbeobligatedtorecognizethemintheelectricityrate. 8) OtherContingentLiabilities a) BuildingaGasDeliverySystemProject SeedetailsinNote13gtotheAnnualFinancialStatements. b) TheIsraelLandsAdministration The Company held and is holding discussions and clarifications with the Israel Lands Administration from timetotime,asneeded,withrespecttotheleasefeesforcertainrealestatepropertiesatdifferentsites. As of the statement of financial position date, the Company is unable to estimate if it will be required to pay the said usage fees for these sites and, if required, what amounts will be demanded. However, if the Company will be eventually required to pay with respect to all these sites, it is probable that the total amount will not exceed NIS 15 million. The Company did not record any provision with respect to these demandsinitsFinancialStatements. c) ProjectD SeedetailsinNote24b9btotheAnnualFinancialStatements. 9) Guarantees RegardingguaranteesprovidedbytheCompany,seeNote27etotheAnnualFinancialStatements. 10)IndemnificationLetters a) IndemnificationLettertotheCompany'sActuary Regarding indemnification letters to actuary of the Company see Note 24 b11 to Annual Financial Statements. b) ForotherindemnificationlettersissuedbytheCompany,seeNote13,sectionsh,l,mandntotheAnnual FinancialStatements. d. Labourdisputes 1) AnoticewithrespecttoastrikewassubmittedonDecember29,2011,accordingtotheSettlementsofLabour DisputesLaw.Thedisputedmattersare: a) Onesided actions of the Company's Management in many issues related to reducing work conditions and benefitsgrantedtotheemployeesuptonow,allwithoutnegotiationswiththeemployeesorganization. b) Implications of the refusal of the Management to place new employees in unmanned budgeted positions onthevolumeandtasksofexistingemployees. c) Implications of the refusal of the Management to place new employees in unmanned budgeted positions including failure to grant permanent status to entitled employees, with the purpose of outsourcing the work of Company employees, while affecting the organizational power of the employees and their representativeorganization. d) Implications of the Company's decision to dismiss 400 permanent employees without entering a collective agreement and without manning the budgeted positions with employees employed at present by the Companywithoutapermanentemployeestatus. e) Failure of the Management to address the requirement of the employees organization on reducing work through contractors, while determining mechanisms for protecting and improving the rights of contractor employeesintheCompany. f) TheemployerisnotactingingoodfaithandactsinwaysthatareunacceptedinLabourrelationsingeneral andspecificallyinLabourrelationsinthepublicsector.Theemployerimpactsthestatusoftheemployee's organization by ignoring it and making onesided decisionwhich may affect the workconditions andrights oftheemployees.

67

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE8: AGREEMENTS,CLAIMS,CONTINGENTLIABILITIESANDLABOURDISPUTES(continued) d. Labourdisputes(continued) g) The employer does not conduct a collective negotiation on all the aforementioned arguments and ignores repeated demands of the employee's representatives. According to the Settlements of Labour Disputes Law,anoticestatedthatastrikemaybeginonJanuary15,2012. On January 22, 2012, Company employees started different sanctions, according to the instructions of the employee's organization. However, these sanctions stopped on January 25, 2012, following agreements reached between the Company's Management and the employee's organization regarding subjects of granting permanent status for 2012, overtime budget implementation, promotion, implementation of the conclusion on the subject of funds in the trust account and changing the status of temporary employees in theCompany. 2) FollowingthedecisionoftheCompany'sBoardofDirectorsonMarch22,2012,toacttotransfertheactuarial excess from the trust account to the Central Provident Fund for Pension, the employees organization opened sanctions on March 25, 2012, expressed mainly by stopping coal and other fuels off loading at the Orot Rabin andRutenbergpowerstations,stoppingworkontheprospectus,preventingworkrequiredinthereductionof contaminants emission project and refraining from connecting private electricity producers. On March 26, 2012, the Company addressed an urgent appeal to the Haifa District Labour Court, requesting temporary remedies and interim remedies in the presence of one party, under a collective dispute. On March 27, 2012, the Court issued a decision stating that the Company employees must stop the sanctions immediately and return to regular work. On March 29, 2012, the Company received a reasoned decision of the Haifa District Labour Court that enables the Company to act according to the decision of the Board of Directors and release theamountofNIS600millionfromthededicatedtrustaccountforcoveringnonpensioncomponents. The employees organization filed a request to appeal the said decision and on April 30, 2012, the National Labour Court decided that there is no reason to interfere in the decision of the District Labour Court on the Company's request for temporary relief. Therefore, as on the publication date of this report, the sanctions of the employees on this issue stopped according to the decision of the Labour Court and the Company can act according to the decision of the Board of Directors and transfer NIS 600 million from the trust account to the Central Pension Fund (gradually, as detailed in the decision). A hearing on the main subject is scheduled for June5,2012.

68

NOTE9: a. General TheCompanyimplementstheInternationalFinancialReportingStandard8("IFRS8")fromJanuary1,2009. This international financial reporting standard replaced IAS 14 "Segmental Reporting". "IFRS 8" requires implementationofthe"management'sapproach"thatpresentsthesegment'sinformationaccordingtothesame basisusedforinternalreportingneeds. Operational segments report on the same basis used for internal reporting needs, presented to the Chief Operational Decision Maker (CODM) of the Company, for purposes of allocating resources and estimating performance of the operational segments. The CEO of the Company is the Chief Operational Decision Maker of theCompany. b. DetailedReportableOperationSegments The operations of the Company are comprised of three main operational segments making up the entire electricitychain.Theseactivitiesare: GenerationSegment includes the operations at17 sites of the electricity generatingpower stations, derives its revenues according to its share in the electricity rate, as determined by the regulator (Electricity Authority). Transmission Segment includes the transmission and transformation system of the ultrahigh, long distance electricity,generatesitsrevenuesaccordingtoitsshareintheelectricityrate,asdeterminedbytheElectricity Authority. Distribution Segment includes the electricitygrids system and the transformation stations which supply the electricitytotheendconsumers,exceptalimitednumberofcustomersthatpurchasehighvoltageelectricity directly from the transmission systems, as well as the customers service and collection system of the Company, the segment generates its revenues according to its share in the electricity rate, as determined by theElectricityAuthority. c. AnalysisofIncomeandResultsaccordingtoOperationalSegments Segmentalrevenuesarecalculatedonthebasisoftheelectricityrateforthesegment,publishedbytheElectricity Authority, multiplied by the sold quantity (kW/h) of that segment. Segmental expenses that can be specifically identified are charged directly to the appropriate items. In addition, certain indirect expenses are recorded according to an allocation, which serves as a reasonable estimate for attributing these expenses, while adjusting to the electricity rate base. The CODM receives the operational results of each segment up to the net income (loss)level.SeedetailsinNote12below.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) SEGMENTALREPORTING

69

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE9: SEGMENTALREPORTING(continued) c. AnalysisofIncomeandResultsaccordingtoOperationalSegments(continued) FortheThreeMonthsendedMarch31,2012 Generation Transmission Distribution Total segment segment segment Company NISinmillions (Unaudited) Revenues(*) 5,392 439 689 6,520 Operatingloss (748) (27) (692) (1,467) Lossbeforeincometax (966) (134) (844) (1,944) Lossfortheperiod (730) (101) (637) (1,468) AdditionalDetails Depreciationandamortization 691 224 292 1,207 Financingexpenses,net 218 107 152 477 FortheThreeMonthsendedMarch31,2011 Generation Transmission Distribution Total segment segment segment Company NISinmillions (Unaudited) Revenues(*) 4,141 403 667 5,211 Operatingincome(loss) 635 73 (84) 624 Income(loss)beforeincometax 424 (32) (224) 168 Income(loss)fortheperiod 353 (24) (182) 147 AdditionalDetails Depreciationandamortization 597 218 320 1,135 Financingexpenses,net 211 105 140 456 FortheYearendedDecember31,2011 Generation Transmission Distribution Total segment segment segment Company NISinmillions (Audited) Revenues(*) 20,107 1,805 2,713 24,652 Operatingincome(loss) 2,267 512 (10) 2,769 Income(loss)beforeincometax 1,269 10 (702) 577 NetIncome(loss)fortheperiod 381 (267) (902) (788) AdditionalDetails Depreciationandamortization 2,291 893 1,159 4,343 Financingexpenses,net 998 502 692 2,192 (*) Revenuesareattributedtothethreesegmentsaccordingtotheirshareintheelectricityrate.

70

NOTE9: d. AnalysisofAssetsandLiabilitiesaccordingtoOperationalSegments The CODM monitors the tangible, intangible and financial assets of each segment for purposes of controlling the segments and resources allocation among the segments. All Company assets are allocated to the different segments. Investments for the period include investments in fixed assets and in intangible assets and exclude financial instruments and deferred taxes assets. The CODM also receives data of the total liabilities of the Company,dividedintothethreesegments. AsofMarch31,2012 Total Generation Transmission Distribution Company segment segment segment NISinmillions (Unaudited) Assets .............................................. 40,816 15,770 23,223 79,809 Investmentsintheperiod* ............ 674 261 388 1,323 Liabilities ......................................... 33,522 12,243 18,181 63,946 (*) Including investments with respect to the emergency plan for the electricity sector, which includes construction of three CCTGs, less consumers participation amounting to NIS 551 million (see also Note 3 j above) AsofMarch31,2011 Generation Transmission Distribution Total segment segment segment Company NISinmillions (Unaudited) Assets .............................................. 42,043 16,975 24,010 83,028 Investmentsintheperiod ............... 609 197 313 1,119 Liabilities ......................................... 33,747 12,751 18,264 64,762 AsofDecember31,2011 Generation Transmission Distribution Total segment segment segment Company NISinmillions (Audited) Assets .............................................. 42,493 16,191 24,294 82,978 Investmentsintheperiod ............... 2,500 606 1,078 4,184 Liabilities ......................................... 34,636 12,251 18,760 65,647

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) SEGMENTALREPORTING(continued)

71

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE10: SUBSEQUENT EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE, IN ADDITION TO THE DETAILSINTHEAFOREMENTIONEDNOTES a. A real revaluation of the NIS occurred after the statement of financial position date, mainly in the rate of the US Dollar to which the Company is exposed in its obligations, which resulted in financing expenses for the period fromthestatementoffinancialpositiondateanduptoMay28,2012,ofapproximatelyNIS67million. b. Onthesubjectoffloatingandrepaymentofdebenturesandtheratingofdebentures,seeNote7canddabove. c. AppointmentandRetirementofDirectorsandPositionHolders: 1. OnApril10,2012,Ms.SaritGiladiDorendedhertermasadirectorintheCompany. 2. OnApril11,2012,Mr.AvrahamNatanendedhistermasadirectorintheCompany. 3. On May 17, 2012, the Company announced that Mr. Moshe Bachar, will end his term as Deputy CEO and DeputyCEOGenerationandTransmission,fromMay31,2012. Mr.YaakovHainwillreplacehiminthispositionofasDeputyCEOandDeputyManageroftheGenerationand TransmissionDivisionfromJune1,2012,uptoOctober31,2012. d. Electricity supply during the summer months in April 18, 2012, the Company announced that it is making preparations,jointlywithteamsoftheMinistryofEnergyandWater,tocontendwiththeexpectedseverecrisisin the electricity sector during the coming summer. At the same time, a review conducted by the Company recently indicatesthatintheabsenceofthegassupplyrequiredfortheexpecteddemandforelectricity,theCompanywill not be able to supply the full demand for electricity during peak hours and will have to initiate power cuts to consumers,fortimeperiodsthatmayextendoverseveralhours. e. On April 22, 2012, the Company was notified by E.M.G., which supplied natural gas to the Company, that the Egyptian Governmentgascompanies, which supply the naturalgas to E.M.G.,cancel their agreement withE.M.G. forsellingnaturalgas.SeedetailsinNote8b2above. f. On April 30, 2012, the Minister of Finance extended the directive that specifies an exemption from purchase tax ondieseloil,attherateof88%,uptoDecember31,2012. g. On employees sanctions On April 30, the National Labour Court decided that there is no case for interfering in the decision of the district court on the request of the Company for temporary relief. According to this decision, the employees' sanctions stopped and the Company can act according to the decision of the Board of Directors and transfer NIS 600 million from the trust account to the central pension fund (gradually, as specified in the decision). h. Ondevelopmentsinthesubjectoffundsintrust,seedetailsinNote1f2,3,5andNote8dabove. i. In April 2012, Noble Energy Mediterranean Ltd., ("Nobel") notified the Company that the daily quantity of gas whichwillbedeliveredtotheCompanyfromMariBfieldwasreducedtoapproximately95,000MMBTU(abouta quarter of the contractual quantity). The initial review, conducted by the Company, shows that the added cost with respect to buying alternative expensive fuels instead of the natural gas pursuant to the said decrease, is estimatedatapproximatelyU.S.Dollar250,000perday. In May 2012, the Company Nobel notified the Company that it reduced again the daily quantity of natural gas it supplies to the Company from Mari B field to approximately 88,000 MMBTU (about a fifth of the contractual quantity). This decrease is expected to cause an addition to fuels costs of the Company, due to the need to purchaseexpensivefuelsinsteadoftheshortageinnaturalgas. The Company estimates that the Electricity Authority will recognize the added costs for purchasing alternative fuelsintheelectricityrateandthatuntilthecoveragewillbeprovidedthroughthesaidelectricityrate,asolution will be provided to the added cost arising from purchasing alternative fuels under the steps detailed in the decisionoftheElectricityAuthorityonMarch22,2012,asdetailedinNote1f2aabove. j. OnMay22,2012,theGovernmentCompaniesRegulationswereextendeduptoDecember31,2014,seeNote2a above.

72

NOTE10:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) SUBSEQUENT EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE, IN ADDITION TO THE DETAILSINTHEAFOREMENTIONEDNOTES(continued)

k. OnMay28,2012,theGeneralDirectoroftheMinistryofFinanceannouncedthattheamountoftheGovernment Guarantee in the float offering to the public of the Company will amount to NIS 3 billion. See details on a float underaStateguarantyafterthestatementoffinancialpositiondateinNot1fabove. l. RegardingthecashflowconditionoftheCompany,seeNote1fabove. m. On May 21, 2012, the Electricity Authority published a document for a hearing on the principles for recognizing costswithrespecttoamountsforpurchasingnaturalgas.SeeNote8b1above. n. OnMay29,2012,theCompany'sAuditCommitteeandBoardofDirectorsapprovedtheissueofacommitmentin advance to indemnify the Directors of the Company, the CEO of the Company, the CFO of the Company and the LegalConsultantandSecretaryoftheCompany("Officers"),subjecttotheapprovalofthegeneralmeetingofthe Company.SeedetailsinNote8a2above.

73

NOTE11:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY

a. For information about attributing the statement of operation and comprehensive income according to the generationtransmissionanddistributionsegments,seenote12below. b. DisclosureaboutReportsontheInternalAudit According to Government Companies Regulations (additional report on actions taken and representations given to assure additional reports on the effectiveness of the internal control over the financial reporting) 2007, all Government companies, among which the Company, were obligated to attach to their annual and Interim Financial Statements an additional report of the actions taken in order to assure effectiveness of the Internal Audit's control of the Financial Statements, including setting up an entire array of internal controls, withthefollowingmainpurposes:examiningtheprocessesaffectingtheCompany'srecordsoftransactions,in order to assure the existence of controls and their effectiveness and in order to ascertain with a reasonable degree of certainty that the Company's receipts and expenditures are only performed in accordance with the authorizationofthequalifiedpersonsintheCompany. The Company established Administration, Control and Work units and elected a consultant to assist in the implementationofthesaidregulations.Asteeringcommittee,comprisedofseniormanagementfunctionaries andexperiencedconsultantsinthefieldwasestablishedandalsoaControlCommitteeandaworkteam. A dedicated computerized system was integrated for management and current ongoing maintenance of the controls. Upon completion of the project, the system allows documentation of risks and controls in any process, documentation of the performed tests and results thereof. The system also provides the ability to monitor faults corrections and to generate various control and administration reports. All for the purpose of enablingpositionholderswhosignthefinancialstatementsandthereportoftheBoardofDirectorstodeclare in an additional report that the financial statements and the report of the Board of Directors do not include any misstatement of a material fact and reflect properly from all material aspects, the financial condition, the operating results, the changes in equity and cash flow of the Company for the days and periods presented in the reports. The Company established a procedure to verify: absence of weaknesses which may affect the correctness of the report, implementation of all disclosure controls enacted, including implementation of a methodical mechanism from managing and monitoring information gathering from position holders and statements of intermediate managers on the implementation of the disclosure controls in their spheres of responsibilityandalsoapplyingsuitablecontrolsoveramendedworkprocesses. The Government Companies Authority required the Company to conduct audits and present disclosure of the audits in the notes to the financial statements on the control of the financial reporting related to assets/ liabilities/ actions/ trusts/ projects and services managed through service providers, as these are defined in SAS70. Controls applied to service providers, as these are defined in SAS 70, were also reviewed during the review of thecontrols. c. Government companies are required to verify that the Financial Statements and accompanying information submitted by them do not include any misstatement, including information that might mislead a reasonable readeroftheFinancialStatementsandrelatedinformation. d. A company will provide proper disclosure in the Financial Statements of significant assets for which it believes there is a material gap between their fair value and their carrying amount in the Financial Statements, which arenotrecordedattheirfullamountsasaboveintheCompany'sbooks,includingonthebasisofappraisalsor evaluationsperformed,orinsuranceappraisals,ifperformed. TheCompanydoesnothavevaluationsofspecificassets(exceptRogozinland,wherethebookvalueishigher thanthefairvalueoftheland). The Company reviews the value of its assets periodically according to IAS 36, and if needed performs a valuationofallitsassets,attachedasanannextothefinancialstatements. e. 1) The Finance Committee of the Board of Directors of the Company and the Government Companies Authority discussed the need to review all the assumptions at the basis of the liabilities arising from employee employer relations. Consequently, the committee decided, to establish a subcommittee to implement the aforementioned ("The Actuary Committee"). This subcommittee reviewed, inter alia, the connection between the assumptions that serve as the basis for calculating the actuary liabilities of the pension funds, guidelines of the Capital Market Department and the actuarial calculation method, as presentedintherecordsoftheCompany.TheworkofthesubcommitteeyieldedaCompanyEmployees Rightsdocumentandworkprocedurestoreviewtheupdateoftheseassumptions.

74

NOTE11:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY(continued)

2) OnAugust24,2008,theDeputyManageroftheCompaniesAuthoritynotifiedtheCompanythat"pursuant to the audit conducted by the Committee of the Board of Directors of the Israel Electric Corporation Limited("TheCompany")andtomeetingsweheldwiththeManagementoftheCompanyonthesubjectof actuarial liabilities, in which we studied data and documents, submitted to us, related to the calculation method and the accounting presentation of the liability for pension of the Company, I wish to inform you that the Government Companies Authority ("The Authority") is reviewing all matters related to issues pertainingtoliabilityforpensionintheFinancialStatementsoftheCompany. To this purpose the Companies Authority appointed, inter alia, the firm of Barlev & Co., Auditors, as an auditor on its behalf, according to Section 55 of the Government Companies Law 1975 and to Government Companies regulations (Rules on Authorization of an Auditor by the Authority) 2005. The auditorwillcontactyoutodecideondetailsoftheissuestobereviewedforeveryperiod." The Board of Directors of the Company instructed the CEO and all related parties in the Company to cooperatewiththeauditor,totheextentrequiredtoaccomplishthetaskefficiently. As of the statement of financial position date, several subjects are still being reviewed and the subject of actuaryliabilitiesisexamined. 3) Pursuant to the appointment of an auditor on behalf of the Government Companies Authority, the Company addressed the Managing Director of the Government Companies Authority on September 16, 2008 and clarified that the Company will cooperate with the auditor and whoever acts on his behalf. The Company appealed concurrently to the Electricity Authority to appoint an auditor on its behalf (or rely on the findings of the auditor appointed by the Government Companies Authority), in view of the announcementoftheElectricityAuthoritythatitintendstoconductitsownauditofthepensionliabilityof the Company. No response was received, as yet, to this appeal. The Company believes that a comprehensive audit, performed jointly by the Board of Directors of the Company (with participation of the Company's Management, Actuary and external auditor) together with the Government Companies AuthorityandtheElectricityAuthoritywillfinallyclarifyallthevariousissuesinquestioninthissubject. Asonthesigningdateofthefinancialstatements,theCompanydidnotreceiveanyresponseregardingthe saidauditreport. 4) OnDecember10,2009,followingpreviousrequestsonthesubject,theChairmanoftheBoardofDirectors addressed the Managing Director of the Government Companies Authority, requesting information on the findings of the audit conducted by the auditor, acting on behalf of the Government Companies Authority. TheChairmannotedthatdespitepreviousrequestsoftheCompanytoreceiveadraftreportoftheauditor andalthoughmanymonthselapsedsincetheauditorcommencedhisaudit,theCompanyhasnotreceived a draft report and main findings of the auditor. The Chairman of the Board of Directors claims that in preparationforpublishingupdatedFinancialStatementsoftheCompany,includingmaterialchangesinthe actuarialliabilitiesandinlightofthelongtimethatelapsed,itseemsthatthetimehascometoreceivethe findings related to these liabilities in an orderly and urgent manner. The fact that no audit report was published on the subject and not even a nonbinding draft, leads to the conclusion that the report submitted by the auditor does not contain any new information in addition to results of audits conducted by the Company, which the Company delivered to the representatives of the Government Companies Authority. If the aforementioned conclusion is not wellgrounded, the actual facts should be presented withoutanyfurtherdelay. On June 29, 2008, the Government Companies Authority Director addressed the Securities Authority Chairman for consultation, under Section 33a of the Government Companies Law, on the matter of regulatingtheattributionofemployees'pensionliabilitiestotheirserviceperiods. In this address, the Authority Director explained, inter alia, that as long as there is a need to change the manner of attributing pension liabilities, the matter will be evaluated concurrently with other actuary issuesrequiringclarificationbythereportingdateinJuneof2008. The Government Companies Authority proposed that the Government Companies Regulations be amendedtoincludereferencetothesaidmatterasabove. Asstated,theamendmentwasincludedintheregulationssignedbytheFinanceMinisteronJune29,2008

75

NOTE11:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY(continued)

OnNovember23,2008,theGovernmentCompaniesAuthorityrequestedtodiscloseitspositionasfollows: "The policy of maintaining real wages for pensioners is the current correct accepted policy and should be implementedbytheCompany.Thepensioners'promotioninrankmechanismintheCompanyisintended, in theory, to maintain the real wages of the pensioners, but actually creates an increase in the real wages, due, inter alia to the fact that the inflation environment in Israel changed materially to a low inflation environment. Considerations should include the fact that a low inflation environment and accelerated promotion in rank of pensioners cannot coexist for prolonged periods of time and are not in the best interest of the Company, since these generate high costs and deficits to the Company" (regarding the changeofthepensionsupdatemechanism,seeNote19above). 5) Regarding the pension liability and the capitalization rate, in it letter on March 12, 2008, the Companies Authoritystated,interalia,itspositionthat"thecapitalizationrateshouldexpresstheriskcomponentsand theuncertaintyincludedinthepension." 6) The Government Companies Authority required the Company to include the pertinent information of the effectofusingtheapplicablediscount/capitalizationrateonhighqualitycorporatedebentures. In calculating the actuarial liability to pension, the Company used, at this stage, the suitable discount rate formarketyieldongovernmentdebentures. If it will be decided in future that a deep market for high quality corporate bonds exists in Israel, the Company will have to restate its pension actuarial liabilities by using the appropriate discount rate for marketreturnsonAAratedcorporatebonds. In Israel, there are currently no special publications of data required for the specific calculation of pension actuarialliabilitiesaccordingtomarketreturnsoncorporatebonds. According to data for 2011, published by "Mirvach Hogen", and for 2010, published by "Shaarey Ribit" (chosen by the Capital Market Division in the Ministry of Finance to quote interest rates and yields to be usedbyinstitutionalorganizations)ateveryfuturetimerange,thereisadifferentmarginbetweentherate of return on AA rated corporate bonds and the rate of return on government bonds (see Note 2 t5 to the AnnualFinancialStatements). The following is the mean effect of each 0.1% of the aforementioned gap on the actuarial liability and on theequityoftheCompany: AsonMarch31 2012 2011 Theweightedaverageofthegap...... 1.82.0 1.11.3 Averageeffectofeach0.1% Fromtheabovegap(inNISmillion): Decreaseoftheactuarialliabilities.......... 300 210 Increaseoftheequity......................... 210 190 7) The Government Companies Authority required to clarify, whether the Company's Board of Directors discussed the draft report of the State Comptroller, mentioned below, according to the required in the circulars of the Government Companies Authority and whether, in view of the stated in the draft, the BoardofDirectorsbelievesthatchangesshouldbeincludedinthefinancialstatementsregardingliabilities ofemployeeemployerrelations. As mentioned in Note 4 k, above, the Company's Board of Directors discussed the draft of the State Comptroller's report on the subject of the pension arrangements in the Company and the response of the Company to this report. The Management of the Company and the Board of Directors estimate, based on theopinionofitslegaladvisers,thatthecontentsofthedraftdonotaffectthefinancialstatementsofthe Company. RegardingthematerialweaknessreportedbytheCompany,relatedtosalaryrights,seesectionhbelow. f) The Government Companies Authority required the Company to ascertain and provide disclosure in a note, that when the accounting principles offer presentation of several alternatives, is should ascertain that the alternativechoseninthefinancialstatementistheonethatprovidesthemostrelevant,accurateandreliable, consideringtheeconomicalenvironmentinwhichtheCompanyoperates.

76

NOTE11:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY(continued)

TheCompany'sresponsetothisrequirement: The main principles of the accounting policy, as detailed in Note 2 above, constitute the information on presenting the accounting alternative which yields the most relevant, accurate and reliable presentation, consideringtheeconomicalenvironmentinwhichtheCompanyoperates.

g) The Government Companies Authority required the Company to ascertain and provide disclosure, that the rights recorded in the financial statements related to liabilities with respect to employeeemployer relations did not deviate from the current binding rights from aspects of Labour laws and that these liabilities were recordedaccurately. TheCompany'spositionis: The Government Companies Authority requests the Company to report a deviation from existing rights which areobligatoryfromaspectsofLabourlaws,inimplementingtheemployeeemployerrelationsinthefinancial statements (regarding the letter of the Supervisor of Wages and Work Agreements, see Note 4 e above). As mentioned, the Company did not apply effective controls to ensure that the rights and benefits, according to which wages and pension were paid, subsequently used to include actuarial liabilities and current liabilities withrespecttowages,areapprovedaccordingtotheFoundationsofBudgetLaw.TheCompanytightenedthe controls and established a procedure, approved by the Company's Board of Directors, on the subject of the rights and benefits, according to which wages and pension were paid, subsequently used to include actuarial liabilities and current liabilities with respect to wages. The Company estimates that these steps strengthened the internal controls over the financial reports in subjects related to handling the employees wages rights sectionfromnowonwards.Regardingrightsofwagesderivingfromthepast,theCompanyactedtoreceivean opinionoflegaladvisersontheeffectivenessoftheCompany'sobligationtopaytheserightstoitsemployees. h) According to the circular of the Companies Authority (see Note 2 a1 above) the Company is required to provide disclosure in the Financial Statements of the implementation of the directives of the Government Companies Authority regarding control and reporting rules for land and attached assets in Government companies in accordance with the Financial Statement Circular 20063 of September 17, 2006. The informationrequiredabovewasnotincludedintheFinancialStatementsduetoemployeesanctions(seeNote 8 d above). In a letter to the Director of the Government Companies Authority dated January 10, 2007, the Company's CEO states that back in 1998, the Company stated that it was preparing to collect the extensive amounts of material required. Furthermore, in 1998, a list of the Company's assets was transferred to the Ministry of Finance as of the date of the expiration of the concession and since then and, to date, the list of added assets is immaterial in relation to total assets and is irrelevant with relation to the assets arrangement prescribedbytheElectricitySectorLaw. Inaddition,theCompanydoesnotcurrentlypossessalloftherequiredinformationduetovariousproblemsin registering the many assets that have been accumulated by the Company over tens of years and due to the considerablecostsanddurationrequiredtoissueassessments.TheCEOalsomentionedthatinmeetingsheld with the Government Companies Authority and representatives of the Company's Management in negotiations regarding the structural change, the representatives of the employees organization announced that they would not allow giving out information to the State or transferring any documents in connection withtheCompany'sassets,etc.

77

NOTE11:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) ADDITIONALINFORMATIONREQUIREDUNDERTHEPROVISIONSOFTHEGOVERNMENTCOMPANIESAUTHORITY(continued)

COST Balanceon December31, 2011 Net increment 13/2012 Balanceon March31,2012 Balanceon December31, 2011 (MillionNIS) (Unaudited)
39,590 7,146 857 1,166 3,893 3,314 21,851 135 1,207 1,594 1,311 1,478 381 433 49 49 84,454 (6,828) 77,626 380 78,006 15 48 2 65 78,071

i) Composition as on March 31, 2012 and for the period ended on Parch31,2012

CumulativeDepreciation Changein Depreciation Net Balanceon March31,2012

Depreciated Balance AsonMarch31, 2012

ActiveFixedAssets Powerstations(includingland,buildingsandmachines) .................... Substations ................................................................................... Loadcontrolcenter ......................................................................... Telecommunication......................................................................... Switchingstationsandultrahighvoltagelines400kW ....................... Highvoltagelines ............................................................................ Distributiongrids ............................................................................ Facilities,etc.,EastJerusalem .......................................................... Meters ........................................................................................... Land,officesbuildings ..................................................................... Inventoryofficeequipmentandtools ............................................... Inventorycomputers ....................................................................... Vehicles ......................................................................................... Mobileheavyequipment Emergencyequipment .................................................................... Differentprojects ............................................................................ Consumers participation in construction of fixed assets not attributed toprojectsasyet ............................................................................ Lessrevenuesforexpandingtheelectricitygrid ................................. Sparepartsforpowerstationsandsubstations ................................ Totalactivefixedassets ................................................................... FixedAssetsUnderConstruction Powerstations,buildingsandothers ................................................ Switchingandtransformationstationsandhighvoltagelines ............. Switchingstationsandultrahighvoltagelines400kW ....................... Advancepaymentsforequipment .................................................... Materials and advance payments for materials designated for investmentinfixedassets ................................................................ Consumers participation in construction of fixed assets not attributed toprojectsasyet ............................................................................ Totalfixedassetsunderconstruction................................................ TotalFixedAssets ............................................................................

63,312 13,038 924 1,478 7,815 6,075 39,656 135 1,708 3,026 1,481 1,530 692 559 60 637 (53) 142,073 (9,056) 133,017 1,573 134,590 2,785 770 260 429 608 4,852 139,442

1,432 91 4 14 18 9 330 21 4 11 3 (22) (6) 1 8 5 1,923 1,923 (63) 1,860 (885) 78 26 8 16 (757) 1,103

64,744 13,129 928 1,492 7,833 6,084 39,986 135 1,729 3,030 1,492 1,533 670 553 61 645 (48) 143,996 (9,056) 134,940 1,510 136,450 1,900 848 286 437 624 4,095 140,545

671 104 4 17 68 39 226 16 20 10 2 (11) (10) 1 6 1,163 (44) 1,119 (4) 1,115 - 1,115

40,261 7,250 861 1,183 3,961 3,353 22,077 135 1,223 1,614 1,321 1,480 370 423 50 55 85,617 (6,872) 78,745 376 79,121 15 48 2 65 79,186

24,483 5,879 67 309 3,872 2,731 17,909 506 1,416 171 53 300 130 11 590 (48) 58,379 (2,184) 56,195 1,134 57,329 1,885 800 284 437 624 4,030 61,359

78

NOTE11:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) ADDITIONAL INFORMATION REQUIRED UNDER THE PROVISIONS OF THE GOVERNMENT COMPANIES AUTHORITY(continued)

j) On the subject of risk management in the Company, the Government Companies Authority draws the attentionoftheBoardofDirectorstothestatedinthecircularoftheGovernmentCompaniesAuthorityon thesubjectofriskmanagementinGovernmentcompanies,andmainlyontheresponsibilityoftheBoardof Directors to outline and approve the risk policy of the Management of the Company and supervise its implementation, including prevention or minimizing the occurrence of financial risks, obedience risks, operationalrisksandstrategicrisks. k) The Government Companies Authority requested to provide proper disclosure of the status of legislating Government Companies Regulations (Principles for Preparing Financial Statements for the Israel Electric Corporation).SeedetailsinNote2aabove. l) The Government Companies Authority announced that the substance of calculating fixed assets impairment is based, in a company of a similar type to that of the Company, on the rates of the Company, which are determined by regulation and thus determine the economical value of the Company's assets, and therefore, it is appropriate to require the Company to examine or depreciate the fixed assets impairment in accordance with the directives of the American Standards for regulated companies of the same type as the Company, including the stated in FAS 144 (ASC 360 in the new codification). Therefore, the Government Companies Authority studies, inter alia, with related State parties, possibilities for applying its professional position in the framework of the Government Companies Regulations (Principles for Preparing Financial Statement for the Israel Electric Corporation Ltd.) (Temporary Order) 2004, includingamendmentthereof,ifrequired. m. The Government Companies Authority requested to disclose the position of the Company on questions it presented, regarding accounting treatment according to FAS 90, in the provision for impairment of new stations,operatedfromJanuary1,2003(andpresentedintheapprovedfinancialstatementsfrom2010). The Position of the Company pursuant to the publication of the rate base for the generation segment in 2010andinviewofnonrecognitionofpartofthefixedassetscosts,theCompanyappliesthedirectivesof FAS 90 and recorded a provision for assets impairment accordingly. Regarding assets which were defined as assets where construction was recently completed ("Assets built after determining the previous rate basewhichthereforewerenotincludedinthatrate.Namely,assetsforwhichnofirstratewasdetermined aftercommissioningthereof"). SeealsoNote2aboveandNote11jtotheAnnualFinancialStatements. n. The Government Companies Authority requested to disclose the implications of the recommendations of the Committee for Reviewing the concentration in the economy and the decisions of the Government on the recommendations and the draft law memorandum for promoting competition and reducing concentration, insofar as these are related to the Company. The Company is studying the implications of thecommittee'srecommendations.

79

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) NOTE12: INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) AccordingtotheprovisionsoftheCompaniesAuthority,whoseprincipalpointsarepublishedintheCircularofMarch 2, 2004, the Company is required by the Companies Authority, under its authority by the Government Companies Law, to include additional information (beyond the information included in the Financial Statements according to generallyaccepted accounting principles) regarding the attribution of the statement ofoperations and balance sheet tothegeneration,transmissionanddistributionactivitysegments. a. StatementofoperationsfortheyearendedMarch31,2012: Total Generation Transmission Distribution segment Company segment segment NISinmillions Requiredrevenues 8,797 6,551 640 1,606 Adjustmentforsegmentrevenues (2,344) (1,190) (203) (951) Revenuesfromelectricity 6,453 5,361 437 655 Otherrevenues 67 31 2 34 Totalrevenues 6,520 5,392 439 689 Costforoperatingelectricitysystem 5,983 312 426 5,245 Profitfromoperatingelectricity 537 147 127 263 system Salesandmarketingexpenses 276 276 Administrativeandgeneralexpenses 223 111 33 79 Expensesfromliabilitiesto 1,505 784 121 600 pensioners,net 2,004 895 154 955 Lossfromcurrentoperations (1,467) (748) (27) (692) Financialexpenses,net 477 218 107 152 TotalComprehensivelossbefore (1,944) (966) (134) (844) incometaxes Incometaxes (476) (236) (33) (207) Netloss (1,468) (730) (101) (637)

80

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) b. DetailsofthegenerationsitesstatementofoperationsfortheyearendedMarch31,2012: Total generation segment PEPand others Rutenberg NISinmillions 6,551 104 1,190 (1,190) (220) 5,361 104 970 31 7 5,392 104 977 5,245 104 881 OrotRabin 1,327 (245) 1,082 7 1,089 1,038

Requiredrevenues Adjustmentforsegmentrevenues Revenuesfromelectricity Otherrevenues Totalrevenues

Costforoperatingelectricitysystem Profitfromoperatingelectricity system 147 Salesandmarketingexpenses Administrativeandgeneralexpenses 111 Expensesfromliabilitiesto pensioners,net 784 895 Lossfromcurrentoperations (748) Financialexpenses,net 218 Operatinglossbeforeincometaxes (966) Incometaxes (236) Netloss (730)

96 51 22 26 160 182 (86) 66 (152) (37) (115) 199 225 (174) 37 (211) (51) (160)

81

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) b. Details of the generation sites statement of operations for the year ended March 31, 2012 (continued) Haifa Reading Eshkol Gezer NISinmillions Requiredrevenues 205 150 1,027 637 Adjustmentforsegmentrevenues (38) (28) (189) (117) Revenuesfromelectricity 167 122 838 520 Otherrevenues 2 2 4 2 Totalrevenues 169 124 842 522 Costforoperatingelectricitysystem 112 73 848 538 Profit(Loss)fromoperating electricitysystem 57 51 (6) (16) Salesandmarketingexpenses Administrativeandgeneralexpenses 6 8 17 7 Expensesfromliabilitiesto pensioners,net 52 64 134 36 58 72 151 43 Lossfromcurrentoperations (1) (21) (157) (59) Financialexpenses,net 18 4 16 28 Operatinglossbeforeincometaxes (19) (25) (173) (87) Incometaxes (5) (6) (41) (22) Netloss (14) (19) (132) (65)

82

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) b. Details of the generation sites statement of operations for the year ended March 31, 2012 (continued) Alon RamatHovav Othergas Hagit Tavor Zafit turbines NISinmillions 710 220 616 256 109 Requiredrevenues Adjustmentforsegment (131) (41) (114) (47) (20) revenues 579 179 502 209 89 Revenuesfromelectricity Otherrevenues 2 1 2 1 1 581 180 504 210 90 Totalrevenues Costforoperatingelectricity 614 179 549 227 82 system Profit(Loss)fromoperating (33) 1 (45) (17) 8 electricitysystem Salesandmarketingexpenses Administrativeandgeneral 8 4 7 4 2 expenses Expensesfromliabilitiesto 47 17 45 18 12 pensioners,net 55 21 52 22 14 Lossfromcurrentoperations (88) (20) (97) (39) (6) Financialexpenses,net 20 10 8 4 7 Operatinglossbeforeincome (108) (30) (105) (43) (13) taxes (27) (7) (26) (11) (3) Incometaxes (81) (23) (79) (32) (10) Netloss

83

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) c. DetailsofthedistributionsitesstatementofoperationsfortheyearendedMarch31,2012 Total Northern distribution Haifa segment District District NISinmillions Requiredrevenues 1,606 337 199 Adjustmentforsegmentrevenues Revenuesfromelectricity Otherrevenues Totalrevenues Costforoperatingelectricitysystem Profitfromoperatingelectricitysystem Salesandmarketingexpenses Administrativeandgeneralexpenses Expensesfromliabilitiestopensioners,net lossfromcurrentoperations Financialexpenses,net Operatinglossbeforeincometaxes Incometaxes Netloss (951) 655 34 689 426 263 276 79 600 955 (692) 152 (844) (207) (637) (199) 138 6 144 85 59 63 16 124 203 (144) 32 (176) (43) (133) (118) 81 4 85 55 30 33 10 78 121 (91) 17 (108) (26) (82)

84

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) c. Details of the distribution sites statement of operations for the year ended March 31, 2012 (continued) Requiredrevenues Adjustmentforsegmentrevenues Revenuesfromelectricity Otherrevenues Totalrevenues Costforoperatingelectricitysystem Profitfromoperatingelectricitysystem Salesandmarketingexpenses Administrativeandgeneralexpenses Expensesfromliabilitiestopensioners,net lossfromcurrentoperations Financialexpenses,net Operatinglossbeforeincometaxes Incometaxes Netloss Jerusalem District Dan Southern District District NISinmillions 213 319 538 (126) (189) (319) 87 130 219 4 7 13 91 137 232 62 84 140 29 53 92 33 56 91 11 15 27 79 119 200 123 190 318 (94) (137) (226) 19 30 54 (167) (41) (126) (280) (69) (211)

(113) (28) (85)

85

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) d. BalancesheetasofMarch31,2012: Total Generation Transmission Distribution Company segment segment segment NISinmillions Currentassets 10,283 7,588 895 1,800 Longtermreceivables 7,313 4,288 553 2,472 Fixedassets,net 61,359 28,547 14,132 18,680 Intangibleassets,net 854 393 190 271 79,809 40,816 15,770 23,223 Currentliabilities Longtermandextendedterm liabilities,net Deferredtaxes,net Shareholders'equity 10,429 48,484 5,033 15,863 79,809 5,709 25,499 2,314 7,294 40,816 1,789 9,334 1,120 3,527 15,770 2,931 13,651 1,599 5,042 23,223

86

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) e. DetailsofthegenerationsegmentBalancesheetasofMarch31,2012: Total generation segment

Currentassets Longtermreceivables Fixedassets,net Intangibleassets,net Currentliabilities Longtermandextendedterm liabilities,net Deferredtaxes,net Shareholders'equity

7,588 4,288 28,547 393 40,816

PEPand others Rutenberg OrotRabin NISinmillions 72 1,452 1,526 935 680 890 36 8,127 4,674 117 62 1,043 10,376 7,152

5,709 25,499 2,314 7,294 40,816 138 905 1,043 1,398 6,115 689 2,174 10,376 1,268 4,373 364 1,147 7,152

87

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) e. DetailsofthegenerationsegmentBalancesheetasofMarch31,2012(continued): Haifa Reading Eshkol Gezer NISinmillions 283 183 1,159 701 Currentassets 219 257 548 162 Longtermreceivables 2,789 434 1,948 3,369 Fixedassets,net 42 6 27 50 Intangibleassets,net 3,333 880 3,682 4,282

Currentliabilities Longtermandextendedterm liabilities,net Deferredtaxes,net Shareholders'equity 329 119 530 455

1,988 245 771 3,333

603 38 120 880

2,484 161 507 3,682

2,599 296 932 4,282

88

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) e. DetailsofthegenerationsegmentBalancesheetasofMarch31,2012(continued): Currentassets Longtermreceivables Fixedassets,net Intangibleassets,net Hagit 810 205 2,642 36 3,693 AlonTavor Ramat Othergas Hovav Zafit turbines NISinmillions 272 696 303 131 73 187 77 55 1,260 1,036 1,053 1,179 18 16 7 12 1,623 1,935 1,440 1,377

Currentliabilities Longtermandextended termliabilities,net Deferredtaxes,net Shareholders'equity 486 2,328 212 667 3,693 182 989 109 343 1,623 286 1,294 85 270 1,935 298 960 44 138 1,440 220 861 71 225 1,377

89

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) f. DetailsofthedistributionsegmentBalancesheetasofMarch31,2012: Total distribution segment Northern Haifa District District NISinmillions 379 220 511 319 4,090 2,071 57 30 5,037 2,640

Currentassets Longtermreceivables Fixedassets,net Intangibleassets,net 1,800 2,472 18,680 271 23,223

Currentliabilities Longtermandextendedtermliabilities,net Deferredtaxes,net Shareholders'equity 2,931 13,651 1,599 5,042 23,223 685 2,947 339 1,066 5,037 328 1,571 178 563 2,640

90

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) f. DetailsofthedistributionsegmentBalancesheetasofMarch31,2012(continued): Currentassets Longtermreceivables Fixedassets,net Intangibleassets,net Jerusalem District Dan District NISinmillions 239 350 325 2,322 34 2,920 365 1,721 201 633 2,920 490 3,610 53 4,503 544 2,654 314 991 4,503 Southern District 612 827 6,587 97 8,123 1,009 4,758 567 1,789 8,123

Currentliabilities Longtermandextendedtermliabilities,net Deferredtaxes,net Shareholders'equity

91

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) g. StatementofoperationsfortheyearendedMarch31,2011: Requiredrevenues Adjustmentforsegmentrevenues Revenuesfromelectricity Otherrevenues Totalrevenues Costforoperatingelectricitysystem Profitfromoperatingelectricity system Salesandmarketingexpenses Administrativeandgeneralexpenses Expensesfromliabilitiesto pensioners,net Income(loss)fromcurrent operations Financialexpenses,net Operatingprofit(loss)before incometaxes Incometaxes Netprofit(loss) Total Company Generation Transmission segment segment NISinmillions 5,490 3,949 563 (340) 167 (162) 5,150 4,116 401 61 25 2 5,211 4,141 403 4,033 3,338 291 1,178 226 187 141 554 624 456 168 21 147 803 112 94 28 74 168 635 211 424 71 353 11 39 73 105 (32) (8) (24) Distribution segment 978 (345) 633 34 667 404 263 226 65 56 347 (84) 140 (224) (42) (182)

92

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) h. DetailsofthegenerationsegmentstatementofincomefortheyearendedMarch31,2011(*): PEPand others Rutenberg OrotRabin NISinmillions Requiredrevenues 3,949 64 1,084 1,164 Adjustmentforsegmentrevenues 167 47 50 Revenuesfromelectricity 4,116 64 1,131 1,214 Otherrevenues 25 5 6 Totalrevenues 4,141 64 1,136 1,220 Costforoperatingelectricitysystem 3,338 64 901 1,038 Profitfromoperatingelectricity system 803 235 182 Salesandmarketingexpenses Administrativeandgeneralexpenses 94 18 23 Expensesfromliabilitiesto pensioners,net 74 16 20 168 34 43 Profitfromcurrentoperations 635 201 139 Financialexpenses,net 211 69 40 Operatingprofitbeforeincometaxes 424 132 99 Incometaxes 71 23 16 Netprofit 353 109 83 Total generation segment

*Reclassified

93

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) h. Adjustmentforsegment revenues Revenuesfromelectricity Otherrevenues Totalrevenues Costforoperatingelectricity system Profitfromoperating electricitysystem Requiredrevenues Haifa 73 3 76 1 77 57 Reading Eshkol NISinmillions 77 401 3 80 2 82 58 24 7 5 12 12 4 8 1 7 16 417 4 421 340 81 15 13 28 53 17 36 7 29 Gezer 371 16 387 2 389 297 92 7 4 11 81 29 52 9 43 Details of the generation segment statement of income for the year ended March 31, 2011 (*) (continued):

20 Salesandmarketingexpenses Administrativeandgeneral expenses 4 Expensesfromliabilitiesto pensioners,net 4 8 Profitfromcurrentoperations 12 Financialexpenses,net 4 Operatingprofitbefore incometaxes 8 Incometaxes Netprofit 8 *Reclassified

94

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) h. Details of the generation segment statement of income for the year ended March 31, 2011 (*) (continued): Hagit AlonTavor Ramat Hovav NISinmillions 93 199 4 97 1 98 64 34 9 208 1 209 179 30 Zafit 60 Othergas turbines 39

Requiredrevenues 324 Adjustmentforsegment revenues 14 Revenuesfromelectricity 338 Otherrevenues 2 Totalrevenues 340 Costforoperating electricitysystem 267 Profitfromoperating electricitysystem 73 Salesandmarketing expenses Administrativeand generalexpenses 9 Expensesfromliabilities topensioners,net 6 15 Incomefromcurrent operations 58 Financialexpenses,net 20 Operatingprofitbefore 38 incometaxes Incometaxes 7 Netprofit 31 *Reclassified

3 2 63 41 1 64 41 47 17 26 15

3 2 5 29 11 18 3 15 3 2 5 25 7 3 1 4 13 5 2 1 3 12 5 7 1 6

18 8 3 1 15 7

95

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) i. DetailsofthedistributionsegmentstatementofoperationsfortheyearendedMarch31,2011: Total distribution segment Requiredrevenues Adjustmentforsegmentrevenues Revenuesfromelectricity Otherrevenues Totalrevenues Costforoperatingelectricitysystem Profitfromoperatingelectricitysystem Salesandmarketingexpenses Administrativeandgeneralexpenses Expensesfromliabilitiestopensioners,net Lossfromcurrentoperations Financialexpenses,net Operatinglossbeforeincometaxes Incometaxes Netloss 978 (345) 633 34 667 404 263 226 65 56 347 (84) 140 (224) (42) (182) Northern District NISinmillions 190 (67) 123 9 132 73 59 48 12 11 71 (12) 30 (42) (8) (34) Haifa District 117 (41) 76 5 81 50 31 26 8 7 41 (10) 16 (26) (5) (21)

96

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) i. Details of the distribution segment statement of operations for the year ended March 31, 2011 (continued): Jerusalem Dan Southern District District District NISinmillions Requiredrevenues 131 211 329 Adjustmentforsegmentrevenues (46) (74) (117) Revenuesfromelectricity 85 137 212 Otherrevenues 7 13 Totalrevenues 85 144 225 Costforoperatingelectricitysystem 60 85 136 Profitfromoperatingelectricitysystem 25 59 89 Salesandmarketingexpenses 25 54 73 Administrativeandgeneralexpenses 9 13 23 Expensesfromliabilitiestopensioners,net 7 11 20 41 78 116 Lossfromcurrentoperations (16) (19) (27) Financialexpenses,net 18 28 48 Operatinglossbeforeincometaxes (34) (47) (75) Incometaxes (5) (10) (14) Netloss (29) (37) (61)

97

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) j. StatementofoperationsfortheyearendedDecember31,2011: Requiredrevenues Adjustmentforsegmentrevenues Revenuesfromelectricity Otherrevenues Totalrevenues Costforoperatingelectricitysystem Profitfromoperatingelectricity system Salesandmarketingexpenses Administrativeandgeneralexpenses Incomefromliabilitiestopensioners, net Income(loss)fromcurrent operations Financialexpenses,net Operatingincome(loss)before incometaxes Incometaxes Netincome(loss) Total Company 25,144 (779) 24,365 260 24,625 20,110 4,515 882 717 147 1,746 2,769 2,192 577 1,365 (788) Generation Transmission segment segment NISinmillions 19,495 2,013 484 (214) 19,979 1,799 128 6 20,107 1,805 17,413 1,173 2,694 632 349 109 78 427 2,267 998 1,269 888 381 11 120 512 502 10 277 (267) Distribution segment 3,636 (1,049) 2,587 126 2,713 1,524 1,189 882 259 58 1,199 (10) 692 (702) 200 (902)

98

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) k. DetailsofthegenerationsegmentstatementofincomefortheyearendedDecember31,2011: Total generation segment PEPand others Rutenberg NISinmillions 471 4,484 114 471 4,598 26 471 4,624 471 3,859 OrotRabin 5,001 127 5,128 29 5,157 4,618

Requiredrevenues 19,495 Adjustmentforsegmentrevenues 484 Revenuesfromelectricity 19,979 Otherrevenues 128 Totalrevenues 20,107 Costforoperatingelectricitysystem 17,413 Profitfromoperatingelectricity system 2,694 Salesandmarketingexpenses Administrativeandgeneralexpenses 349 Incomefromliabilitiestopensioners, net 78 427 Incomefromcurrentoperations 2,267 Financialexpenses,net 998 Operatingincomebeforeincome taxes 1,269 Incometaxes 888 Netincome 381

765 539 67 82 17 84 681 317 364 268 96 21 103 436 174 262 163 99

99

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) k. Adjustmentforsegment revenues Revenuesfromelectricity Otherrevenues Totalrevenues Costforoperatingelectricity system Profitfromoperating electricitysystem Requiredrevenues Haifa 395 10 405 7 412 302 Reading Eshkol NISinmillions 408 2,116 10 418 8 426 356 70 23 6 29 41 17 24 15 9 54 2,170 19 2,189 1,933 256 53 13 66 190 76 114 71 43 Gezer 1,632 42 1,674 12 1,686 1,369 317 28 4 32 285 136 149 113 36 Details of the generation segment statement of income for the year ended December 31, 2011 (continued):

110 Salesandmarketingexpenses Administrativeandgeneral expenses 16 Incomefromliabilitiesto pensioners,net 4 20 Incomefromcurrent operations 90 Financialexpenses,net 45 Operatingincomebefore 45 incometaxes Incometaxes 45 Netincome

100

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) k. Details of the generation segment statement of income for the year ended December 31, 2011 (continued): Hagit Ramat AlonTavor Hovav NISinmillions 946 1,429 Zafit 636 Othergas turbines 235

Requiredrevenues 1,742 Adjustmentforsegment revenues 45 Revenuesfromelectricity 1,787 Otherrevenues 11 Totalrevenues 1,798 Costforoperating electricitysystem 1,546 Profitfromoperating electricitysystem 252 Salesandmarketing expenses Administrativeand generalexpenses 28 Expensesfromliabilities topensioners,net 5 33 Incomefromcurrent operations 219 Financialexpenses,net 97 Operatingincomebefore 122 incometaxes Incometaxes 85 Netincome 37

24 36 16 6 970 1,465 652 241 5 5 4 2 975 1,470 656 243 847 128 1,345 125 589 67 178 65

15 2 17 111 49 62 44 18 19 3 22 103 37 66 39 27 12 2 14 53 21 32 20 12 6 1 7 58 29 29 25 4

101

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) l. Details of the distribution segment statement of operations for the year ended December 31, 2011: Total distribution Northern Haifa segment District District NISinmillions Requiredrevenues 3,636 728 435 Adjustmentforsegmentrevenues (1,049) (210) (125) Revenuesfromelectricity 2,587 518 310 Otherrevenues 126 28 13 Totalrevenues 2,713 546 323 Costforoperatingelectricitysystem 1,524 286 191 Profitfromoperatingelectricitysystem 1,189 260 132 Salesandmarketingexpenses 882 189 100 Administrativeandgeneralexpenses 259 50 32 Incomefromliabilitiestopensioners,net 58 11 8 1,199 250 140 Income(loss)fromcurrentoperations (10) 10 (8) Financialexpenses,net 692 146 78 Operatinglossbeforeincometaxes (702) (136) (86) Incometaxes 200 45 20 Netloss (902) (181) (106)

102

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION, TRANSMISSION AND DISTRIBUTION (SEE NOTE 3.b AND 3.c TO THE ANNUAL FINANCIAL STATEMENTS)(Continued) l. Details of the distribution segment statement of operations for the year ended December 31, 2011(continued): Jerusalem Dan Southern District District District NISinmillions Requiredrevenues 495 741 1,237 Adjustmentforsegmentrevenues (143) (214) (357) Revenuesfromelectricity 352 527 880 Otherrevenues 16 19 50 Totalrevenues 368 546 930 Costforoperatingelectricitysystem 213 321 513 Profitfromoperatingelectricitysystem 155 225 417 Salesandmarketingexpenses 123 171 299 Administrativeandgeneralexpenses 36 50 91 Incomefromliabilitiestopensioners,net 8 12 # 19 167 233 409 Income(loss)fromcurrentoperations (12) (8) 8 Financialexpenses,net 87 138 243 Operatinglossbeforeincometaxes (99) (146) (235) Incometaxes 23 38 74 Netloss (122) (184) (309)

103

NOTE12:

m.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) General 1) As previously stated, based on section 33.b. of the Government Companies Law, and in accordance with the provisions of the Companies Authority circular dated March2, 2004 (see Note 1c above), the Company is required to provide disclosure in the form ofa noteto the primary financial statements. It will include statements of operations, condensed balance sheets related to the various activities segments and details of assumptions and the principal details that were used in their preparation. Disclosurewillalsobeprovidedofthefinancialtargets,includingtargetstomeetnormativerecognized costs in the various activities segments that were (or will be) determined by the Electricity Authority, and the differences between them and the effective costs, as stated in the Companies Authority's circularonfinancialstatements(seeNote1above). 2) TheCompany'sactivitiesarecomposedofthreeprincipalsegments: a) Generationactivitiesofthepowerplantsproducingelectricity. b) Transmission the transmission and transformation system for highvoltage electricity over long distances. c) Distribution the electricity grid and the transformer stations system that brings electricity to the end consumer (except for a small number of customers who purchase highvoltage electricity and are directly connected to the transmission system), as well as the customer service and collection systemoftheCompany.Thesesegmentsarecalledtheelectricitychain("theelectricitychain"). 3) The rate basethatcame into force in July2002 initially included various rates for foursegments in the electricity chain: generation, transmission, distribution and supply. The different rates were intended to enable the private producers and customers to trade in electricity through a partial usage of the Company'ssystem. 4) TheCompanymanagesoneaccountingsystemthatincludesalloftheactivitiesoftheelectricitychain. The internal controls principles that exist for everything concerning the internal trade between the activities of the electricity chain are not compatible with those required for separate audited financial statements.

104

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) Theprinciplesusedinattributingthestatementsofincomeareasfollows 1) General a) TheprinciplesthattheElectricityAuthorityusedfordeterminingtheratefortheaforesaidactivities segments,willbeimplementedinthesestatementsofoperations. b) Since the Company is one legal entity, complete separate entries are not actually recorded for the segments of the electricity chain. The attribution of the expenses and income of the statement of operationstothelevelofthesegmentsisperformedasapplicable,aswillbedescribedbelow. Thestatementsofoperationsastheyarepresentedinthisnotedonotnecessarilyreflecttheresultsof operations of the various segments if they had been managed as separate economic entities, as signifiedbygenerallyacceptedaccountingprinciples. 2) Belowaretheprinciplesforattributingtheincomebetweenthevarioussegments a) Revenuesfromthesaleofelectricity The gross revenues for the segment arecalculated basedon the ratefor the segmentpublished by theElectricityAuthority,multipliedbythequantitysold(kWh)forthatsegment. (1) Amountsoldpersegment The amount sold by each segment is calculated based on data of the amount of sales to the end customers according to the type of the customer (quantity measured in a systematic way for each segment), with theaddition ofthe quantitypurchasedfrom private producers (known quantity for each segment) and their adjustment to the generation data, net (continuous measured quantity), by adding the quantity of normative loss for each segment and standardizingitaccordingtotheactualamountofloss. Adjustment of the quantities between the segments is required since there is a gap between thequantitysoldandthequantitygeneratedandpurchased.Thegapderivesfromlossesinthe systems that are primarily caused by weather conditions, system load and the distance of transmission. Since there is no continuous quantitative measurement of KWhs transferred between the transmissionsegmentsandthedistributionsegment,itisnotpossibletoestimatethescopeof lossesineachsegment. For that purpose, they are aided by normative loss coefficients that the Electricity Authority determinedforcalculatingthequantityofsalesbetweenthesegments. The total losses in the system are added to segments according the ratio of normative losses thatweredeterminedbytheElectricityAuthority. (2) Rateforthesegment The electricity rates that were determined by the Electricity Authority are divided into two maincategories: (a) Rates according to load and time ("LTR") rate that varies according to the season of the year and the time of day, where it is split to each of the segments of the electricity chain (atotalofnineratesatthesegmentlevel). (b) A uniform rate according to type of consumer that is supposed to reflect over an entire year, the LTR rate according to the expected level of demand by those paying that same rate during the various seasons and time of day (a total of five types of uniform rates at thesegmentlevel). Theuniformrate,inaccordancewiththevarioustypesofconsumers,iscalculatedforthe varioussegments,inaccordancewiththemodelthatwasusedbytheElectricityAuthority indeterminingtheratesfortheCompany.

n.

105

NOTE12:

n.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) Theprinciplesusedinpreparingthesestatementsofincomeareasfollows(continued) (3)Calculationoftheincomefortheelectricitychainsegments Theincomeforthesegmentiscalculatedbymultiplyingtheamountofsalescalculatedforeach segmentbythevarioustypesofconsumersattheappropriaterates. The difference, which derives from the Company's actual income and the calculated income obtained, is distributed among the segments according to the amount of their calculated income. (4) In addition, in view of the matter discussed in m.4 above, as of July1, 2006, revenues from usage fees are calculated for substations and connections. These revenues are collected through the generation and distribution segment rates and transferred to the transmission segment for the usage fees for the segment's properties. Revenues from usage fees of substations are calculated at a rate per kWh multiplied by the quantity transmitted by the segment.RevenuesfromusagefeesforconnectionsarecalculatedatarateperkWhmultiplied bytheinstalledtransformationcapacity. b)Otherincomeisattributedtotheappropriatesegment,accordingtoitsnature. 3) Belowaretheprinciplesforattributingtheexpensestothevarioussegments The specifically identifiable expenses are charged directly to the appropriate items. Certain indirect expenses are recorded for those items according to distribution bases that, in the Company's assessment,constituteareasonableestimatefortheattributionofthoseexpenses. a) Cost for operating the electricity system reflects in the Company's financial statements the operating expenses for the generation, transmission and distribution segments. Fuels costs and provisions for nonrecognition of fixed assets construction costs are fully attributed to the generationsegment. b) Selling and marketing expenses include the expenses for services to consumers that are attributedtothedistributionsegment. c) Generalandadministrativeexpenses(includessalary,depreciationandotherexpenses) The basis for attributing the general and administrative expenses items to segments was determined in accordance with the nature of the activities of the Company's various units, whose costsareattributedtogeneralandadministrativeexpenses;seethefollowingdetails:

106

NOTE12:

n.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) Theprinciplesusedinpreparingthesestatementsofincomeareasfollows(continued) 3) Belowaretheprinciplesforattributingtheexpensestothevarioussegments(continued) c) General and administrative expenses (includes salary, depreciation and other expenses) (continued) (1) The general administrative expenses, the accounting and economic division and asset maintenance expenses are presented according to the ratio of the division of the operating expensesintheelectricitychainduringthereportedperiod. (2) The expenses for the humanresources department are presented according to the ratio of the divisionofthesalaryexpensestotheelectricitychainduringthereportedperiod. (3) Doubtful accounts and bad debts are presented according to the ratio of the gross revenues fromelectricitysalesoftheelectricitychainduringthereportedperiod. (4) Communications, electronics and quality control, planning and technological development expensesarepresentedaccordingtotheactivitiesoftherelevantunit. d) Expenses (income) from liabilities, net, to pensioners These expenses (income) are presented according to the ratio for allocating the salary expenses to theelectricity chain duringthe reported period. e) Financial expenses (income), net Primarily derive from the operated fixed assets and, therefore, they were attributed according to the average ratio of the operated fixed assets, net, as presented intheCompanysbooksintheelectricitychainduringthereportedperiod. 4) Taxesonincomedeferred The deferred taxes are presented according to the ratio of the income before tax for all of the various segments,outofthetotalpretaxincomeofallofthesegments. Income from taxes and deriving from the effect of the change in tax rates on deferred taxes are allocatedtothevarioussegmentsaccordingtothenetoperatedfixedassets.

107

NOTE12:

o.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) Theprinciplesusedinattributingtheaforesaidstatementoffinancialpositionitemsareasfollows 1) The Company is one legal entity and, in effect, the statement of financial position balances are not separated according to the Company's activities segments in its accounts (except for direct fixed assets). Therefore, the Company is reallocating the balance sheet balances for purpose of this note, in everyreportingperiod,basedonallocationkeys,asdescribedbelow. 2) Thebalancesheetsastheyarepresentedinthisnotedonotnecessarilyreflectthefinancialpositionof the various segments, if they would have been managed as separate economic entities, as signified by generallyacceptedaccountingprinciples. 3) Below are the principles for attributing the statement of financial position balances to the various segments: a) Workingcapitalitems: Theworkingcapitalitemswereattributedtothesegmentsinaccordancewiththoseprinciplesthat the Electricity Authority used in determining the electricity rates (principally for the purpose of determiningthecoverageoftheworkingcapital'sfinancialexpenses)wheretheprincipalallocation keysare: Fuel inventories and balance for fuel suppliers were fully attributed to the generation segment. The trade receivables balance allocated according to the ratio for distributing revenues. Trade payablesandotheritemswereallocatedprimarilyaccordingtotheratiooftheoperatingexpenses andsalaryforthesegments. b) Fixedassets: Fixed assets that are specifically identifiable are included in the appropriate segment. Joint assets (about 3% of the entire assets) were distributed according to distribution keys that, in management'sopinion,constituteareasonableestimateforattributingtheseassets. c) Shareholders'equityanddeferredtaxes: Shareholders' equity and deferred taxes are allocated according to the ratio of the active fixed assets,net. d) Loansanddebentures: The loans and debentures were allocated to the segments in accordance with the other statement of financial position items, and principally according to the distribution ratio of fixed assets to segments, pursuant to the nature of the financing for the Company's assets under the rate principles. e) Theremainingstatementoffinancialpositionitemsweredistributedaccordingtodistributionkeys that,intheCompany'sestimation,constituteareasonableestimateforattributingtheseitems.

108

NOTE12:

p.

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) Information regarding the attribution of the income statement and statement of financial position accordingto18reportingunits 1) General In addition to the aforesaid in section m.1 above, the Company was required to provide disclosure in the form of a note that is to include condensed statements of operations and a statement of financial position, in reference to 18 activities that are included in the three electricity chain segments,asfollows: Generationsegment 11 generation sites: Rutenberg, Orot Rabin, Haifa, Reading, Eshkol, Gezer, Hagit, Alon Tavor, Ramat Hovav, Zafit and the othergasturbines. In addition, it also reports on activities for acquiring electricityfromprivateproducers. Transmissionsegment Theelectricitytransmissionandtransformationsystem. Distributionsegment The Company's five districts: Northern, Haifa, Jerusalem, Dan,Southern. Below,the18operationssegmentswillbecalled:"reportingunits". 2) Belowaretheprimaryprinciplesforattributingtheincome The income at the level of the reporting unit is calculated by stages since presently there is no electricity rate at the reporting unit level, and the Authority's current rates, at the level of the electricity chain's segments, do not allow for their attribution to a level that is lower than the segmentlevel.

109

NOTE12:

THEISRAELELECTRICCORPORATIONLIMITED NOTESTOTHECONSOLIDATEDFINANCIALSTATEMENTS ASOFMARCH31,2012(NEWISRAELISHEKELS) (AdjustedtoNISpurchasingpowerofMarch2012) INFORMATION REGARDING THE ATTRIBUTION OF THE STATEMENT OF OPERATIONS & COMPREHENSIVE INCOME AND THE STATEMENT OF FINANCIAL POSITION ACCORDING TO ACTIVITY SEGMENTS: GENERATION,TRANSMISSIONANDDISTRIBUTION(SEENOTES3.bAND3.cABOVE) Information regarding the attribution of the income statement and statement of financial position accordingto18reportingunits(continued) 2) Belowaretheprimaryprinciplesforattributingtheincome(continued) Theincomeiscalculatedbasedonthefollowingprinciples: a) Calculationoftheincomefromelectricityattheleveloftheelectricitychainsegments,which is based on the electricity rates and agrees with the total of all revenues from electricity at thetotalCompanylevel. b) Determinationoftherequiredrevenuesatthereportingunitlevelforeachreportingperiod. Required income cover for the actual costs during the reported period (operating costs including fuel and depreciation) neutralized by the various other income and expenses, and with the addition of normative financing costs of assets recorded in the books and the normativerateofreturnoncapital. The required revenues are structured based on the principal elements of the rules and principles that served the Electricity Authority for determining the electricity rate for the varioussegments. c) The difference between the total required revenues for the reporting unit in the segment and the revenues of the appropriate segment was distributed among the reporting units accordingtotheratioofrequiredrevenueofthesegment. d) The revenues from electricity at the reporting unit level were not designated in order to estimate the revenues that will be obtained from the electricity if and when electricity rates aredeterminedatthereportingunitleveland,therefore,statementsofoperationsaccording tothe18reportingunitsdonotnecessarilyreflecttheresultsoftheiroperationsiftheywere managed as separate economic entities, as signified by generally accepted accounting principles. 3) Theprinciplesfortheattributionofexpensesareasfollows: The principles for attributing the expenses at the level of the reporting units agree with the principles that were applied in the reporting according to the three electricity chain segments (see sectionn.above). Joint expenses for a segment (such as management of the segment) were attributed to the reportingunits,generallyonthebasisofthedirectoperatingcostsforeachreportingunit. Other expenses that are not allocated in the Company's books of account (such as general and administrative and financial) were attributed to the reporting units in accordance with the loading basesusedinthereportingaccordingtotheelectricitychainsegments. 4) Principles that were used in attributing the statement of financial position items according to 18 reportingunits According to what is stated in section o. above, the Company is one legal entity and, in effect, the statement of financial position balances are not segregated in the Company's books according to the segments of the Company's activities. Therefore, the Company reattributes the statement of financialpositionbalancesforthepurposeofthisnoteforeachreportedperiodbasedonallocation keys,asdescribedaboveinsectiono.,whileprovidingadditionaldetailsforthe18reportingunits.

p.

110

ANNEX 1
Actuarial Liabilities of the Israel Electric Corporation At March 31, 2012

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

May 29, 2012

To Mr Harel Belinda, CFO Israel Electric Corporation Ltd. P.O. Box 10 Haifa 31000, Israel

Dear Sir, Re: 1. Actuarial liability as of March 31, 2012 in respect of employee benefits pursuant to IAS 19

General 1.1 This report consists of the following chapters and appendices: 1. 2. 3. 4. 5. 6. 7. 8. Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F 1.2 General The benefits included in the valuation Methodology and actuarial and accounting principles underlying the valuation The data based on which the report has been prepared The assumptions based on which the report has been prepared Valuation changes in the current reporting year Results of valued liabilities Uncertainties and risks Additional reports for disclosure in the financial statements Presentation of expected benefit cashflows Additional details of financial assumptions Additional details of data Valuation changes made prior to the current year Details of benefits

We have been requested by the Israel Electric Corporation Ltd. ("the Company" or "IEC") to prepare this actuarial valuation relating to the value of the Company's employee benefit liabilities for the purpose of reporting in the financial statements pursuant to International Financial Reporting Standard 19, "Employee Benefits" ("IAS 19"). The valuation was requested by Mr Harel Belinda, the Company's CFO. The starting date of the engagement was 1.4.2010, and the date of signing the engagement agreement was 30.5.2010. We agree to publish this report with the Company's financial statements. The Company agreed to grant us indemnity for this work to an amount of up to $ 30 million (US Dollar). The valuation was performed solely for the purpose mentioned above and this report is not to be used, or to reach conclusions, for any other purpose such as determining the provisions required for funding the benefits, valuations of the Company etc. The actuarial results appropriate for any other purpose may materially differ from the results reported in this document.

1.3

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

1.4

This report is intended to present results and provide explanations relating to the valuation. This report is prepared for the purpose of its inclusion in the Company's financial statements. The amounts reported herein were calculated according to the Company's interpretations of IAS 19 and its accounting policies regarding its implementation (see section 3 below). The Company is fully and exclusively responsible for these interpretations and policies. On January 31, 2011, a collective agreement was signed between the Company, the general trade union of workers (Histadrut) and the Company employees' committee, which, among other things, modifies the manner of updating the pension (by linking the pension to the Israeli Consumer Price Index ("CPI") instead of updates based on rank promotion and salary agreements). On February 27, 2012, the Knesset approved a law that allows the implementation of this agreement. This agreement has significant implications for the amounts of projected benefit payments in this valuation. This agreement was first taken into consideration in the valuation as at March 31, 2012. According to this valuation, there is a surplus of assets over liabilities in the pension plan. Based on the Company's instructions, this surplus is presented as an asset of the Company in whole. According to legal regulations of the Fund, in specific situations where there is a surplus, it is returned to the Company, where the surplus is determined according to the actuarial valuation of the Fund. The actuarial valuation of the Fund is different from the Companys valuation contained in this report, primarily due to different assumptions regarding salary increases and future updates to the pension. According to the most recent actuarial valuation of the Fund (as of 31.3.2012), the liabilities were higher than those calculated in this valuation, and there were no surplus assets over liabilities. In order to calculate the amounts included in this report, we relied on information concerning the employee benefit terms and conditions (including constructive obligations) and on historical and current employee data, as provided to us by the Company, that were not verified by us. The full responsibility for the completeness and reliability of the information and data as provided to us lies with the Company. The valuation results are highly sensitive to the actuarial assumptions. The actual demographic and economic experiences are likely to differ from the assumptions, and assumptions are likely to change in future, which will impact on the valuation of the accrued benefits liability. Paragraph 8 below provides additional information. The valuation was performed by Mr Emanuel Berzack, a qualified actuary, and his actuarial team at Ernst & Young (Israel) Ltd. Mr Berzack has a B.Econ.Sc (Statistics and Actuarial Science) from the University of the Witwatersrand in South Africa and is a Fellow of the Israel Association of Actuaries (FILAA) and a Fellow of the Institute of Actuaries (FIA) in the UK. Our professional experience of the last 12 years includes actuarial valuations of employee benefits of a similar kind to those of the Company, of pension liabilities of pension funds and insurance liabilities of insurance companies, in the role of a valuation actuary or reviewing or audit actuary. This report has been prepared in accordance 1 with the relevant standards in "Technical Actuarial Standard R Reporting Actuarial Information" published in November 2009 and in the " Pensions Technical Actuarial Standard" published in October 2010 by the Board for Actuarial Standards of the Financial Reporting Council in the UK. We did not refer to "Technical Actuarial Standard D - Data" of said Board since in view of the agreement

1.5

1.6

1.7

1.8

1.9

1.10

1.11

excluding paragraph C.5.20 which requires providing forecasted results for the next report date (we did not calculate the next quarter's expected liabilities).

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

entered into between Ernst & Young and the Company, the responsibility for validating the completeness, reliability and suitability of the data lies with the Company. 1.12 Definitions:

2.

"salary" Pensionable Salary "the Fund" the Central Pension Fund of the employees of the Israel Electric Corporation Ltd. "pension plan" the set of benefits paid by the Fund "date of valuation" March 31, 2012 "linked pensions agreement" the agreement as stated in section 1.6 above

The benefits included in the valuation 2.1 Our calculations are based on the details of the benefits and their terms, as obtained in a document from the Company, dated March 20, 2012, attached to this report as Appendix F. The information in this document, upon which we relied for the purpose of preparing this report, was not verified by us. The valuation relates to the benefits in respect of permanent employees, pensioners (including disability retirement) and survivors (for convenience purposes, the pensioners and survivors shall hereinafter be referred to as "pensioners"), who are divided into generations A and B (for whom the benefits are identical) and generation C. Generation A and B employees commenced their employment at the Company up to and including June 10, 1996, and generation C employees are permanent employees who commenced their employment at the Company after this date. In addition, the valuation relates to the supplemental severance pay benefit in respect of employees employed under a special agreement. The benefits to which the valuation refers are as follows (see details in Appendix F): 2.3.1 In respect of generation A and B employees and pensioners, a defined benefit pension plan and supplementary benefits consisting of the following: post-retirement pension in respect of pensionable salary, comprised of the following components, subject to each employee/pensioner's individual entitlement to each one: regular salary 2 , shift work, home service, Arava additions, convalescence pay (one 12th of salary), 13th salary (one 12th of salary) 14th salary (one 12th of salary) and "CPI increment"; disability pension; survivors' pension for employees who die during service 3 or following retirement (including employees who died after retirement on account of disability); retirement grant for service above 35 years' service and to survivors on the death of the spouse as above ("additional years grant"); "up to 35 years" grant paid upon retirement and to survivors in the event of the employee's death; disability retirement grant;

2.2

2.3

includes combined salary, management increment, seniority, personal addition, continual education addition and physical effort addition. 3 a lump sum which is paid upon the employee's death as a result of a work-related accident (see section 7.2 of Appendix F, in section "Rights of Employees Entitled to Pension from the Pension Fund of Company Employees and Rights of Pensioners") was not taken into consideration in the valuation.

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

grant for unutilized days of sick leave; severance pay at 8.33% of salary received when leaving employment without entitlement to pension; discounted electricity for pensioners (including VAT and tax grossing up); holiday gifts for pensioners (including tax grossing up); grant at 20 years of service; social welfare activities (worth 0.49% of grants and pension excluding convalescence pay, discounted electricity and holiday gifts); and social welfare fund.

2.3.2

In respect of generation C employees, benefits consisting of: supplementation of severance pay at 2.33% of regular salary (including 13th salary) for each year of service, and in respect of 14th salary for employees who started work at the Company before January 1, 2004, supplementation of severance pay for years of work above 35 years will be calculated; "up to 35 years" grant paid upon retirement and to survivors in the event of the employee's death; grant for unutilized sick leave; discounted electricity for pensioners (including VAT and tax grossing up); holiday gifts for pensioners (including tax grossing up); grant at 20 years of service; and social welfare activities (valued at 0.49% of the other benefits). In respect of non-permanent employees employed by a special agreement: supplementation of severance pay upon leaving or retiring or upon the termination of the maximum work period for this type of employee (5 or 10 years), whichever is soonest.

2.3.3

2.4

In the past, the pensions were updated in relation to the salary scale (according to advances in rank), general salary agreements applicable to all of the Company's employees and costof-living allowance agreements (see Appendix F for details). With effect from January 1, 2012, the pensions update mechanism changed. The update will take place in the month of January each year, in accordance with the rate of annual change in consumer price index (the ratio of the index for the most recent month of December to the index for the December previous to that). Our valuation does not take into consideration the payment of other possible benefits or increase to existing benefits at the Company's discretion, other than the allowance for early retirements, which require Company approval, based on the assumed early retirement rates (see 5.4 below).

2.5

3.

The valuation methodology and actuarial and accounting principles underlying the report 3.1 In accordance with IAS 19, the liabilities were calculated using the projected unit credit method. Under this method the liability is calculated as the present value of projected payments to employees and pensioners in respect of the relevant benefits based on the accrued rights of employees and pensioners as of the valuation date (the "past obligation").

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

The calculation projects each employee and pensioner's expected benefit payment amounts and dates, while taking into account the projected salary growth rate, mortality, termination and disability rates of employees and pensioners, as well as the labor agreements and the Company's benefit payment policy. 3.2 The liabilities and additional disclosures in this report were calculated and presented in accordance with the Company's guidelines as detailed in paragraphs 3.3-3.10 below. Accrued rights are calculated for each benefit in the following way 4 :
The benefit Post-employment pension (including disability pension) and social welfare activities Grant of post employment discounted electricity rates and holiday gifts, including tax grossing up (and VAT on the electricity benefit) Method of calculating the past liability Based on the benefit formula in the pension plan, namely, at the rate of accruing the plan's pension percentages. The liability is fully recognized for anyone who has at least 10 years of service and has reached the age of 40 (60 for generation C employees). If those criteria are not met, the past liability is based on the ratio of accrued service to accumulated service until said service and age, multiplied by the full liability. The liability is recognized in full. Based on eligibility on the valuation date. Eligibility is accrued based on accrued service. For the "up to 35 years of employment" grant, there is a 35-year accumulation maximum. This liability is not recognized prior to 35 years of service. As for employees with over 35 years of service, the past liability is calculated according to the actual benefit terms, namely the number of additional years' (over 35 years) service as at the valuation date. According to the number of unutilized sick leave days as of the valuation date According to eligibility on the valuation date. Eligibility is accrued according to service, subject to a maximum of 30 years (up to 15 times salary). Based on the ratio of accrued service to 20 years. There is no liability in respect of employees with over 20 years of service (as they already received the grant). Using the straight-line method from commencement of work through the end of the maximum work period or retirement age (67), whichever is sooner. Using the straight-line method from commencement of work until the date the employee reaches age 50/55 (male/female), or 30 years of service, whichever is later.

3.3

Death in service survivors' pension Severance pay upon leaving without entitlement to pension, and grant of "up to 35 years" Grant for additional years

Grant for unutilized sick leave Grant for disability retirement

20-year grant

Increased severance pay for nonpermanent employees employed under special agreement Social welfare fund

3.4

All actuarial losses and gains are spread over 15 years, without any corridor. The spread is done annually in other words, a portion of the retained actuarial losses and gains from the end of the previous year is recognized in the current year, and the actuarial losses and gains from the current year will not be recognized at all until the following year.

Namely, the manner of attributing the benefits to the period of employment

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

3.5

The results presented in Appendix A are on a real (index-linked) basis. Thus the opening balances have been linked to the CPI of the valuation month, and the calculation of the expected return on assets, the interest cost and all other results displayed in Appendix A are on a real (index-linked) basis. The service cost was calculated in respect of rights accrued during the reporting period using the method described in paragraph 3.3. For example, for the main pension benefits, until 35 years of service the cost reflects the added percentage to the pension rate. After 35 years of service the cost reflects the added grant for additional years. After full recognition of the liability, the service cost does not include any cost in respect of this benefit. The annual service cost is calculated once a year, based on the assumptions that applied at the end of the previous year, and in each quarter the proportion that relates to that quarter is presented. Differences between this service cost and the actual service cost are represented in actuarial gains and losses. The interest cost and expected asset return are calculated at a real annual interest rate of 2.77% (the uniform discount rate inherent in the liability as of December 31, 2011). The liability and service cost presented in this report have not been reduced by employee participation in the cost of pension (that is, the employees' pension contributions were not taken into consideration in the liability or service cost). We have been informed that the Company is handling this issue through appropriate adjustments to the data displayed in this report, when recording the relevant amounts in its financial statements. The value of the assets presented in Appendix A was provided to us by the Company and was not checked by us. The "termination benefits" displayed in Appendix A are defined as payments to existing pensioners until the forecasted average retirement age on the basis of this valuation (including consideration of early retirement). The actuarial gain / loss because of "termination benefits" is not included in the actuarial gain / loss displayed in Appendix A. These amounts are not deferred, but are recognized directly in the Companys profit and loss statement. During the reporting period, the past service cost arising from the linked pensions agreement was calculated. The past service cost that is defined as "vested" is fully recognized in the liabilities and expenses. The cost that is defined as "vested" is the cost of the agreement in respect of all existing pensioners and for employees who reached the age of 50/55 (male/female) or 30 years of service, whichever is later. Recognition of the past service cost that is defined as "non-vested", is spread over a period of 86 months, which represents a weighted average of the projected remaining working years as at February 27, 2012 (the increase in liabilities arising from the agreement represents the weights in this calculation). In accordance with this spread, during the reporting period only one month of the past service cost that is defined as "non-vested" was recognized.

3.6

3.7

3.8

3.9

3.10

3.11

4.

The data based on which the report has been prepared The valuation is based on data received from the Company, correct to March 20, 2012. We have relied on this data and did not check it in a detailed manner or validate it in relation to the data source. We have only checked the general reasonability of the data in relation to the data from the prior quarter. The main data we received was as follows (see Appendix D for more detail):

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

4.1

Employee and pensioner 5 data we received files on April 5, 2012 containing data for each employee and pensioner entitled to their relevant benefits. The data includes details of age, gender, pension or salary components, rank, service etc. as of the valuation date. In addition, these files include data for the average monthly value of the holiday gift and discounted electricity rate (according to the full price) including grossing up for tax (and VAT on the electricity benefit). We made the following adjustments to said data based on the Company's instructions 6 : 4.2.1 Increase of salary and pension for cost of social welfare activities by 0.49%. This increase was done for all salary / pension components except convalescence pay, Arava addition, home service, holiday gifts and discounted electricity rates. Increase of salary (excluding convalescence pay, holiday gifts and discounted electricity rates) by 1.59% to reflect the effect of the new salary agreement that was signed at the start of 2011. This rate relates to the increase in salary , as a result of the new agreement, for the period up to the valuation date. We received a file containing a list of employees who, according to the Company, retired near the date of the valuation and whose status needed to be changed from "employee" to "pensioner" along with the calculation of their liability accordingly.

4.2

4.2.2

4.2.3

The possibility that pensioners died without the Company's knowledge was not taken into consideration in the valuation. To remove all doubt, the rates and manner of adjustment represent part of the Company's instructions and were not determined or examined by us.

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

4.3

Below is a summary of the aforementioned data, before and after the adjustments mentioned in section 4.2: Before the adjustments in paragraph 4.2 above Monthly salary/pension in NIS regular salary, taken Average Number from data age
52.1 72.9 72.7 41.1 47.4 42 4.2 11.7

Group Generations A and B* Employees 8,275 113,700,965 Pensioners former employees 3,469 44,958,340 Pensioners survivors (including children) 1,880 13,963,091 Generation C** Employees 1,563 12,500,509 Pensioners former employees Pensioners survivors (including children) 10 7,470 Employees under special agreements (non-permanent employees) *** Employees 758 3,874,811

Average service (years)

25.3

Group Generations A and B* Employees 8,266 115,830,464 Pensioners former employees 3,478 45,934,212 Pensioners survivors (including children) 1,880 14,290,596 Generation C** Employees 1,563 12,738,272 Pensioners former employees Pensioners survivors (including children) 10 7,471 Employees under special agreements (non-permanent employees) *** Employees 758 3,955,681 *

After the adjustments in paragraph 4.2 above Monthly salary/pension in NIS regular salary, calculated by formula based Average on salary components age Number
52.1 72.9 72.7 41.1 47.4 42

Average service (years)

25.3

11.7

4.2

The generation A and B salary and pension include all the components to which the employee/pensioner is entitled, including regular salary 7 , shift work, home service, Arava additions, convalescence pay (the 12th portion), 13th salary (the 12th portion), 14th salary (the 12th portion), value of holiday gifts (grossed up for tax) and discounted electricity rates (including VAT). The amounts of the 13th and 14th salaries were calculated by dividing the regular salary by 12 in respect of all those qualifying based on service data.

includes combined salary, management increment, service addition, personal addition, continual education addition and physical effort addition.

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

**

The generation C salary and pension (electricity and holiday gift) include all the components to which the employee/pensioner is entitled, including regular salary, 13th salary (the 12th portion) and grossed up value of holiday gifts and discounted electricity rates (including VAT). The amount of the 13th salary was calculated by dividing the regular salary by 12. The displayed salary for non-permanent employees under special agreements is the salary eligible for severance pay only. (In the data file there are two salary fields regular salary and severance pay. The field that is used for calculations is severance pay.)

***

4.4

Data obtained for assets, payments and contributions consisted of the following (at nominal value): NIS '000

Data item Assets as at the valuation date Balance of plan assets for post-employment benefits Balance of assets according to clause104A (of IAS 19) benefits Payments during the reporting period Increased severance pay to employees under special agreements Supplemented severance pay (2.33%) to generation C employees "20-year grant" Termination benefits 8 Unutilized sick leave grant Post-employment benefits (excluding termination benefits) "up to 35 years" grant Discounted electricity benefit and holiday gifts Withdrawals from plan assets for payment of benefits Contributions during the reporting period Company's contributions to plan assets or assets according to Clause 104A (of IAS 19) Employees' contributions to plan assets or assets according to Section 104A (of IAS 19)

4.4.1 4.4.2

21,602,612 2,061,631

4.4.3 4.4.4 4.4.5 4.4.6 4.4.7 4.4.8 4.4.9 4.4.10 4.4.11

404 1,150 20,822 2,701 164,873 800 11,683 164,951

4.4.12 4.4.13

150,636

includes NIS 19,739,000 for paid benefits by the fund, and the remainder for benefits not paid by the Fund (electricity, holiday gift).

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

5.

Actuarial assumptions The assumptions detailed below represent the Company's assumptions the Company being the entity that is responsible, according to IAS 19, for determining the assumptions. Our involvement in, and approach to, the material assumptions are as follows: The financial assumptions (see section 5.1 below) are based on generally accepted market data as published by an external party. The demographic assumptions such as mortality, disability and marriage (see sections 5.3 and 5.5 below) were established by the Company in consultation with us. We examined these assumptions during the past two years at the Company's request and in our opinion they are reasonable. The assumed salary increase associated with general salary agreements (see sections 5.2.2.1 and 5.2.2.2 below) was determined by the Company on the basis of independent, professional evaluation and/or consultation with its advisors. We have not been asked to investigate this subject or to make recommendations regarding these assumptions. On the basis of the general knowledge available to us, we are unable to express a professional opinion on these assumptions. In our opinion, the knowledge and ability of the Company's professionals are more reliable and relevant than ours, for the purpose of determining these assumptions, because of their familiarity with the Company, the public sector and the electricity sector, and with the relevant labor relations with the employee and pensioner groups. The remaining assumptions were determined by the Company, most of them in consultation with another advising actuary. In our opinion, on the basis of our review of the work of the Company or the other actuary, these assumptions are reasonable. Regarding the assumed early retirement rate, for employees in generations A and B, which are not defined as "terminations", our examination is subject to the accounting determination with regards to the approach to early retirement, and is limited due to a lack of relevant past experience, as explained in section 5.4.4 below. In principle, changes may be expected to assumptions as a result of investigations relating to employees and pensioners demographic experience or other relevant information, that are carried out from time to time, and/or after publications of new mortality and disability tables by the Israeli Ministry of Finance or other parties, to the extent that it is decided that these tables apply to the Company.

5.1

Financial assumptions 5.1.1 Inflation rate the difference between the nominal spot interest rate (on nonindexed Government bonds) and the real spot interest rate (on indexed Government bonds) for a period of 15 years, the longest period for which Mervach Hogen Ltd quotes a nominal interest rate. For the actuarial valuation there is essentially no requirement for an explicit assumption for inflation, since, according to the Companys accounting policy, the interest rate for discounting is based on the Government bond rate tied to inflation, and since the assumptions for salary and pension increases are set in real terms. The rate of inflation is relevant for calculating the erosion of real value of the convalescence and holiday gift components of salary, since they are linked to CPI on a yearly basis (and not monthly). With effect from the valuation for the first quarter of 2012, after applying the linked pensions agreement, the inflation rate is also relevant to the calculation of the erosion of pension payments (due to linking once a year rather than each month). The resulting inflation rate as at the valuation date is 2.48%.

10

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

With regard to the past, an adjustment to pension amounts was made, in respect of the actual index from the last update of the pensions until the valuation date. Furthermore, from a technical perspective, the cash flows that we calculated for the valuation are future pension and other benefit payments, projected without the influence of future inflation. Therefore, the real discount rates mentioned below (based on the Government bond rate tied to inflation) are appropriate for discounting these cash flows. The use of nominal discount rates (based on market data for non-indexed Government bonds) and adding inflation (the difference between the nominal and real interest rates) to the projected cash flows, leads to the same result. 5.1.2 Discount rates according to the accounting policy of the Company, the discount rates used in the valuation are taken from the "risk-free" yield curve based on market data for Government bonds tied to inflation as of March 31, 2012, as established by Mervach Hogen Ltd. The use of these interest rates is required by IAS 19, given the Company's opinion (which coincides with that of other Israeli corporations) regarding the absence of a deep market in high quality corporate bonds in Israel (see Section 78 of IAS 19). The valuation discount rates reflect the returns that can be achieved, according to "market" expectations, on risk-free assets (excluding the risk of the countrys insolvency). If the plan assets yield lower real returns than the discount rates, based on their fair value, the net liabilities (total liabilities net of plan assets) will increase and vice versa. See Appendix B for details of the projected cash flows of benefits. See Appendix C for information on the values of the interest rates. 5.1.3 The interest cost rate and expected return on assets for the reporting period were determined by the Company at 2.77% pa, as described in paragraph 3.7 above.

5.2

Salary and pension increases 5.2.1 As was communicated to us, the salary increase assumptions (as detailed in section 5.2.2) were determined by the Company based on, among other things, the analysis of the past increases in the various salary components, subject to the principles of IAS 19. It is assumed that each individual generation A, B and C employee's salary components will increase according to the framework of salary increases and rank progression included in the Company's existing labor agreements and policies (as specified in Appendix F). The supplementary assumptions applied to this framework are as follows: 5.2.2.1 The future annual increase in respect of general salary and cost-ofliving allowance agreements (the general update in the salary scale) is the rate of the actual increase in the CPI less 1.38% per year (a 1.38% erosion each year in real terms). This increase affects all of the salary components. This increase does not affect the pension, discounted electricity, holiday gifts and convalescence (it is assumed that the Arava and home service components will be included in future salary agreements).

5.2.2

11

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

5.2.2.2

As stated in paragraph 4.2.2 above, it is assumed that the salaries (that were in force in March 2012) will increase due to the effect of the new salary agreement, which was signed in the beginning of 2011, in relation to the period up to the valuation date, by 1.59%, in addition to the assumption described in paragraph 5.2.2.1. Regarding the job classification increment for employees, which comprises a rate of base salary, it is assumed to increase each year at a rate of 0.04% of base salary. The job classification increment shall be no more than 21% of base salary (for senior employees, it is assumed that the job classification increment shall remain unchanged). This assumption is also in effect for employees who at the valuation date were not receiving the job classification increment. In respect of non-senior employees, a cumulative salary growth of 0.60% is assumed up to reaching age 60, which represents promotion to senior ranks. It is assumed that the value of holiday gifts (including tax grossing up) and convalescence pay will increase by the actual rate of increase in the CPI, and that the update (for CPI) of convalescence takes effect at the end of June each year, and of holiday gifts takes effect at the end of December each year. It is assumed that the discounted electricity rate will increase at a real rate of increase of 21% in April 2012, then decrease at a real rate of 16.5% in June 2013 (relative to the current rate - that is, the cumulative real increase from the valuation date to June 2013 will be 4.5%) and then, from the start of 2014 will grow at a real rate of 0.25% per year. It is assumed that 8.12% of pensioners will not receive discounted electricity. It is assumed that for the payment of discounted electricity and holiday gifts before retirement age, the cost in respect of grossed up tax at a rate of 18.31% will be added. It is assumed that the average power consumption per pensioner will remain constant.

5.2.2.3

5.2.2.4

5.2.2.5

5.2.2.6

5.2.2.7

For the purpose of the actuarial valuation prepared according to IAS 19, it is assumed that the Company will not create new ranks or execute other changes to employment terms and the existing system for rank promotion and salary increases (apart from the general upgrading of the salary scale from time to time due to future salary agreements). It is assumed that there were no changes, and will not be any changes, to employees' rate of part-time employment, and that the current rate of part-time employment reflects the average rate of part-time employment from the past and that will be in future.

5.2.2.8

12

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

5.2.2.9

For employees who are not entitled to continuing education payment A, it is assumed that half of them will be entitled to the payment in another 10 years' time from the valuation date (if they have not left beforehand). For employees who are not entitled to continuing education payment B, it is assumed that they will not be entitled to this payment in the future. It is assumed that the ceiling for continuing education payment B for employees at professional grade 44 (nominal) and up will be linked to salary and cost-of-living allowance agreements. The amount of the ceiling, correct to the valuation date, was NIS 904.57. It is assumed that employees without a master's degree will not receive one in future (the service increment for those with a master's degree is higher). It is assumed that employees who are entitled to Arava, home service and shift work salary additions will be entitled to these additions to pensions, and employees who are not entitled to these salary additions, at the valuation date, will not be entitled to these additions to pensions. There is a group of employees who were previously entitled to shift work additions, and who are classified as entitled to this addition in pension; for them it is assumed that they will be entitled to this addition to pension. It is assumed that, except for employees who at the valuation date were entitled to an additional grade at Eilat (including employees who left Eilat after 7 years and transferred their grade), there are no employees who will in future receive the additional grade at Eilat.

5.2.2.10

5.2.2.11

5.2.2.12

5.2.2.13

5.2.2.14

5.2.3

The average uniform annual real salary 9 growth rate for all employees that results in the same liabilities as presented in this report is approximately 0.8% per year, assuming that the extra rank at retirement will be granted (or approximately 1.2% per year, assuming that the extra rank at retirement will not be granted). In respect of non-permanent employees under special agreements, a real annual salary growth of 2.0% is assumed, including the general salary updates and individual employee salary increases.

5.2.4

5.3

Mortality and disability rates 5.3.1 As stated above, in this valuation we use the same demographic assumptions that were used in the 31.12.2011 valuation.

all salary components except convalescence pay, discounted electricity and holiday gifts, which are assumed to be tied to CPI.

13

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

5.3.2

Life expectancy improvement (decline in mortality rates) The value of the actuarial liability is highly sensitive to the mortality assumption. It is known that medical developments and lifestyle improvements have helped to increase life expectancy in general. The actuarial assumptions take into account the continued increase in life expectancy. The mortality rates detailed below are in effect as of December 31, 2001. We assumed a decline in mortality rates (leading to prolonged lifespan) from December 31, 2001 and on, based on the Table P7 of the Circular issued by the Capital Markets, Insurance and Savings Division of the Israeli Ministry of Finance on May 17, 2007 ("the Circular") and the model presented in Section 8 of the Circular Appendix 10 . It should be emphasized that there is a great deal of uncertainty regarding this assumption, and an alternative assumption may be just as reasonable (see paragraph 8.4 below).

5.3.3

Pensioner mortality tables - Table P3 of the Circular In 2009, the former actuary analyzed the mortality records of the Company's pensioners from 1997 through July 2008 and established that the pensioners' mortality rates do not differ significantly from the mortality rates Table P3. Therefore the former actuary and the Company decided to use this table. It is noted that this table is based on the experience of Israeli pension funds where the number of pensioners is larger than the number of pensioners in the Company. Thus it is statistically more reliable than the table that would have been built specifically for the Company, as long as there is no material difference (related to mortality) in the populations characteristics. Below is a sample of the remaining life expectancy of pensioners, based on Table P3 and combined with the assumed improvement in life expectancy. Age and year 67 at the end of 2010 67 at the end of 2020 67 at the end of 2030 Female 22.2 22.9 23.5 Male 19.6 19.9 20.5

5.3.4

Survivors' mortality based on Table P5 of the Circular. Table P5 only provides mortality rates from age 60 for men and 55 for women. Consequently, for ages up to 60 (men) and 55 (women), we used the previously published mortality rates (Table 1A4 of the Ministry of Finance's Circular of January 2000).

10

According to this model, the average annual decline in mortality rates from 2001 to 2031 for ages 70, 80 and 90, for example, is 1.6%, 1.3% and 0.5% for men (born after 1949), respectively and 2.3%, 1.7% and 0.7% for women, respectively.

14

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

5.3.5

Mortality for active employees based on Table P1 of the Circular 11 . Mortality for disabled pensioners at 2% per year up to age 60, and based on Table P3 of the Circular after age 60. Disability incidence based on Table P8 of the Circular. Disability recovery no recovery is possible as the liability is in respect of permanent disability.

5.3.6

5.3.7

5.3.8

5.4

Retirement age, leaving and early retirement 5.4.1 5.4.2 As stated in section 5, these assumptions were determined by the Company. It is assumed that normal retirement will occur at the mandatory retirement age (67 for men and women). Therefore employees over age 67 are assumed to retire immediately. Leaving and early retirement rates (prior to normal retirement age), for generation C: It is assumed that there will not be any leavers (by resignation) that do not receive any benefits. The assumed rates of leaving (with eligibility) and early retirement, by age and sex, are detailed in the table below:

5.4.3

11

women at ages 63-67 according to Table P3.

15

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Early retirement rates (entitled to all Leaving rates (entitled to all benefits For generation benefits detailed in paragraph 2.3.2 detailed in paragraph 2.3.2 except for except for supplementation of discounted electricity and holiday C severance pay (2.33%) ) gifts) Age up to 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 5.4.4 Women 0.037% 0.037% 0.037% 0.037% 0.037% 0.193% 0.164% 0.172% 0.223% 0.325% 0.488% 0.720% 1.028% 1.420% 1.906% 0.831% 1.900% 2.471% 2.100% 2.100% 2.100% 2.100% Men 0.017% 0.017% 0.017% 0.017% 0.017% 0.017% 0.017% 0.017% 0.017% 0.017% 0.021% 0.052% 0.046% 0.058% 0.121% 0.240% 0.393% 0.552% 0.703% 0.886% 1.241% 2.068% 3.892% 1.400% 1.400% 1.400% 1.400% Women 0.411% 0.472% 0.521% 0.557% 0.582% 0.594% 0.594% 0.583% 0.559% 0.523% 0.475% 0.414% 0.342% 0.258% 0.161% 0.053% Men 0.660% 0.603% 0.549% 0.498% 0.450% 0.404% 0.361% 0.321% 0.283% 0.248% 0.216% 0.187% 0.160% 0.136% 0.115% 0.096% 0.080% 0.067% 0.056% 0.049% 0.043% 0.041% 0.041% 0.044% 0.050%

Leaving and early retirement rates (prior to normal retirement age), for generations A and B: It is assumed that there will be no leavers at all, besides for early retirements. The early retirement rates represent the assumption regarding early retirements that are not defined as "termination benefits" pursuant to IAS 19 since, according to IAS 19, the cost of terminations is not to be recognized in advance

16

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

except under certain conditions. In practice, this assumption is difficult to make as it is very difficult to distinguish between early retirements that should be defined as termination benefits and others. It is even more difficult to make this assumption because employees' behavior in regard to terminations is highly affected by various past and future special retirement programs. The early retirement rate assumption was determined by the Company on the basis of past experience, from the years 2002 to 2010, of the rate of early retirements, excluding retirements within a special retirement program. This assumption has been updated since the valuation at December 31, 2010 (see paragraph 6.3 below). The early retirement rate assumption, by age and sex, is detailed in the table below: For generations A and B Age Up to 40 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 Early retirement rates Female Male 0.04% 0.04% 0.04% 0.04% 0.04% 0.13% 0.13% 0.13% 0.13% 0.13% 0.14% 0.14% 0.14% 0.14% 0.14% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34% 0.34% 5.56% 5.56% 0.79% 0.79% 0.00% 0.08% 0.08% 0.08% 0.08% 0.08% 0.10% 0.10% 0.10% 0.10% 0.10% 0.14% 0.14% 0.14% 0.14% 0.14% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 0.31% 2.54% 2.79% 2.83% 3.58% 0.00%

17

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

5.4.5

Leaving in respect of non-permanent employees under special agreements: The assumed rates of leaving with eligibility for benefits included in this valuation, by service, are detailed in the following table: Service Leaving rates (terminations) (eligible for benefits) 3.0% 1.5% 0.0%

0 1 2+
*

For non-permanent employees under special agreements, in addition to these rates, it is assumed that they will leave at the end of the maximum work period based on the special agreements, which is 5 or 10 years from commencement (whether it is 5 or 10 depends on the date of commencement of work), and will receive increased severance pay upon leaving.

5.5

Marriage rates and age difference between spouses according to Tables P9 and P10 of the Circular, with an adjustment to Table P10, for male employees and pensioners, in order that the expected age difference between spouses for an employee or pensioner will be according to the table for an employee until age 35, 2 years for an employee aged 36 until 46, and 1 year less than the table for an employee / pensioner older than 46 (widow/ers are not expected to remarry so the payment of a survivor's pension to the widow/er is not assumed to discontinue due to remarriage). This assumption was made by the Company.

5.6

Orphans the number of children and their ages are determined according to Table P11 of the Circular. These assumptions were made by the Company.

5.7

Utilization of sick leave days (for calculating the unused sick leave benefit) it is assumed that every employee's proportion of unutilized sick leave days will be identical to the proportion of unutilized sick leave for the working period until the valuation date. This assumption was made by the Company.

5.8

It is assumed that all non-permanent employees under special agreements will receive increased severance pay. Future Company expenditure in respect of the operation of the pension plan was not taken into account. Below are certain issues that were not taken into consideration in the valuation. We believe the overall effect of these issues is immaterial:

5.9

5.10

18

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

pensions for "dependent orphans" over age 21 for future orphans; possible future pensions for "dependent parents" of deceased employees or pensioners; increases in pensions to future orphans in the absence of widow/ers (not taken into account); the actual dates on which pension is paid for 13th and 14th salaries (we assumed that the 12th portion of the annual allowance is paid monthly); possible increases in pensions based on the minimum pension rate; possible grant of discounted electricity and holiday gifts to orphans (we assume that all orphans have a parent receiving these benefits); cancellation of the right of pensioners to receive rank promotions for various reasons such as disciplinary infractions; a few pensioners who received a capitalized amount of future pensions for a period of 6 years. The valuation is not based on the decreased pension during the remaining capitalization period but rather on the full pension; and additional severance pay or grants in respect of the difference between the salary reported in the data file and the minimum salary, to be paid to a small number of generation C employees who retire or leave with salary lower than the minimum salary.

6.

Valuation changes in the current valuation For changes made prior to the current valuation, see Appendix E. For the current valuation, the pension updating mechanism was changed on account of the linked pensions agreement. With effect from January 1, 2012, the determining salary components for calculating monthly pensions will be updated in January each year, in accordance with the rate of annual change in consumer price index (the ratio of the index for the most recent month of December to the index for the December previous to that). This change increased the liability by NIS 2,771 million, of which a total of NIS 768 million is unrecognized past service cost. For the current valuation, the assumption regarding the future annual increase of salary and cost-ofliving allowance agreements (the general update of the salary scale) was changed to the actual increase in the CPI index minus 1.38% per year. This rate is determined by the Company on the basis of salary growth for the years 1990-2005. In the previous valuation the assumption was as stated, minus 1.54% (see section 5.2.2.1) this change increased the liability (after the CPI index link agreement) by about NIS 190 million. In the year of this report, there were no changes to the assumptions or methodology used, except for that which is stated above and except for changes to the discount rate (occurring every quarter). At the start of 2011 a new salary agreement was signed, which influenced the results of this valuation. This influence relates to the difference between the salary and pension increases, in respect of this new agreement, until the date of valuation (see paragraph 4.2.2 above) compared to the salary and pension increase assumption used for the previous valuations. This issue does not represent a change to this assumption or methodology, but reflects a variance between the actual salary increase compared to expected.

19

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

7.

Valuation results The values of the liabilities (in million NIS) as at March 31, 2012, without offsetting against plan assets or adjustments in respect of unrecognized actuarial gains / losses, are as follows: 7.1 The liabilities, for all the benefits included in this valuation, except for the liability for special agreements on early retirement, for "20 year grant" and for increased severance payments for (non-permanent) employees under special agreement: Active employees Pensioners and survivors Total 7.2 12,773.1 9,403.8 22,176.9

Liability for special agreements on early retirement in respect of the past: Pensioners and survivors 227.1

7.3

Liability for 20 year grant: Active employees 24.4

7.4

Liability for increased severance payments for (non-permanent) employees under special agreement in respect of the past: Active employees 28.6

In Appendix A, additional information is provided which is required for the financial statement disclosures according to IAS 19.

20

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

8.

Uncertainties and risks

8.1

Due to the nature of the benefits and the long term of the valuation, the future payments of benefits are uncertain and may materially differ in practice from this valuation despite the efforts made to assess them as accurately as possible. For this reason, the Company is exposed to a risk that the estimated liability does not properly represent future payments and, consequently, additional costs will be incurred in the future for past accrued rights that are under-estimated and/or additional revenues will be derived from past accrued rights that are over-estimated. Below are the main issues that we believe result in said uncertainties and risks.

8.2

Interest, inflation and returns Future fluctuations in market interest rates used to estimate the liabilities (using discounted expected cash flows) will change the gross value of the liabilities. Higher or lower plan asset returns compared to these interest rates will result in the decrease or increase of the net liabilities, respectively. At times, these two changes are offset one against the other to a certain extent based on the level of matching between the assets and liabilities. Sensitivity analysis: a) If the discount rate falls by 1%, the liability will increase by NIS 4,156 million (18.5%). b) If the discount rate falls by 0.1%, the liability will increase by NIS 369 million. c) If the discount rate increases by 0.1%, the liability will decrease by NIS 360 million. Actual inflationary changes affect the value of the liability (indirectly due to the connection between salary / pension and inflation) and the value of the assets (due to index-linked assets) and in this case, the two changes are offset one against the other to a certain extent. Anticipated inflationary changes affect the value of the liability and the value of the assets based on the anticipated inflationary influence on market interest rates and the value of unlinked assets.

21

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

8.3

Future salary and pension increases The assumption of general salary increases (in respect of salary and cost-of-living allowance agreements) considerably affects future cash flows. This assumption is currently -1.38% (on a real basis, namely, that the pensionable salary will erode for employees who reached the maximum rank). Sensitivity analysis: a) If the actual change (in respect of salary and cost-of-living allowance agreements) to the overall salary scale is at the actual inflation rate (linked to the CPI), the liability will be deficient by approximately NIS 1,819 million (8.1%). b) Similarly, if the actual change of salary will be higher than what is assumed, by 0.5% per year, without any change to the rate of pension increases, the liability will be deficient by approximately NIS 615 million. If the actual change of salary will be lower than what is assumed, by 0.5% per year, without an change to the rate of pension increases, the liability will be higher than required by approximately NIS 573 million.

8.4

Life expectancy Although the actual mortality rates are relatively stable, and the mortality assumption corresponds with current experience relatively well, the mortality factor contains considerable uncertainty regarding the distant future owing to the increase in life expectancy, whose rate is extremely difficult to assess and may significantly differ from the assumption. The life expectancy increase rate is affected by behavioral and social changes and by medical developments, both past and future, and these factors are liable to affect life expectancy significantly and unexpectedly, in addition to the fact that, even without these new developments, the changes in future life expectancy cannot be clearly foreseen.

Sensitivity analysis: if the annual rates of decline in mortality are double what was assumed 12 , the life expectancy of a 67 year-old male at the end of 2020 (for example) will rise from 19.9 to 22.2 years (for women from 22.9 to 25.4 years) and the total liability will have been understated by approximately NIS 1,235 million (5.5%). For comparison sake: if the actual mortality rates will be 20% lower than assumed, the life expectancy of a 67 year-old male at the end of 2020 (for example) will rise from 19.9 to 21.7 years (for women from 22.9 to 24.5 years) and the total liability will have been understated by approximately NIS 1,078 million (4.8%).

12

See paragraph 5.3.2 above.

22

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

8.5

Early retirements As stated in paragraph 5.4.3 above, the early retirement pattern is relatively unstable and the determination of the assumption is highly challenging both due to the applicable accounting standards and since it is naturally difficult to anticipate employee behavior in an unstable environment. This phenomenon materially affects the payment of benefits and the valuation of the liability since under early retirement the employee will begin receiving the fully accrued pension immediately without any pension reduction that would have offset the added cost of pension payments in the years prior to normal retirement age.

Sensitivity analysis: if the actual early retirement rates are double the assumed rates (see paragraph 5.4.3 above), the total liability will have been understated by approximately NIS 337 million (1.5%).

Yours truly,

Ernst & Young (Israel) Ltd.

23

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Appendix A additional reports for disclosure in the financial statements Introduction

In this section, the actuarial liability and the additional results are divided into 3 sections: 1. Amounts relating to all post-employment benefits which are paid by the Fund, and assets of the Fund. See Tables 1, 4, 6, 8 & 11 below. 2. Amounts relating to other post-employment benefits (including severance pay, all grants after the termination of employment, discounted electricity, and holiday gifts to pensioners) and assets not in the Fund but designated for the coverage of actuarial obligations. See Tables 2, 3, 5, 7, 9 & 12 below. 3. Amounts relating to other long-term benefits, including the "20 year benefit". See Table 14 below. (Table 10 relates to all pension and other post-employment benefits.)

This report is presented on a real (index-linked) basis. All amounts are in NIS millions.

1. Surplus assets at end of the period 31.3.2012

Fair value of plan assets Present value of the obligation - gross Unrecognized actuarial gains (losses) Unrecognized past service cost Surplus assets 21,603 (19,653) 1,342 749 4,041

31.3.2011
20,656 (15,467) 379 5,568

31.12.2011
21,332 (16,490) 1,092 5,934

2. Funds in trust designated for actuarial obligations (104A assets) 31.3.2012

Funds in trust to cover actuarial obligations (assets per paragraph 104A) 2,061

31.3.2011
1,934

31.12.2011
2,055

24

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

3. Liability at the end of the period for other post-employment benefits (including special agreements for early retirement) 31.3.2012
Present value of obligation for other post-employment benefits Unrecognized actuarial gains (losses) Unrecognized past service cost Obligation for other postemployment benefits 2,565 132 (19) 2,678

31.3.2011
2,135 417 2,552

31.12.2011
2,469 181 2,650

4. Movement in the present value of the obligation 3 months ending 31.3.2012

Present value of the obligation beginning of period Interest cost Current service cost Prior service cost changes in plan conditions, recognized, due to linking pensions to CPI Prior service cost changes in plan conditions, unrecognized, due to linking pensions to CPI Benefits paid Actuarial losses (gains) Present value of the obligation end of period 16,490 119 57 1,982

3 months ending 31.3.2011

15,792 113 53 78

Year ending 31.12.2011

15,792 452 201 78

749

(152) 408 19,653

(135) (434) 15,467

(538) 505 16,490

5. Movement in the present value of the obligation for post-employment benefits 3 months ending 31.3.2012
Present value of the obligation beginning of period Interest cost Current service cost Cost of new retirements early retirement Prior service cost changes in plan conditions, recognized, due to linking pensions to CPI Prior service cost changes in plan conditions, unrecognized, due to linking pensions to CPI Change in liability due to special agreements for early retirement Benefits paid Actuarial losses (gains) Present value of the obligation end of period 2,469 17 12 21 19 (13) 40 2,565

3 months ending 31.3.2011

2,218 16 11 (1) (11) (98) 2,135

Year ending 31.12.2011

2,218 64 45 (1) (50) 193 2,469

25

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

6. Movement in the fair value of plan assets 3 months ending 31.3.2012

Fair value of plan assets beginning of period Expected return on plan assets Company contributions Employee contributions Benefits paid Actuarial gains (losses) Fair value of plan assets end of period 21,332 146 151 (166) 140 21,603

3 months ending 31.3.2011

21,114 149 153 (195) (565) 20,656

Year ending 31.12.2011

21,114 607 665 (701) (353) 21,332

7. Movement in the fair value of the funds in trust to cover actuarial obligation (104A assets) 3 months ending 31.3.2012
Fair value of plan assets beginning of period Expected return on plan assets Company contributions Benefits paid Actuarial gains Fair value of plan assets end of period 2,055 13 (7) 2,061

3 months ending 31.3.2011

1,987 14 (67) 1,934

Year ending 31.12.2011

1,987 58 10 2,055

8. Movement in unrecognized actuarial gains (losses) 3 months ending 31.3.2012

Unrecognized actuarial gains beginning of period Actuarial gains (losses) for the period From obligation From plan assets Actuarial gains recognized in period (*) Unrecognized actuarial gains (losses) end of period (1,092)

3 months ending 31.3.2011

(252)

Year ending 31.12.2011

(252)

(408) 140 18 (1,342)

434 (565) 4 (379)

(505) (353) 18 (1,092)

26

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

9. Movement in unrecognized actuarial gains (losses) for other actuarial obligations & trust assets (104A assets) 3 months ending 31.3.2012
Unrecognized actuarial gains beginning of period Actuarial gains (losses) for the period From obligations for other postemployment benefits From trust assets (104(A)) Actuarial gains recognized in period (*) Unrecognized actuarial gains (losses) end of period 181 (40) (7) (2) 132

3 months ending 31.3.2011

394 98 (67) (8) 417

Year ending 31.12.2011

394 (193) 10 (30) 181

(*) 1) The Company recognizes actuarial gains and losses according to the Corridor option. The corridor is 0% of the obligation and the period of recognition is 15 years. 2) The actuarial gains and losses are calculated as real amounts. Hence changes due to inflation do not appear in the actuarial gain and loss.

10. Components of the expenses for the period 3 months ending 31.3.2012
Current service cost Interest cost Recognized actuarial gains Prior service cost of "non-vested benefits" recognized in the period Prior service cost of "vested benefits" Expected return on plan assets Expected return on funds in trust (104A assets) Total expenses for the period 69 136 15 9 1,995 (146) (14) 2,064

3 months ending 31.3.2011

143 128 (2) (150) (14) 105

Year ending 31.12.2011

324 517 (9) (607) (57) 168

11. Actual return on assets 3 months ending 31.3.2012

Expected return on plan assets Actuarial losses on plan assets Actual return on plan assets 146 140 286

3 months ending 31.3.2011

149 (565) (416)

Year ending 31.12.2011

607 (353) 254

27

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

12. Actual return on assets in trust to cover actuarial obligation (104A assets) 3 months ending 31.3.2012
Expected return on trust assets Actuarial losses on trust assets Actual return on trust assets 13 (7) 6

3 months ending 31.3.2011

14 (67) (53)

Year ending 31.12.2011

58 10 68

13. Obligation for special agreements for early retirement (termination benefits) 31.3.2012
Obligation at end of period - pensions Obligation at end of period other benefits** Obligation at end of period total 214 13 227

31.3.2011
264 15 279

31.12.2011
211 13 224

(**) These obligations are included in Tables 3 & 5 above.

14. Obligation for 20 year grant (other long-term employee benefits) 31.3.2012
Obligation at end of period 24

31.3.2011
26

31.12.2011
25

28

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Appendix B forecasted benefit payments Below is a graph of the expected cash flows included in the valuation (including all benefits for all employees and pensioners), in real terms and in nominal terms (including the future expected influence of inflation). The payments are annual.

29

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Appendix C additional detail regarding the financial assumptions (annual rates shown) Period ending 31.12.2010
Weighted average real discount rate used to compute liabilities * Real interest rate used to compute the interest cost on pension liabilities * Real interest rate used to compute the interest cost on other post-employment liabilities Expected real return on plan assets Expected real return on trust assets (104A assets) Expected inflation rate 2.88%

31.3.2011
3.09%

31.12.2011
2.77%

31.3.2012
2.81%

3.30%

2.88%

2.88%

2.77%

3.30%

2.88%

2.88%

2.77%

3.30% 3.30%

2.88% 2.88%

2.88% 2.88%

2.77% 2.77% 2.48%

* In practice the valuation was performed according to a vector of interest rates (a yield curve) which was determined by Mervach Hogen Ltd and which we received from the Company (see section 5.1.2). The above rate represents the vector of interest rates in consideration of the expected liability cashflow at each point in time. A valuation according to this constant interest rate leads to the same results as presented in this report.

30

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Appendix D additional detail regarding the assumptions List of data files received from the Company: 1. "ong03121" 15,197 records data including all employees / retirees / survivors (permanent workers only). 2. "actuarpizuisug13410312" - 758 records data including all non-permanent workers (special agreement). 3. " 2012 " 9 records. 4. "change012012", "change022012", "change032012" files that describe status changes of employees / retirees in the months December 2011 to March 2012. The files listed above were received on April 5, 2012.

31

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Appendix E changes to the valuation that took effect before the current year due to the implementation date of International Financial Reporting Standards (January 1, 2007) Changes that took effect in the course of 2011 For the valuation in September 2011, the yield curve that the Company used for discounting the actuarial liabilities was as quoted by Mervach Hogen Ltd, in light of it having been chosen as the company to quote prices and interest rates, when previously the Company used a quote of the yield curve from Shaarey Ribit Ltd. Accordingly, the move led to an increase in liabilities, as at September 30, 2011, of NIS 320 million, which is attributed to actuarial losses which have not been recognized. For the valuation in December 2011, a change to the assumed increase in the cost of discounted electricity was made. Up to the third quarter of 2011, the cost of electricity was assumed to be linked to CPI. For this valuation, the price of discounted electricity was assumed to increase at a real rate of 21% in April 2012, then decrease at a real rate of 16.5% in June 2013 (relative to the current rate - that is, the cumulative real increase from the valuation date to June 2013 will be 4.5%) and then, from the start of 2014 will grow at a real rate of 0.25% per year. In parallel with this change, it is assumed that 8.12% of pensioners will not receive discounted electricity. This new assumption offset most of the impact of the stated change to the assumed increase in cost. In addition, another change was made with regards to the payment of discounted electricity and holiday gifts for pensioners before retirement age in order to more accurately reflect the grossed up tax. The impact of this change was negligible. Overall, these changes have increased the liability by approximately NIS 10 million. Additional influences of the salary agreement are expressed in the cancellation of the Commissioner's position regarding: (a) eligibility to the 14th salary: starting from the 1st quarter of 2011, eligibility to the 14th salary is after 25 or 20 years' service for males and females respectively, in place of 30 or 25 years. (b) rank promotion for pensioners: starting from the valuation date until the 1st quarter of 2011, there is no adjustment of rank granted until the valuation date (every two years), whereas, previously, rank promotion until the valuation date was adjusted every 3 years. This change is defined by the Company as a "plan change", and its influence is charged as pension expenses for the period (see section "Prior service cost changes in plan conditions due to decisions by MOF" in section 4 of Appendix D below).

32

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Changes that took effect in the course of 2010 Section Marriage rate and age difference between spouses New Assumptions According to Tables P9 and P10 of the Circular, with an adjustment to Table P10, for male employees and pensioners, in order that the expected age difference between spouses for an employee or pensioner will be according to the table for an employee until age 35, 2 years for an employee aged 36 until 46, and 1 year less than the table for an employee / pensioner older than 46. It is assumed that there will be no leavers, besides for early retirements. Old Assumptions According to Tables P9 and P10 of the Circular

Leaving assumption for generations A and B, and for employees under special agreements Leaving assumption for employees under special agreements Early retirement assumption for generations A and B Grant for increased severance pay at early retirement

See the table in the actuarial report at 31.12.2009

See section 5.4.5 of this report. The See the table in the actuarial rates were fixed according to an up- report at 31.12.2009 to-date study. See section 5.4.4 of this report. The See the table in the actuarial rates were fixed according to an up- report at 31.12.2009 to-date study. At early retirement entitlement to At early retirement entitlement to this grant this grant does not exist. exists.

The section that follows was written by the former actuary and has not been checked by us. It was copied, without changes, from the valuation report as of December 31, 2009.

33

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Changes that took effect in June 2007 Section Mortality rate for pensioners New Assumptions Old Assumptions

According to Table 3P, in the On the basis of 90% of Finance Ministry circular of May Table 4.A.1. in the Finance Ministry circular of 17, 2007 February 29, 2000. From age 60 for men and age 55 for women, according to Table 5P in the Finance Ministry circular of May 17, 2007. Until age 60 (55) according to Table 4.A.1. in the Finance Ministry circular of February 29, 2000. According to Table 4.A.1. in the Finance Ministry circular of February 29, 2000.

Mortality rate for survivors

Mortality rate for active employees

According to Table 1P in the On the basis of 60% of Finance Ministry circular of May Table 4.A.1. in the Finance Ministry circular of May 17, 17, 2007. 2007. According to Table 8P in the According to Table 2B in Finance Ministry circular of May the Finance Ministry circular of February 29, 17, 2007. 2000. 2% until age 60. After age 60, 2% until age 60. After age according to Table 3P in the 60, according to Table Finance Ministry circular of May 4.A.1. in the Finance Ministry circular of 17, 2007. February 29, 2000. According to Table 9P in the According to Table 3 in the Finance Ministry circular of May Finance Ministry circular of 17, 2007. February 29, 2000.

Disability rate

Mortality rate for the disabled

Marriage rate

Reasons for the changes: In light of the publication of the final Finance Ministry circular letter of May 17, 2007, concerning the updated actuarial assumptions for computing the actuarial obligation of the pension funds, examinations were conducted for computing the effect of adopting the actuarial tables as per the instructions of the circular, compared with the tables according to which the computations of the Companys actuarial obligation had been made until that time, which had been based on specific studies of the Company. The effect of the adoption of the actuarial tables, according to the instructions of the aforementioned Finance Ministry circular, on the actuarial obligation of the Company in respect of the past as of June 30, 2007, was an increase in the obligation of the sum of about NIS 265 million (NIS 289 million when adjusted for inflation to December 31, 2009). The adoption of the actuarial tables according to the instructions of the aforementioned Finance Ministry circular, starting with the financial reports of June 30, 2007 is necessary due to the mortality tables set in the circular being based on studies that were conducted on pension funds in the arrangement, these being more credible than the study that was conducted on the smaller population of the Company. The marriage rates according to which the actuarial obligation had been computed until that time were based on tables that appeared in the Finance Ministry circular of 2000/1. With the change in the table of marriage rates in the new circular, adjustment of these rates was required.

34

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

The rates of leaving work because of disability according to which the actuarial obligation had been computed until that time were based on the table that appeared in the Finance Ministry circular of 2000/1 and related to the definition, He is not able to do any work. In the new circular of the Finance Ministry, a single table is given, which relates to the definition, He is not able to do his work or any other work appropriate to his level of education, training, or abilities. The changed table for the rate of leaving work because of disability had virtually no effect on the actuarial obligation and therefore the computation of the obligation from that time onwards is based on the table that appears in the current Finance Ministry circular, despite the fact that this table is geared to a definition of disability that does not match precisely the definition of disability used by the Company. Other assumptions that are taken into account in the determination of the actuarial obligation and that are not mentioned in the Finance Ministry circular ( e.g. rates of early retirement, rates of resignation, salary increase table etc.) are according to forecasts or specific studies conducted in the Company. Changes that took effect in June 2008
Section Past obligation for pension payments after ending employment (because of oldage, because of disability or because of death while employed), including convalescence Early retirement rates New Calculation Methods and Assumptions The past service obligation is calculated according to the plans benefit formula, i.e. according to the accumulation of percentage pension rights in the pension plan. Old Calculation Methods and Assumptions

The new methods and assumptions were applied retroactively with the transition to full application of IAS19.

25 workers a year according to the existing mix of the relevant population (this number of workers is equivalent to the Early Retirement table in Appendix F). Full obligation is recognized for workers who have at least 10 years service and have reached age 40. For those workers who have not yet served for 10 years or have not yet reached age 40, the past service obligation is calculated as the past service divided by the service required until both conditions will be fulfilled. This obligation is not recognized until 35 years of service in the Company. The obligation is computed only for employees with service in excess of 35 years, according to the accumulated additional years of service (in excess of 35 years) at the valuation date. According to the service accumulated at valuation date. According to the service accumulated at valuation date.

Discounted electricity and holiday presents, grossed-up for income tax

Additional Years Benefit

Past service obligation for: Disability benefit Past service obligation for: Early retirement benefit

35

Ernst & Young (Israel) Ltd 3 Aminadav St. Tel-Aviv 67067, Israel
Tel: 972 (3)6232525 Fax: 972 (3)5622555 www.ey.com/il

Past service obligation for: Severance payments for employment termination without pension rights Past service obligation for: Up To 35 Years Benefit

According to the service accumulated at valuation date.

According to the service accumulated at valuation date. Upon 35 years of service, the benefit is fully recognized.

The reasons for the changes: All of the above changes result from full application of the methodology of IAS19. The updated assumptions for the early retirement rate are according to the best estimate of the number of early retirees in the future (not including early retirees in special early retirement programs and ignoring the influence of such programs on early retirement rates) which was set by the Board of Directors at its meeting on September 1, 2008 and also at its meeting of April 30, 2009. The estimate which was set by the Board of Directors is 25 retirees a year given the mix of the relevant population. This estimate is reflected in the early retirement table in section 5.4.3.

Changes that took effect in June 2009 The changes that apply to this report regarding salary and pension increases result from changes in accounting practice (according to the letter from the Company dated December 20, 2009). Therefore it is not relevant to this Appendix. Changes that took effect in December 2009 1. Specific calculation for discounted electricity and holiday gifts: the obligation is recognized for whoever completes 10 years of service and has reached age 40 (age 60 for generation C). For whoever has not reached age 40 (age 60 for generation C) or has not accumulated 10 years of service, the obligation is based on the years worked relative to the amount of time left until the fulfillment of the 2 conditions above. In the past, the obligation was recognized for generation C in the same vein as for generations A and B. This change resulted in a decrease in the obligation of NIS 26.6 million. 2. Assumption of increased salaries for employees with special agreements 1.5% per year on a real basis. In December 2009, I conducted an investigation to determine an assumption for these employees. It was found that the salary increase for these employees was lower than the salary increase in wages for permanent employees. This change had an impact of NIS 2.5 million.

36

Appendix F Details of Benefits Date: March 20, 2012

Description of the Main Rights which Should be Taken into Consideration in Determining the Actuarial Obligation with respect to Benefits After Termination of Employment as at December 31, 2011
The Determining Salary Components for Calculating the Pension:

1. Normal Salary - including combined salary, service increment (up to a 40 years maximum), extra effort increment, continuing education payments, job classification increment, personal extra, cost of living allowance.

Normal Salary Calculation Formula:

Normal Continuing Extra Personal salary = Effort + Education + Extra Job classification + (1.01)N X Increment + 1 (Cost of Living Salary Allowance Rate + 1) X Grade

N number of years of service for calculating the service increment for payment

Normal Salary Components: (a) The Combined Salary according to accepted salary tables in the Company. The salary agreement for the period up to June 30, 2012 (signed on January 31, 2011) states that salary increments will be paid (updated basic salary tables and salary increments in NIS) at the following rates and dates: Starting from January 1, 2011 2.25%. Starting from January 1, 2012 (in the salary of January 2012) completion up to 3.75%. Starting from January 1, 2013 (in the salary of January 2013) completion up to 5.75%. The combined salary of Management level members includes global payment for overtime. In his letter on October 2, 2011, the Supervisor of Wages and Work Agreements announced that he intends to conduct a hearing process on the subject of paying pensionable global overtime hours to Management members in Grade B.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 37

Appendix F Details of Benefits (b) Service increment: 1. The annual service increment rate is 1% for each year of service. 2. The Service Increment Calculation Formula: Service Increment Amount for Payment = [(1.01)N 1 ] X (job classification increment + salary grade). N number of service years for payments where N =< 40 (as detailed in HR procedure "Service Increment" No. 04-01-02). 3. Masters Degree Service: Another service increment at a 50% rate, starting from completing the studies for a master's degree, for employees at the grade of engineers, academics and lawyers only (instead of a service increment of one year each year, such an employee is entitled to an increment of 1.5 years for each year from the Master's studies completion date onwards). Service Increment/ Pension Percentage with respect to Security Service prior to Establishing the State of Israel/ Prisoners of Zion: An employee who served a full active service period in one of the recognized service units (Palmach, Hagana, Etzel, Lehi, British Army, Jewish Brigade, Palestinian Ghaffir, Policeman in the Mandate Police) - 80% of the service period will be added to the work service factor for determining the pension rate. - An employee who served as a volunteer in the Hagana, Etzel or Lehi and is entitled to ALEH decoration is entitled to a 3% increase in his pension. - A "Prisoner of Zion" employee will receive a 1% increase in pension for each year of recognized imprisonment, up to a total of 5%. In any event, the total pension rate will not exceed 70%. (c) Extra Effort Increment:

1. An increment paid according to entitlement groups and updated for active employees with each cost of living allowance and each work agreement. 2. The Main Entitlement Groups are: - Group A Maintenance employees. - Group B Other workers, meters readers. - Group C The population that is not defined in groups A, B, D. - Group D Trainees in a shift. (d) Managers continuing education payment:

1. Monetary increment paid to employees of management rank, who meet the entitlement terms. 2. Entitlement terms are: Employees whose nominal grade is 14 at least. - Who are high school/vocational school graduates, including 11 years of education. - Who completed two study years in a higher education institution or completed a predefined number of study hours related to their occupation or profession, as detailed below:

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 38

Appendix F Details of Benefits Service years in the field of occupation/ profession Up to one year Up to two years Up to four years Up to six years Up to eight years Up to ten years Up to twelve years Twelve years and up Note: 3. Required study hours related to the occupation or the profession 800 700 600 500 400 300 200 100

An employee with long tenure in his occupation requires a smaller number of study hours. Employees who fulfill all the terms specified in section 2 and also accumulated 400 study hours according to the tests listed in Section 5 of HR procedure "Continuing Education Payments to Employees in Managerial Grade" (No.04-01-04). Threshold Terms (for section 3): Courses/continuing education recognized by the "Committee for Recognizing Courses and Continuing Education of the Ministry of Education and Culture" and listed in the Approved Courses List, that ended within a period of 5 years prior to the request for payment filing date. Rates Update: Managerial continuing education payments rate is updated for active employees according to each cost of living allowance. Rate update derived from a wages agreement if specified in the agreement. Professional Continuing Education Payment:

4.

5.

(e)

1. A monetary increment paid to employees in the professional rank (academic degrees, engineers, lawyers, practical engineers and technicians) who fulfill the terms of entitlement, as detailed in HR procedure 04-01-05. 2. The entitlement to continuing education payment A and B is determined by a joint committee of representatives of the professional Histadrut and representatives of the Ministry of Finance. 3. Recognition of Studies Period for Payment A: Courses and continuing education that ended in a period of 5 years prior to submitting the request for continuing education payment to the payment committee will be recognized, even when these occurred before the employee was entitled to the degree. 4. Recognition of Studies Period for Payment B: An employee in a professional grade who received continuing education payment A, who completed a continuing education of 400 study hours at least and fulfilled the entitlement terms specified in HR procedure "Continuing Education Payment to Employees in a Professional Grade" (No. 04-01-05) is entitled to payment B. 5. Rates Update: Rates of payment for professional continuing education A + B are published and updated from time to time for active employees by the Supervisor of Wages and Work Agreements in the Ministry of Finance. The rate update that is derived from the salary agreement, provided it is specified in the agreement. Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 39

Appendix F Details of Benefits Employees in the professional grade, at grade 44 (nominal) and up will receive payment at the rate of continuing education B, at a rate of 9% of the salary grade and the service increment of the employee, up to the ceiling specified in the related HR procedure or according to the standard rate, the higher of the two. Job Classification Increment:

(f)

1. Employees defined as managers are entitled to Job Classification Increment according to the defined group to which they belong: M Professional group: 2.5% (*) P 1 Unit leaders, deputy unit leaders, group leaders and their equivalent: 5.5% P 2 "Large" units leaders, foremen and their equivalent: 6.5% P 3 Deputy Department Managers, Senior unit leaders Senior foremen and their equivalent, special roles and senior experts: 7.5% P 4 Department Managers, Special roles and senior experts at peak rank: 10.0% Note: Defined as Equivalent 5960, 1960, 5521, 3861 will receive an 18% job classification increment after serving two years at peak grade. P 5 Standard Department Managers at peak grade: 21.0% Senior Managers (salary groups C, D, E): 23.5% Senior Managers (salary groups A, B): 26.0% (*) Including employees employed by the Company for 20 years at least who were not entitled to any Job Classification Increment.

2.

Calculation of Job Classification Increment: (Job classification factor rate x salary grade). Personal Extra: 1. A fixed monetary increment, paid to a closed group of employees in whose combined salary a gap was created when a uniform salaries grade was defined for all employees in April 1, 1973. Following general wages agreements in 1978, the salaries schedule was updated again, aiming to simplify the salary structure and create a uniform and clear salaries grade, while cancelling certain additions, once again causing the creation of this increment. 2. The personal extra component is intended to maintain the level of the base salary paid to employees prior to the changes in the salary tables. 3. The addition is updated for active employees with every cost of living allowance and wages agreement.

(g)

2.

Payment of 13th Salary 1. Employees from their 2nd year of employment and pensioners/survivors are entitled to 13th salary payment. 2. The 13th salary consists of a normal salary for the payment month, divided by 12 and multiplied by 6 months, payable in two parts: the 1st part before Passover and the 2nd part before the Jewish New Year (Rosh Hashana).

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 40

Appendix F Details of Benefits 3. 20/25 years Salary Payment (14th Salary Bonus) An addition at the rate of one normal salary, payable once a year, to a woman after 20 years and to a man after 25 years, provided that the employee started working in the Company before January 1, 2004. Entitlement to payment is according to years of work in the Company, less all unpaid leave periods the employee took after the salary agreement signing date, January 31, 2011, unless and insofar as the employee purchased rights with respect to the unpaid leave period, by paying the Company a payment at the rate of 18.5% of the determining components for calculating the monthly pension (including an increment of 1/12 for convalescence pay). The aforesaid does not affect an unpaid leave of an employee taken before the signing date of the salary agreement on January 31, 2011, for a period that does not exceed one year and was or will be taken into account be the Company for the purpose of time periods specified in this section. Pensioners/survivors who fulfilled the aforesaid terms on the eve of their retirement, are entitled to payment of 20/25 years salary. The salary of 20/25 years will be paid as before to an employee entitled to budgetary pension who retired/will retire from the Company and who, on the eve of retirement, was/will be entitled to 20/25 years salary, according to the aforementioned terms. 4. Convalescence Payments 1. An annual payment of a convalescence allowance. 2. An employee is entitled to convalescence payment only after completing the 1st year of work in the Company. At the end of the year the employee will also be entitled to convalescence payments with respect to parts of the year, relative to the number of paid days. 3. Convalescence Days Quota (to permanent employees, pensioners and survivors): Number of work years year 1. After one year of work (for the 2nd year) 2. After two years of work 3. After three years of work 4. After eight years of work 5. After twelve years of work Number of Convalescence days per 13 14 16 18 20

4. Convalescence Day Rate: The rate per one convalescence day will be updated once a year on June 15, according to the cumulative changes in the CPI from the CPI of May to the CPI in May on the following year. 5. Payment Date: An advance on account of convalescence payment is paid in the salary for April and the balance is paid with the salary for July. 6. Convalescence payments are paid to pensioners/survivors according to the pension rate.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 41

Appendix F Details of Benefits 5. Arava Addition 1. Arava addition is paid to an employee whose permanent work site and base are located in the Negev, south of latitude 30. 2. Arava addition will be included in calculations of pension to eligible employees who received the addition for at least three years before retiring from work. 3. The Arava addition rate is updated for active employees after each cost of living allowance. Rate update derived from a wages agreement if specified in the agreement. 6. Home Service Payment 1. An addition paid to employees on home service, according to the grading of the Company, included in the calculation of the pension. 2. The criteria for including home service payment in the calculation of the pension are: - An employee who retired to pension and received a monthly payment for home service of eight hours per evening and/or night for 10 consecutive years just before his retirement is entitled to an addition of 50% paid to him with respect to the home service before the retirement in the pension payment, according to his pension rates. For every year over the aforementioned 10 years, the pensioner is entitled to an addition of up to 5% (for part of the year: up to 6 months 2.5%; more than 6 months 5%) of the payment paid before the retirement for home service, according to the pension rate due to him, up to a maximum of 100% of the amount of the addition after 20 years of payment with respect to the home service paid on the eve of the retirement and according to his pension rates. Maximum payment in the pension for fixed or non-fixed home service will not exceed 10 home services per month, multiplied by the pension rate, multiplied by the home service rate, multiplied by the home service increment to the pension. An inspector who was transferred to another role whose entitlement to have the shift percentages included in his pension was recognized and during shift work received payment for home service for 10 consecutive years at least, is entitled to home service payment in the pension, even if the home service was terminated before the retirement date. The increment will be determined upon the employee's retirement to pension and will be updated according to rates applied to employees. Home service rate is updated for active employees with every cost of living allowance. Rate update derived from a wages agreement if specified in the agreement.

7.

Payment for Shift Work 1. An addition paid to employees on shift work, according to the grading of the Company, included in the calculation of the pension. 2. The criteria for including shift work percentage increment in the calculation of the pension are:

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 42

Appendix F Details of Benefits 1. A shift worker, according to the Company's grade, who worked for at least 10 years in two shifts (morning and evening only) and retires to pension from shift work, will receive an addition of shift percentages in the pension at a rate of 20% of the pension. 2. A shift worker who is a CCGT operator, according to the Electric Company's grade, who worked for at least 10 years in shifts and retires to pension from shift work, will receive an increment of shift percentages in the pension at a rate of 40% of the pension. 3. A shift worker, according to the Electric Company's grade, who worked for at least 10 years in three shifts (morning and evening and night) and retires to pension from shift work, will receive an increment of shift percentages in the pension at a rate of 40% of the pension. 4. A shift worker according to the grade of the Electric Company, who was permanently transferred to another position due to re-organization or an illness approved by a medical board and upon approval of the VP of Human Resources, who worked for at least 10 years in shifts prior to being transferred to another position, will receive shift percentages upon retirement, as follows: Shift worker in three shifts: 2% for each year up to a maximum of 40%. CCGT Operator: 2% for each year up to a maximum of 40%. Shift worker in two shifts: 1% for each year up to a maximum of 20%.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 43

Appendix F Details of Benefits

Proper Description of all the Rights which should be Taken into Consideration in Determining the Actuarial Obligation with respect to Benefits After Termination of Employment Electricity Rate for Company Employees
1. Permanent employees and receivers of pension (pensioners/survivors), insured in the budgetary pension arrangement, as defined in the labor constitution and according to the directives of the pension regulations are entitled to the electricity rate for Company employees. The obligation of the Company includes the cost of the benefit, the VAT and the grossed up income tax with respect to them. 2. Generation C employees and pensioners and their survivors are entitled to the employees' electricity rate in each of the following cases: An active generation C employee. Upon retiring from work in the Company due to a disability which is recognized as an entitling event by the pension insurer of the employee, as long as the employee is recognized as a disabled person by the insurer. Upon retiring from work at the Company at the age of 60 or later, provided that the employee has 10 years of work at least. Survivors are entitled to pension from the pension insurer of an entitled generation C employee. 3. The aforementioned entitled employee will be entitled to electricity at the rate of Company employees for one residential unit only, at his actual residence, provided that the electricity is intended for domestic consumption and personal use only. 4. In the event that two entitled persons reside together in the same residence, only one of them is entitled to the electricity rate for Company employees. 5. Pensioners/survivors are entitled to electricity at the rate of Company employees without doubling the pension rate. 6. Pension recipients are entitled to electricity on condition that the pension from the Company is their main source of subsistence.

Holiday Presents
1. The Company grants holiday presents to its employees, pensioners and their survivors, handed out on two dates: just before Passover and just before the Jewish New Year (Rosh Hashana). The Company liability includes the cost of the benefit and also the grossed up income tax with respect to them. 2. Generation C employees and pensioners and their survivors are entitled to holiday presents in each of the following cases: An active generation C employee. Upon retiring from the Company due to a disability which is recognized as an entitling event by the pension insurer of the employee, as long as the employee is recognized as a disabled person by the insurer. Upon retiring from work at the Company at the age of 60 years or later, provided that the employee has 10 years of work at least. Survivors are entitled to pension from the pension insurer of an entitled generation C employee. 3. In the event that in one family the pension is paid to survivors in separate payments, only one family member is entitled to holiday presents. 4. Pensioners/survivors are entitled to holiday presents without doubling the pension rate. Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 44

Appendix F Details of Benefits

Raise of Salary Grade for Active Employees

1. An employee in the managerial grades up to grade 15 (inclusive), or an employee in the professional grades up to grade 40 (inclusive), will be promoted by one grade every year. An employee in the managerial grades, from grade 15 and up, or an employee in the professional grades from grade 41 and up, will be promoted by one rank once every two years. 2. Employees employed at managerial grade 27 / 46 professional will not be promoted until their retirement. 3. Promotion in salary grade for employees in senior status usually occurs only after promotion to a higher position (division deputy manager/division manager). There are no automatic promotions in grades.

Star Grade
A male employee who has 25 years of service and a female employee who had 20 years of service are entitled to a payment equivalent to one additional salary grade to their grade, without changing the nominal grade, provided they began work at the Company before January 1, 2004. Entitlement to payment is determined according to years of work in the Company, less all unpaid leave periods of the employee after entering the salary agreement, on January 31, 2011, unless and insofar as the employee purchased rights with respect to the unpaid leave period by paying the Company payments at the rate of 18.5% of the determining components for calculating the monthly pension (including and increment of 1/12 for convalescence pay). The aforesaid does not affect an unpaid leave of an employee taken before the signing date of the salary agreement on January 31, 2011, for a period that does not exceed one year and was or will be taken into account be the Company for the purpose of time periods specified in this section. Pensioners/survivors who fulfilled the aforesaid conditions on the eve of their retirement are entitled to a star grade. A star grade will be paid as before to an employee entitled to budgetary pension who retired/will retire from the Company and who, on the eve of his/her retirement, was/will be entitled to a star grade, according to the aforementioned description. Employee who is entitled to a grade promotion and to a star grade on the same date, will be concurrently promoted to both grades.

Additional Grade at Eilat

A permanent employee employed at Eilat under a special tenure agreement and a temporary employee under a special agreement is entitled from starting work in this region to payment equivalent to one additional salary grade, without changing the nominal grade. The aforementioned employee, who moves out of the Eilat region at the end of seven years of work or more, will carry over the additional salary grade.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 45

Appendix F Details of Benefits

Promotion in Grade upon Retirement

1. Up to the update date of the "Changing the Update Method of Budgetary Pension Law, 2012", on February 27, 2012, an employee who retired to pension, under all retirement plans, was promoted by one salary grade immediately after retiring, if his tenure in the rank is one year at least. If the employee did not have tenure of one year in the current salary grade for retirement, the salary grade for retirement was granted on the completion date of one year's tenure for the salary grade at which he retired. 2. A pensioner who retired before the effective date of the law and did not receive the retirement salary grade will receive the salary grade in the first pension paid after the law becomes effective. 3. Starting from the effective date of the law, an employee entitled to budgetary pension who will retire from the Company (and in the event of the demise of such an employee, his survivor), will be entitled to one salary grade on the retirement date from the Company, regardless of the date on which he was promoted by one salary grade as an employee. If an active employee is entitled on April 1, 2012, to a salary grade according to the work agreements and is scheduled to retire to pension on April 1, 2012, he will be entitled to both a salary grade according to the work agreements and to a retirement salary grade. 4. An employee who is entitled to a star grade will receive a retirement grade, as detailed above, as if he had the subsequent grade. 5. The following table details the granting mode of retirement salary grades to retiring employees (after the application of the law): Grade before retirement date +43 / 22 44 / 23 +44/ 24 45 / 25 +45 / 26 46 / 27 (f) 46 / (f) 27 *46 / *27 *(f) 46 / *(f) 27 Granting retirement grade on the retirement date (after 12 months at least in the former grade) 44 / 23 +44 / 24 45 / 25 +45 / 26 46 / 27 +46 / +27 + (f) 46 / + (f) 27 +*46 / +*27 + *(f) 46 / + *(f) 46 / + *(f) 27

6. The CEO of the Company has the authority to approve or refrain from approving a retirement grade of an employee entitled to budgetary pension who is included in the senior employees grade scale, with due consideration, inter alia to the seniority of the employee in the grade. Nevertheless, an employee graded at grade B of the senior employees grades scale is not entitled to a retirement grade (except a closed list which was approved by the authorized entities).

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 46

Appendix F Details of Benefits

Pension Updating Mechanism

1.

Grading in 2011 - Grade promotion of pensioners/survivors will continue in 2011 as follows: a) Grade promotion will be every three years from the promotion date to the previous grade (except the retirement grade). However, a pensioner/survivor who reached managerial grade 27/professional grade 46 and up, or an employee/survivor with a grade of the senior employees grade scale, will not be promoted. b) The grade promotion applies to whoever is at the grade to which he would have been entitled if he/she would have been promoted to a higher grade every three years during the period from January 1, 2004 and December 31, 2011. From January 1, 2012, the determining components of the salary for calculating the monthly pension of a pensioner/ survivor entitled to budgetary pension will not be updated through any grades, except promotion by one salary grade upon retirement. From January 1, 2012, the determining components of the salary for calculating the monthly pension of a pensioner/survivor entitled to budgetary pension will not be updated according to changes in the salary granted to any active employee of the Company at any time, e.g. salary agreement, CPI increment, changed reward rate for advances studies/effort, command supplement, etc. From January 1, 2012, the pensions update mechanism of employees entitled to budgetary pension from the Company will change as follows: The determining salary components for calculating the monthly pension of every pensioner/survivor entitled to budgetary pension will be as follows: normal salary, shift percentage increment (to those entitled), 1/12 of the 13th salary, home service (to those entitled), 1/12 of the 14th salary (to those entitled), Arava increment (to those entitled) and CPI increment (as aforementioned in section 6) will be updated in January of each year only, according to the rate of the annual change in the CPI (the first update , according to the specified in this section, will occur in the pension for January 2013). The aforementioned applies to every pensioner/survivor entitled to budgetary pension and retired from the Company before the date on which the law became effective and also to employees entitled to budgetary pension (or their survivors), starting from their retirement date from the Company In the event that the annual change in the CPI rate will be negative, the determining components of the salary for calculating the monthly pension will not be updated on the following January of the year for which the CPI is negative. However, in the first update, and where needed in the following pension updated (in each January), the changes in the CPI with respect to the said period or periods will be fully included in the calculations for those updates. CPI Calculation Increment: The pension for January 2012 included a double CPI calculation increment with respect to January February 2012, as an advance payment to pensioners/survivors entitled to budgetary pension who retired from the Company before January 1, 2011. Upon completion of the aforementioned regulation on the subject, this advance payment is regarded as a CPI calculation increment for all intents and purposes. From March 1, 2012, a monthly increment to the pension with respect to the months from March 2012 onwards, will be paid to the every aforementioned pensioner/survivor, who retired from the Company before January 1, 2011, as follows:

2.

3.

4.

5.

6.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 47

Appendix F Details of Benefits a. An 8% monthly increment to the pension: A pensioner/survivor who received a managerial grade of 27 and up (or a professional grade of 46 and up) before January 1, 2011, or alternately, whoever received a retirement grade of 27 and up (managerial grade) or 46 and up (professional grade), or alternately, received a grade of the senior employees grade scale before January 1, 2011. Or alternately A 12% monthly increment to the pension: A pensioner/survivor who was not graded at a managerial grade of 27 and up (or a professional grade of 46 and up) before January 1, 2011, whose retirement grade is not an increment to grade 27 and up (managerial grade) or 46 and up (professional grade), or alternately, did not receive a grade of the senior employees grade scale before January 1, 2011. An employee/survivor who was promoted to a grade (which is not a retirement grade) in 2011, will receive a CPI calculation increment at the rate of the difference between 12% and the rate of the change in the pension deriving from receiving a grade in 2011. b. Increasing the CPI Calculation Increment at an additional rate of 6%: The CPI calculation increment of a pensioner/survivor who retired from the Company before January 1, 2011, and on January 2, 2012, was graded in a managerial salary grade of 23 and below, or in a professional salary grade of 44 and below, will be increased at the end of four years from the approval date of the law, at an additional rate of 6% of the base pension. A pensioner/survivor who retired from the Company after December 31, 2011, will not be entitled to a CPI calculation increment at all.
7.

Additional increment to the pension (Third Step of the Salary Agreement entered on January 31, 2011): From January 1, 2013, another addition to the pension, at the rate of 1.927%, calculated according to all the determining components for calculating the monthly pension, as detailed in section 4 above, as on December 20, 2012, will be paid to every pensioner/survivor entitled to budgetary pension. This addition will be paid concurrently with an identical increment to the salary, paid to active employees on that date (completion to 5.75%). Payment of a one-time only award to pensioners/survivors (in 2011 only): A pensioner/survivor entitled to budgetary pension who retired from the Company before January 1, 2011, was entitled to a one-time only award, paid on the following two dates: a) On February 20, 2011, a payment of 83% of the monthly rate (as aforementioned in section 4 above) due to an employee/survivor on December 20, 2010 (excluding the salary increment at the rate of 2.25% according to the salary agreement), less the one-time award of NIS 2,000 times the pension rate (as paid according to the specifications of the salary agreement). b) On July 20, 2011, a one time award was paid that was calculated as follows: 96% of the monthly pension to a pensioner/survivor whose grade before January 1, 2011 was managerial 27 and up (or professional grade 46 and up), or alternately, an employee who received a retirement grade of managerial grade 27 and up (or professional grade 46 and up), or alternately, was promoted to a grade in the senior employees grade scale before January 1, 2011 (8% times 12 months).

8.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 48

Appendix F Details of Benefits Or alternately: 144% of the monthly pension to a pensioner/survivor who did not receive a grade of managerial 27 and up (or professional grade 46 and up) before January 1, 2011, or alternately, an employee who did not receive a retirement grade of managerial grade 27 and up (or professional grade 46 and up), or alternately, was not promoted to a grade in the senior employees grade scale before January 1, 2011 (12% times 12 months). Calculation of the one-time award to a pensioner/survivor who was promoted to a grade in 2011, according to section 1 above, was as follows: multiplying the monthly pension by the difference between 144% and the rate that results from multiplying the monthly rate of change in the pension deriving from receiving a grade in 2011 by the number of months on which the grade for 2011 will be paid.

The Determining Salary for Pension Payment Up to the enacting date of the aforementioned law, the last salary paid to an employee prior to retirement, updated after retirement according to salary grade, while promoting to higher grades according to work agreements. From the enactment date of the said law onward, all instructions to update the determining salary for calculating the pension will be cancelled, including all components of the salary deriving from an agreement of an arrangement. Therefore, the determining components of the salary for calculating the monthly pension of a pensioner/survivor entitled to budgetary pension will not be updated according to changes that will be made in the salary of an active employee of the Company, at any time, such as: salary agreement, increment for increased CPI, changes in the rate of advanced studies compensation/extra effort increment etc., or through any grades, except the retirement grade.
9.

The determining salary includes the following components: normal salary, added shift percentage (to those entitled), 1/12 13th salary, home service (to those entitled) 1/12 14th salary (to those entitled), Arava addition (to those entitled) and the aforementioned CPI calculation increment (as detailed in section 6 above).

Deduction of Payments from Salaries of Employees Insured in Budgetary Pension

1. The "Plan for the Recovery of Israel's Economy" Law 2003, states (in chapter P to the law, on "Payments of Employees to Budgetary Pension") that an employer whose employees or part of them are subject to a budget arrangement of pension paid by the treasury of the State or from the employer's fund (budgetary pension), will deduct 1% (starting on January 1, 2005 the deduction is at the rate of 2%) from the determining salary paid to the employee, whose pension arrangement is budgetary pension. 2. According to a legal opinion, the instructions of this chapter apply to the Electric Company and its employees, insured in a pension out of the Company's budget, namely, permanent employees who began to work at the Company before June 11, 1996 (employees insured in the budgetary pension arrangement). 3. Determining salary for paragraph 1 above: "Salary components paid to an employee, which would have been included for the purpose of calculation of the pension, had that employee retired to pension at that time." Namely, normal salary, shift work payment, convalescence, fraction of 13th salary and 14th salary, permanent home service and Arava addition. 4. The pension liability is not reduced due to the participation of employees insured in the budgetary pension arrangement in the cost of the budgetary pension.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 49

Appendix F Details of Benefits

Obligation of the Company to Welfare Activities for Employees and Pensioners / Survivors
a. In addition to salaries paid to employees and pensions paid to pensioners, the Company has an obligation to incur costs of welfare activities of 0.49% of the salary of each employee, or of the pension to which each pensioner/survivor is entitled. b. Starting on January 2, 2012, the Company will allocate to a fund, to be managed by the representatives of the employees (in a dedicated bank account to be opened for this purpose) with respect to each pensioner (without survivors) who is entitled to budgetary pension only, an annual sum for the following welfare activities: The sum allocated in 2012 with respect to each aforementioned pensioner is NIS 445. The allocated sum will be updated on January of each year according to the annual change rate in the CPI. If the pensioner was entitled to a pension for part of the year for which the aforesaid allocated sum is paid, the sum paid with respect to that pensioner will be proportional to the part of the year in which he is entitled to pension. The objective of the fund is to act for the welfare of pensioners in the cultural, health, recreation and leisure fields. The fund will be managed according to accounting measures from aspects of detailed audit and reporting of all actions made by the fund and funds expended by the fund, respectively. Despite the aforesaid, starting from January 2, 2012, only half (50%) of the aforementioned total amount will be allocated to the welfare of pensioners entitled to budgetary pension, until the CPI calculation increment, detailed in section 6 b above, will be fully financed.

Details of Grants Paid upon Termination of EmployerEmployee relations:

1. Excess years grant The grant is calculated as one monthly salary for each additional year worked beyond 35 years' service. The grant is based on the normal salary plus 13th and 14th salaries. The entitlement is subject to retirement after age 60 for males or after age 55 for females. In the event of death after 35 years worked in the Company after age 55 for females or age 60 for males, eligibility to the grant exists. In the event that the death is after 35 years worked at the Company, but the age on date of death is under 55 for females or 60 for males, the entitlement is at a rate of 10% (10% of the normal salary only, multiplied by the number of excess years).

2. Disability retirement grant An employee retiring with a disability pension is eligible to a grant of 50% of one monthly salary for each year worked. The grant is limited to a total amount of 15 monthly salaries (up to 30 years worked in the Company). The grant is calculated on the basis of the normal salary only. The grant for 35 years of work will not be paid when this grant is paid.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 50

Appendix F Details of Benefits 3. Severance payments for employment termination without pension Upon termination without pension entitlement, an employee is eligible to a severance payment of one monthly salary for each year of employment. Upon resigning after a prolonged employment period, the aforesaid severance payment is paid if the authorized authorities approve it. The severance pay is calculated on the basis of the normal salary with the addition of the 13th salary.

4. 20 Year grant (including Generation C employees) Permanent employees who have completed 20 years of employment with the Company are entitled to a one-time grant equal to the normal monthly salary.

5. Grant for Up To 35 Years (including Generation C employees) A monetary grant given to an employee retiring to pension, equal to one normal monthly salary for every ten years of actual employment (according to service factor for pension), up to a maximum of only 3.5 salaries (up to 35 years of employment). For a period of less than ten years, the proportional amount of ten years benefit is paid. In the event of the employee's death, the grant will be paid to the survivors.

6. Unused sick days benefit (including Generation C employees) A sum of money paid to an employee upon retirement to pension (including early retirement and disability retirement), or to survivors of a deceased employee, according to the percentage of sick days used to which he was entitled during all his years of employment in the Company and in accordance with the number of unused sick days accumulated to his credit as of the retirement date: For an employee whose percentage of used sick days is less than 36%, a grant equal to 26.66% of the unused sick days accumulated to his credit is paid. For an employee whose percentage of used sick days is between 36% and 65%, a grant benefit equal to 20% of the unused sick days accumulated to his credit is paid. For an employee who used 65% or more of the sick days, a grant is not paid.

The salary per sick day for purposes of calculation of the grant is 1/25 of the normal monthly salary, including the 13th salary. The salary per sick day after 35 years of service and after age 60 (55 for women) includes the 25/20 years salary. 7. Supplement of Company obligation for severance payments to Generation C employees According to the relevant collective agreement, the Company provides a sum each month equal to 6% of employees' monthly insurable salary for the severance pay obligation to Generation C employees (permanent employees who began work after June 10, 1996) who are insured by an external cumulative pension fund. This provision is under the conditions of Section 14 of the Severance Pay Law (in place of supplement) and therefore, the Company has no obligation to supplement it. In addition, these employees will receive a severance benefit of 28% of their last salary only if they are entitled to severance pay (an employee who voluntarily terminates his employment does not receive severance pay). The supplementary severance payments for these employees are as follows: last normal salary (including the 13th salary fraction) multiplied by the years of employment with the Company and multiplied by 28% (an Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 51

Appendix F Details of Benefits employee who started work before January 1, 2004 and will be entitled to a 14th salary, the 14th salary will be calculated for him even for years exceeding 35 years). The supplementary severance payment will be also paid in the event of death (to survivors), disability and compulsory retirement. 8. Increased severance payments for employees under special agreement According to the relevant collective agreement, Company employees under special agreement (non-permanent staff) are eligible for increased severance payments beyond those covered by monthly contributions of 8.33% of salary deposited in an external cumulative pension fund. This provision conforms to the directives of Section 14 of the Severance Payments Law. These employees are entitled to additional severance pay from Company funds equal to one monthly salary for each of the first two years of employment; from the 3rd year onwards, two additional monthly salaries. An employee who resigns from work voluntarily is not eligible for this extra severance benefit in excess of that provided for him in the pension plan. The maximum term of employment for these employees is ten years for those who began work before or on December 31, 2004 and five years for those who began work from January 1, 2005 and onwards. Increased severance payments will also be paid in the event of death (employee survivors), disability and at the end of the employment period according to the agreement. Note: Company procedures include extended details of the rights specified in this document.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 52

Appendix F Details of Benefits

Rights of Employees Entitled to Pension from the Pension Fund of Company Employees and Rights of Pensioners
1. Retirement Pension
1.1 Upon retiring from work according to work agreements, the status of the employee will change from an entitled active employee in the fund to the status of an entitled pensioner. 1.2 Advance Notice An entitled employee due to retire receives at last three months advance notice from the Electric Company about reaching the compulsory retirement age, with a corresponding notice to the managing company. A female employee due to retire receives at least six months advance notice before reaching the retirement age. A female employee who chooses to retire after the retirement age and before the compulsory retirement age will notify the Company in advance about her intention and will indicate her retirement age, three months in advance at least. 1.3 Entitlement to Retirement Pension An active entitled employee, who ends his employment with the Electric Company due to one of the following circumstances will become an entitled pensioner and will receive a retirement pension for life:

- Retirement for Age Reasons ("Age Retirement"):

An entitled, active male / female employee who worked for at least ten years in the Electric Company and reached the compulsory retirement age will be entitled to receive retirement pension for life. The 1st retirement pension will be paid in the calendar month following the month on which the employee retired from work, for the current month. Retirement from work when retiring on the compulsory retirement age will be at the end of the month on which the employee reached the compulsory retirement age.

- A female employee is entitled to retire on age retirement if she worked in the

Company for at least 10 years and chose to retire between the retirement age and the compulsory retirement age. It should be mentioned that, based on the experience of the recent years, there were only a few cases of women retiring voluntarily in the range between retirement age and compulsory retirement age, therefore the subject is immaterial.

- Retirement due to Employment Termination ("Termination Retirement"):

An entitled active employee who worked in the Company for ten years at least and is over age 40 and was dismissed from the Company under circumstances detailed in work agreements, will be entitled to receive a retirement pension for life. Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 53

Appendix F Details of Benefits

- Early Retirement ("Early Retirement"):

An entitled active employee who worked for at least 30 years, aged 55 or older (if male) or 50 or older (if female), who wishes to retire from work voluntarily and the Electric Company consented or, where the Electric Company would like the employee to retire and the workers committee consented to this move, will be entitled to receive a retirement pension for life.

- Special Retirement ("Special Retirement"):

An entitled employee is entitled to retirement pension under a special retirement framework, if and to the extent that it will be established according to a specific agreement, made and approved by the legally authorized authorities, according to the approved principles.

- Disability Retirement see above.

1.4 Pension Rate In age retirement, termination retirement, early retirement or special retirement, the pension rate shall not be less than 25% and not more than 70% of the determining salary of the employee for calculating the pension, and the rate will always be a calculation of the number of work years, determined by the Electric Company, according to the following principles: - After ten years of work: 25% of the determining salary of the employee. - For each additional year until 30 years of work: 25% with respect to the first 10 work years and an addition of 2% for each full year of work after the first 10 years (up to a maximum of: 25% + 20*2% = 65%). For calculating entitlement for a fraction of a year, the employee will be entitled to an addition of 2% if he/she worked more than half a year and a 1% addition only when working for a shorter period. - For each additional year over 30 years and up to 35 years of work - 65% with respect to the first 30 years of work and an addition of 1% for each full year or a fraction thereof, of work after the first 30 years (up to a maximum of: 25% + 20*2% + 5*1% = 70%).

2. Pension to Survivors of a Pensioner:

2.1 Eligibility of Pensioner Survivors to Pension The widow, orphans and also parents who were dependent on the employee while employed are entitled to receive a pension subject to the following: - A widow - is entitled to pension until she remarries. - An orphan is entitled to pension until he/she reaches age 18, or until age 21 if and as long as he/she does compulsory service in the army/national service, or without any age limitation if he/she cannot support him/herself due to an illness. - A parent is entitled to pension if he/she was dependent on the deceased when he/she was alive.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 54

Appendix F Details of Benefits 2.2 Pension Rates to Survivors - The pensioners widow will be paid a monthly pension equal to 60% of the pension paid to her deceased husband. In addition, 25% of the pension paid to the deceased pensioner will be paid to all other dependants jointly. Eligibility of a widow will stop when she remarries. - When a deceased pensioner has no widow, or upon the death of a widow, a monthly pension of 15% of the pension paid to the deceased pensioner will be paid to each of the survivors. In addition, 45% of the pension paid to the deceased pensioner will be paid to all survivors, even if there is only one, provided that the total pension payments to all survivors will not exceed 80% of the deceased's pension.

3. Pension to Survivors of an Active Employee:

Following the death of an active employee, his survivors will be eligible to a pension, as detailed below: 3.1 Entitlement of Active Employee Survivors to Pension The widow, orphans and also parents who were dependent on the active employee while employed are entitled to receive a pension as detailed below and according to the entitlement and tests thereof, as stated in section 2.1 above. 3.2 Pension Rate to a Widow The widow of an active employee will receive a monthly pension according to the number of the employee's work years in the Company, at the following rates: - Widow of an employee who worked in the Company after one or two years of work 20% of his determining salary. - Widow of an employee who worked in the Company after three or four years of work 25% of his determining salary. - Widow of an employee who worked in the Company after five years of work and up 42% of his determining salary. 3.3 Pension Rates to all Other Survivors

- Up to 5 years of work, the other survivors will each receive a pension of

10% of the determining salary, provided that the total pension to the widow and all other survivors jointly shall not exceed 50% of the determining salary of the employee just before his death. - Starting from the fifth year of work onwards, the other survivors will each receive a pension of 15% of the determining salary, provided that the total pension to the widow and all other survivors jointly shall not exceed 70% of the determining salary of the employee just before his death.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 55

Appendix F Details of Benefits 3.4 Survivors Pension in the Absence of a Widow or after her Death

- Up to 5 years of work, each of the survivors will be entitled to a pension of

10% of the determining salary of the employee just before his death, with the addition: o Of 10% to all survivors, even when there is only one survivor, if the deceased worked for up to two years. o 15% to all survivors, even when there is only one survivor, if the deceased worked for 3 to 4 years.

o The aforesaid is subject to the principle that payments to survivors of an

employee according to this section will not exceed 50% of the determining salary of the employee just before his death. - Starting from the fifth year of work onwards, each of the survivors will be entitled to a pension of 15% of the determining salary of the employee just before his death, with an addition of 25% to all the survivors, even if there is only one survivor, provided that the total payments to the employee's survivors according to this section shall not exceed 70% of the determining salary of the employee just before his death.

4. Survivors Pension to a Common-Law Wife of a Deceased Pensioner/ Employee:

In the absence of a widow, a common-law wife (as defined in Section 4.9 of HR Procedure No. 04-12-11 "Pension to Survivors") will be eligible to a pension as if she is a widow, subject to the following conditions: 4.1 A common-law wife who is entitled to a widow's pension from any other source on the date of death of the employee/pensioner, will be entitled to a pension from the Company only if the pension to which she is entitled from the Electric Company is higher than the pension to which she is entitled from another source. In this case, the common-law wife is entitled to a pension from the Electric Company according to the difference between the pension to which she is entitled from the Electric Company and the pension she receives as a widow from another source. 4.2 A common-law wife, whose pension from another source as a widow is higher than the pension she would have been eligible to from the Electric Company if she would not have received a pension from another source, is not entitled to a pension from the Electric Company and/or any other entitlement due to a pensioner of the Electric Company (electricity rate for Company employees, gifts).

5. Disability Pension:
5.1 Determining the Eligibility to Disability Pension The disability of an active employee will be determined as follows: The employee will be examined by a medical board. If the medical board decides on permanent disability, an interdisciplinary team will be appointed, headed by the Human Resources Manager, the welfare officer and a representative of the workers committee. Based on the recommendations of the medical board, the interdisciplinary team will determine if the permanent disability of the employee prevents him from fulfilling any other position in the Company. In the event that the interdisciplinary team decides that the employee cannot fulfill any other function in the Company and upon approval of the Senior Vice President - Human Resources, the employee will retire to disability pension. Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 56

Appendix F Details of Benefits

5.2 Pension Rate An employee entitled to a disability pension will receive a pension, at the rate calculated according to the number of work years as determined by the Electric Company, according to the following principles: o After one work year and up to the end of two work years - 20% of the determining salary. o Starting from the 3rd year and up to the end of four work years 25% of the determining salary. o Starting from the 5th year and up to the end of the 5th year 30% of the determining salary. o Starting from the 6th year and up to the end of 25 work years a 2% addition for each work year after the 5th year and up to the 25th year (up to a maximum of: 30% + 20*2% = 70%). There is no incremental disability pension with respect to work years exceeding 25 years. 5.3 Supplements to the Disability Pension with respect to Dependants 5.3.1 A dependant for the purpose of this section: o Wife/ husband. o Child, including a step child or an adopted child until age 18, or without age limit if the child is unable to support himself due to an illness. o Parents of the disabled employee, if they are dependent on the disabled employee. 5.3.2 After 1 year to the end of 5 years of work the pension is increased by 10% of the determining salary for each dependant of the disabled person as long as the total payments to the disabled person do not exceed 50% of his final determining salary. After 6 years of work the pension is increased by 10% of the determining salary for each dependant of the disabled person as long as the total payments to the disabled person do not exceed 70% of his final determining salary. 5.3.3 The additional entitlement to disability pension with respect to dependants will be paid for each dependant at any time and as long as the definition of a dependant applies to the dependant, as detailed above. 5.3.4 A divorced employee who retired due to disability is entitled to a percentage of increment with respect to children until age 18, even if these children are not in the employee's care. 5.3.5 Marriage of an employee who retires due to disability, or birth of children to such a pensioner, after the retirement date, do not entitle the pensioner to additional percentage increments of the pension. Following a change in their marital status (divorce/death of the spouse) or 5.3.6 when children reach the age of 18, the percentage of the pension will be decreased accordingly.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 57

Appendix F Details of Benefits

6. Pension General Instructions:

6.1 Pension Payment Dates Pensions of eligible pensioners/survivors will be paid on the same dates as salaries to active permanent employees in the Company. 6.2 Work up to age 18 The years during which the employee served in the Company before reaching age 18 will not be considered as work years for the purpose of pension according to these rules. 6.3 Breaks from Work Calculation of the number of work years of a Company employee will include the following breaks during the work period: - Leave granted to the employee according to labor law. - Absence caused by an accident at work. - Break in work over which the employee had no control. - Army service in its meaning in the Discharged Soldiers Law (return to work) 1949 and any absence afterwards if it occurs during a period regarded by law as military service according to Section 12 of the said law. - Partial military service in its meaning in the said Discharged Soldiers Law. - Absence for a period of up to one year due to continued studies or appointment to a mission on behalf of institutions, upon written approval of the Company. Cases of absence from work for a period exceeding one year will be submitted to a discussion between the Company's management and the workers committee. 6.4 Complete Entitlement of an Orphan to Pension An orphan's right to receive pension according to these rules is complete and does not depend on the economic condition, employment or marital status of the surviving parent. 6.5 Responsibility of the Surviving Parent to a Pension for the Orphan The widow or widower will be responsible for drawing the pension due to orphans, for their support. If proven that pension funds paid for the orphans are not used for the intended purpose, the Company and/or the Fund and/or the Managing Company have the right to pay the pension to the said orphans in another appropriate way. 6.6 Pension Payment to Parents Pensions to parents will be paid to them directly, together or separately, according to their wishes.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 58

Appendix F Details of Benefits 6.7 Payment of One Time Only Amounts and Pension Capitalization The fund is not permitted to pay to an eligible employee or his survivors one time only amounts, including capitalization of his/her pension, except capitalization permitted by work agreements, as valid on the joining date, or according to any law, subject to the directives of the Central Provident Fund for Pension Statutes and the income tax regulations. When all the above are fulfilled, an employee who retires to pension or a pensioner up to two years from his retirement date, are entitled to capitalize up to 25% of the respective pension. The capitalization is for six years. A reduced pension, based on the proportion capitalized, is paid for six years to the pensioner. Following the death of a pensioner, his survivors are entitled to a pension, according to pension regulations, as if there was no capitalization. 6.8 Prevention of Double Pensions The person who is eligible to two pensions of the same type according to these rules has the option to choose only one of them. In this case, each of the following will be regarded as separate types: retirement pension, survivors pension, disability pension. 6.9 Minimum Pension An employee who retires due to age or disability, whose pension rate is less than 40%, may have the pension increased to 40%, provided that the two following conditions are fulfilled: - The pension paid according to these rules is the only income of the pensioner, for as long as it is the sole source of income. An allowance from the National Insurance Institute will not be considered as additional income in this case. - The pensioner was accepted as an employee of the Company before reaching age 55. 6.10 The law requires an employer to employ a widow/widower or a parent of soldier that was killed in action, including a step parent and an adopting parent (subject to the Families of Soldiers Killed in Action Law 1950), who is qualified to work, for the period until they turn 70 years old.

7. Pension to Survivors Shortly after the Death of an Employee/Pensioner

7.1 In the case of the death of an employee/pensioner, survivors will receive, respectively, full determining salary (100%) for the 3 months after the death, or the full pension paid to the deceased pensioner before his death. Pension payments to survivors according to pension regulations will begin from the fourth month after the death of the employee/pensioner. 7.2 Survivors of an employee whose death was caused by a work accident will receive the determining salary for pension (100%) paid to the employee for the 1st 6 months after the date of death. Pension payments to survivors of a deceased employee according to pension regulations will begin from the seventh month after the death of the employee/pensioner. 7.3 The pension rate for survivors of a pensioner who capitalized the pension and died will be equal to the pension rate without capitalization.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 59

Appendix F Details of Benefits

8. No Frozen Rights
Rights cannot be frozen (as applied to civil servants); namely, a person who resigns from the Company will not be eligible for a pension upon reaching the retirement age.

9. No Continuation of Rights from Former Employers

Pension rates are calculated only according to work years in the Company.

Additional Right Not Taken Into Consideration in Determining the Actuarial Obligation with respect to Benefits After Termination of Employment
Early retirement to pension grant (due to severance) A grant of 50% of one monthly salary for each year worked. The grant is calculated on the basis of a normal salary with the addition of the 13th salary. This grant is not calculated for the years for which the retiring employee is entitled to receive excess years grant. The grant rate (50%) will be offset at the rate of 1.111% for each month of work over age 62 and up to age 65, consequently, the grant rate starting from age 65 after the offset is 10% (similar to the grant for up to 35 years of work). It is noted, that when a female employee chooses to continue working in the Company after retirement age and retires from the Company due to severance, she will be entitled to a grant at the rate of 50% of the salary, according and subject to the aforementioned, as applied to any other employee.

Israel Electric Corporation Ltd., 16 Chashmal St., PO Box 25, Tel Aviv, 61000 Israel Electric Corporation Ltd., 1 Netiv-Haor St., PO Box 10, Haifa, 31000 60